Ratemaking: Loss Ratio Method. Indicated Average Rate Change equals?

• A. Indicated Average Rate Change = (Losses per exposure + Fixed Expenses) / (1 - Variable Expenses - Profit)
• B. Indicated Average Rate Change = (Losses per exposure + Fixed Expenses) / (1 - Variable Expenses - Qt)
• C. Indicated Average Rate Change = (Losses per exposure + Fixed Expenses) / (1 - Variable Expenses - Fixed Expenses)
• D. Indicated Average Rate Change = (Losses per exposure + Fixed Expenses) / (1 - Variable Expenses)

Answer: (A)

The main idea is to determine how much to raise the rate so that the premium collected will cover both expected losses and fixed costs, after accounting for the portion of premium taken up by variable expenses and the targeted profit.

In the loss ratio method, losses per exposure and fixed expenses are the costs that must be funded from the premium. Variable expenses and the profit margin consume a fraction of the premium, leaving the remaining portion to cover those costs. So the indicated rate change is found by dividing the total required costs (losses per exposure plus fixed expenses) by the share of premium that remains after subtracting variable expenses and profit from 1. This gives:

Indicated rate change = (Losses per exposure + Fixed Expenses) / (1 - Variable Expenses - Profit)

This formulation correctly reflects how much price lift is needed once the predictable, non-variable parts of the premium and the target profit are already accounted for. The other forms misplace components in the denominator or replace the profit term, which would distort how much of the premium is actually available to cover the losses and fixed costs.