B.7 Overall Rate Indications

Question 1

Differences between Pure Premium and Loss Ratio

methods

Answer 1

1. The Loss Ratio Method relies on the loss ratio, which
   requires premium in the denominator. This means that
   current premium must be available, and it must then be
   on-leveled, developed (if necessary), and trended.
   The Pure Premium Method relies on pure premium, which requires exposures in the denominator. This means that exposures must be well defined. Also, future exposures will need to be estimated. If that estimate is based on historical exposures, then those exposures need to be developed (if necessary) and trended.
2. The output of the 2 methods is different. The Pure Premium Method produces an indicated average rate, and the Loss Ratio Method produces an indicated rate change.