Our actuarial department calculates rate level indications periodically by state

Question

Our actuarial department calculates rate level indications periodically by state, coverage, territory and other breakdowns. Although the entire process is complicated, it boils down to calculating a projected loss ratio in some future time period divided by a permissible (target) loss ratio. Recall, Loss Ratio = Losses/Premium.

If the permissible loss ratio is 81% and the projected loss ratio is 77%, by how much should the premium rates change in order to achieve the permissible loss ratio? Please write a few sentences explaining your choice and what it represents.

Explanation / Answer

PERMISSIBLE LOSS RATIO IS A TARGET LOSS RATIO SET BY MANAGEMENT, AND IS BASED ON DESIRED RETURN ON EQUITY, TAX RATES, ETC.

PROJECTED LOSS RATIO IS THE LOSS RATIO YOU ARE ACTUALLY EXPECT TO EXPERIENCE BASED ON SOME TYPE OF ACTUARIAL ANALYSIS.

TO ACHIEVE THE PERMISSIBLE LOSS RATIO WITH A RATE CHANGE, GIVEN YOUR PROJECTED LOSS RATIO, YOU CHANGE YOUR PREMIUM RATES BY ,

= (PROJECTED LOSS RATIO / PERMISSIBLE LOSS RATIO) - 1

= (77% / 81%) - 1

= 0.9506 - 1

= -0.0494 OR -4.94%

IN ORDER TO ACHIVE PERMISSIBLE LOSS RATIO THE PREMIUM RATES SHOULD CHANGE BY -4.94%.

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