Chapter 8 - Overall Indication

Question 1

Compare and contrast the Pure Premium and Loss Ratio rate indication methods including any relative advantages or disadvantages

Answer 1

• The pure premium method results in an indicated rate while the pure premium method results in an indicated rate change.
• The pure premium method is particularly useful for a new company (or new line of business) where there is no historical data or existing rates to change since the actuary can still estimate expected pure premium, expenses, and target profit provision using external data and actuarial judgement.
• The loss ratio method is more commonly used than the pure premium method.
• The pure premium method require clearly defined exposure while the loss ratio method require on-level premium.