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Foundations of Casualty Actuarial Science

ratio method uses earned premiums whereas the pure
premium method uses earned exposures.

If detailed data is available for both and consistent
methodology is applied., both the methods produce the
same results. In practice ,the loss ratio method is often
used when detailed exposures are not available. Earned
premiums at current rate are then estimated from overall
rate changes.

With full exposure details, earned premiums at current
rates are calculated by applying the current rates to the
historical exposures to be used in the pure premium
approach.

However when earned premiums at current rates are
estimated , the loss ration and pure premium approach
produce different results. Sometimes instead of
premiums at current rates, we use base exposures. Base
exposures are calculated as the number of insured
exposure (e.g car months) times of the rate relativities
for all relevant rating variables.

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