Spring 2017 Q10 - Policy Fee and Expense Fee

StudyFor5

Part b, asks specifically for the "indicated policy fee" but in the solution we are supposed to reference the "fixed expense fee per exposure" of $50. That is very confusing to me. To make matters worst, in the examiners report they say "Indicated policy fee = fixed expense/(1-V-Q) = 50/(1-17%-3%) = 62.5" So it leads me to believe that policy fee and fixed expense can be used interchangeably but I know that not to be the case. Can you help me understand what's going on here and how I should be interpreting these two terms as it relates to solving this problem? Thanks!

Graham

This is a little bit of a confusing problem. You're right that they seem to be using "fixed expense per exposure" and "policy fee" as sort of the same thing. The distinction is this:

• The fixed expense is the E(F) term in the pure premium rate change formula.
• The policy fee is the corresponding term in the rating algorithm formula. (The policy fee is how the fixed expense is incorporated into the rating algorithm as an additive fee.)

Check the following 2 sections in the chapter 14 wiki article because there is a simple example that may clear things up for you:

• https://www.battleacts5.ca/wiki5/Werner14.Implementation#Intro:_The_Rating_Algorithm
• https://www.battleacts5.ca/wiki5/Werner14.Implementation#Example_A:_Proposed_Fixed_Expense_Fee

You can see from the solution in the examiner's report that the actual calculation of the indicated policy fee is very simple. You just have to understand what these different terms represent.