Question

Assume that you have an actual loss ratio of 100% and expected loss ratio of 50%. Further assume a credibility factor of 0.5. According the experience ratemaking method, how much should premiums increase in the next period?

Answer 1

The premiums should increase by 25% in the next period.

Step-by-step explanation:

The experience ratemaking method takes into account both the actual loss ratio and the expected loss ratio to determine how much premiums should increase in the next period. In this case, the actual loss ratio is 100% and the expected loss ratio is 50%. The credibility factor of 0.5 represents the weight given to the actual loss ratio in determining the premium increase.

To calculate the premium increase, we can use the formula:
Premium Increase = (Actual Loss Ratio - Expected Loss Ratio) * Credibility Factor
Premium Increase = (100% - 50%) * 0.5 = 25%

Therefore, the premiums should increase by 25% in the next period.