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related expenses, profit and contingencies factor.
Traditional application of the loss ratio method assumes
that only the loss adjustment expenses are non-premium
related.
We get the value of G by dividing unallocated loss
adjustment expenses by loss and allocated loss expense.
We get the value of V as the ratio of other expenses to
written premium.
Q12. Differentiate between parameter risk and
process risk.
Ans. A portion of the profit and contingencies provision
represents a provision for adverse deviation or a risk
loading. There are two separate and distinct risk elements
inherent in the rate making function. These are generally
termed parameter risk and process risk.
Parameter risk is simply the risk associated with the
selection of parameters underlying the applicable model
of the process. Selecting the wrong loss development
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