The ultimate rate change derived from pricing is given by ELR/PLR - 1. If PLR is given, which expression yields the required rate change?

Study for the SOA Fundamentals of Actuarial Mathematics (FAM) Exam. Prepare with flashcards and multiple choice questions with detailed explanations. Get ready for your future as an actuary!

Multiple Choice

The ultimate rate change derived from pricing is given by ELR/PLR - 1. If PLR is given, which expression yields the required rate change?

Explanation:
When pricing, the rate change is expressed as the relative change of the expected loss ratio over the baseline premium loss ratio. That means the rate change equals ELR/PLR minus 1. Algebraically, ELR/PLR − 1 is the same as (ELR − PLR)/PLR, so you could rewrite it in that form and get the same result. The standard way to present the rate change is ELR/PLR − 1. For example, if ELR is 0.15 and PLR is 0.10, the rate change is 0.15/0.10 − 1 = 0.5, i.e., a 50% increase.

When pricing, the rate change is expressed as the relative change of the expected loss ratio over the baseline premium loss ratio. That means the rate change equals ELR/PLR minus 1. Algebraically, ELR/PLR − 1 is the same as (ELR − PLR)/PLR, so you could rewrite it in that form and get the same result. The standard way to present the rate change is ELR/PLR − 1. For example, if ELR is 0.15 and PLR is 0.10, the rate change is 0.15/0.10 − 1 = 0.5, i.e., a 50% increase.

More practice questions
Subscribe

Get the latest from Passetra

You can unsubscribe at any time. Read our privacy policy