Fall 2017 Q13
Why do we not "back out" the base rate decrease here? It is the base territory that is affected by the 13% cap, however in the solution you simply add the premium shortfall to territory 1 and 3 (in capped prem 13% max column) and then directly calculate the capped impact to get the new changes and thus the new relativities.
Also, if this is a valid way to getting the new relativities then can I just follow these solution steps (comparing the capped premium to current premium to obtain new relativities) rather than doing the same method as the example where you are directly calculating the relativities and having to back out the BR adjustment? I'm not understanding when to use which method and how the BR adjustment works.
Comments
In sample answer 2, they did back out the base rate change but it was embedded in the calculations and not explicit. I would just ignore sample answer 2 and study my sample answer shown below. (You can click on it to make it larger.)