Page 21 - ic92 actuarial

Foundations of Casualty Actuarial Science

problem of manual ratemaking: the pure premium method
and the loss ratio method.

60. Pure Premium Method
The pure premium method develops indicated rates -
those rates that are expected to provide for the expected
losses and expenses and provide the expected profit -
based upon formula.

61. Loss Ratio Method
The loss ratio method develops indicated rate changes
rather than indicated rates. Indicated rates are determined
by application of an adjustment factor, the ratio of the
experience loss ratio to a target loss ratio, to the current
rates.

62. Pure premium method requires well defined, responsive
exposures.

62a. Loss ratio method cannot be used for a new line. Because
the loss ratio method produces indicated rate changes, its
use requires an established rate and premium history.

63. Pure premium method is preferable where On-level
premium is difficult to calculate.

64. Determination of the loss experience period to be used
in the manual ratemaking process involves a combination

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