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MATH 3640 – Assignment
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1) (2 point) Describe possible distortion with the Pure Premium approach and why the Loss Ratio
approach may be better.
2) (8 points) Given the following information, answer i. and ii. (Note: 2b is the base class)
(1)
Fire
Class
(2)
Trended
EPAPR
(3)
Trended
Ultimate
Loss+ALAE
(4)
PP Ind
Rel to
Base
(5)
LR Ind
Rel
to
Base
1a 42,000 49,500 0.83 0.81
1b 64,300 55,000 0.73 0.75
2a 119,800 98,175 0.73 0.74
2b 206,250 165,000 1.00 1.00
3a 157,050 134,750 1.28 1.29
3b 62,500 55,000 1.41 1.38
i. Given that the indicated pure premium for the base class is $30, find the exposures that
were used in the Pure Premium approach to calculate the indicated rate relativities
(relative to the base class) given in column 4.
ii. Find the current relativities used in the Loss Ratio approach to calculate the indicated rate
relativities (relative to the base class) given in column 5.