What is the relationship between pure premium and loss ratio method Insurance Institute Of India 2013

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Asked On2017-12-07 16:56:58 by:Divyanshu-Changkakoti

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Answers
The Pure Premium Method
Under the Pure Premium Method, the following equation can be used to determine the indicated average rate per exposure:
Formula 75.1:
Indicated Average Rate =
((Pure Premium (including LAE)) + (Fixed Underwriting Expense Per Exposure))/
(1 – Variable Expense Ratio – Target Profit Percentage).
The symbolic expression of this formula is as follows :
Formula 75.2:
P-I = (L- + E-L + E-F)/(1 – V – QT)
We can also express this result as Formula 75.3:
P-I = ((L + EL + EF)/X)/(1 – V – QT).
Definitions of variables:
EF: Total fixed expense
E-F: Fixed expense per exposure
EL: Total loss adjustment expense
E-L: Average loss adjustment expense per exposure
L: Total incurred losses
L-: Average loss per exposure
P-I: Indicated average rate
QT: Company-selected profit provision as a fraction of premium
V: Variable expense as a fraction of premium
X: Number of exposures
The Loss Ratio Method

Under the Loss Ratio Method, the following equation can be used to determine the indicated rate change:
Formula 75.3:
(Indicated Change Factor) = (Loss & LAE Ratio + Fixed Expense Ratio)/
(1 – Variable Expense Ratio – Target Underwriting Profit %).
The symbolic expression of this formula is as follows:
Formula 75.4:
(Indicated Change Factor) = ((L + EL)/PC + F)/(1 – V – QT)
Formula 75.5:
(Indicated Change) = ((L + EL)/PC + F)/(1 – V – QT) – 1
Definitions of variables:
EL: Total loss adjustment expense
F: Fixed expense ratio
L: Total incurred losses
PC: Total earned premium
QT: Company-selected profit provision as a fraction of premium
V: Variable expense as a fraction of premium
                                                                                                                          
Contributed by, Satya Shiromani

Answerd on:2018-06-06 Answerd By:satyashiromani

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