Fall 2014 Q7
Why is the current rate 1000?
How do I know when it is okay to use the pure premium method, then compare that to current rate to get indicated rate change when the question asks for rate change (as opposed to using loss ratio method directly)? Is it possible to calculate EP in this question and use loss ratio method directly? i.e. multiple EE by 500?
Comments
The current annual rate is $1,000 because you are told the current rate is $500 for 6-month policies. Just multiply that by 2.
The loss ratio method is acceptable according to the examiners' report:
But the pure premium method might be easier because they give you all the pieces for the pure premium method.
(You're right that normally when they ask for the rate CHANGE, that's USUALLY a signal to use the loss ratio method.)