Don't Waste Time

General Exam Caution & Common Pitfalls

• Indicated Rate vs. Rate Change (Pure Premium Indication): When calculating the indicated rate (rather than indicated rate change), premium information and premium trends are irrelevant. Do not waste time analyzing them.
• Interpretation of Trends:
  • Annual Payroll Level Change: Interpret as the change to that year (e.g., a 2.5% change from 2012 to 2013 is represented by the 2013 figure). Mathematically: $\frac{\text{Current}}{\text{Previous}}$.
  • Year Ending Quarter (YEQ) Data: YEQ data represents a rolling 12-month period, not a 3-month quarter. When calculating trend periods, ensure you treat it as a 12-month period.
    • Example: The midpoint of YEQ 2010-4 is July 1, 2010.
• Claims-Made (CM) vs. Occurrence Costs: A CM policy does not always cost less than or equal to an occurrence policy. A CM policy is only cheaper if claim costs (inflation) are increasing over time.
• Tail Factors: Always remember to multiply the loss development factors by the tail factor to find ultimate losses.
• Expense Averaging: If multiple years are given, calculate average expenses at the most granular level first (e.g., $\text{Avg. General Expenses} + \text{Avg. Other Acquisition} + \text{Avg. Licenses \& Fees}$) rather than averaging total expenses.

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Technical Calculations & Formulas

Combining Multi-Tiered Adjustments

If an adjustment factor (e.g., 1.05) applies to only a portion of the losses/premiums (e.g., 40%) and another factor (e.g., 1.10) applies to the rest (60%):

• Correct Approach: Weight the adjustment factors, not the percentages.
• Combined Factor Formula: $$\text{Combined Factor} = (\text{Portion}_1 \times \text{Factor}_1) + (\text{Portion}_2 \times \text{Factor}_2)$$ $$\text{Combined Factor} = 0.40 \times 1.05 + 0.60 \times 1.10 = 1.08$$

Insurance to Value (ITV)

• Rate Basis: ITV rates are typically expressed per unit of coverage (e.g., “Rate per $100 of coverage for 80% ITV”).
• Division Basis: Always divide by the coverage amount (amount of insurance) rather than the total property replacement value. Remember to scale by the ITV requirement (e.g., divide by $80\%$).

Non-Modeled CAT Loss Loading

• AOI Interpolation: To find the average Amount of Insurance (AOI) per exposure that aligns with the future average earned date, interpolate between the given calendar year AOIs.
  • Example: If CY2015 Avg AOI = 272.80 (midpoint 7/1/2015) and CY2016 Avg AOI = 280.99 (midpoint 7/1/2016), and the target average earned date is 1/1/2016, average the two values.

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Ratemaking & Trend Analysis

On-Leveling & Trends

• Written vs. Earned Premium: Pay attention to whether you are on-leveling written or earned premium. Do not default to the earned premium method if written premium is requested.
• Selecting Premium Trends: Use average on-leveled premiums to:
  1. Isolate the effect of exposure differences across periods (via Average premium).
  2. Isolate the effect of rate changes and one-time adjustments (via On-leveled premium).
• Trend Rationale Wording: When explaining why trending must be performed on on-leveled data, explicitly mention both one-time changes and historical rate changes.
• Trended Present Rates: The trend period for present rates runs from the original policy effective date to the future policy effective date (not average earned/written dates).
• Rate Change Effects: When discussing the impact of a rate change on average premium, address both the direct effects (rate change itself) and indirect effects (customer behavior/retention shifts).
• Expense Allocation: Commissions are 100% variable expenses unless stated otherwise. Do not include them in fixed expenses or omit them.

Law Changes (On-Leveling Losses)

• Check the scope of the law change:
  1. Policies written on or after implementation: The change affects losses gradually as policies earn out. The on-level factor calculation requires a parallelogram area calculation. !assets/images/2025/10/Careful-1760082117880.webp !assets/images/2025/10/Careful-1760162064857.webp
  2. Accidents occurring on or after implementation: Represents a clean vertical line; the change affects all losses immediately on the implementation date.

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Reserving & Loss Development

Incremental Triangles

• Format Requirements: When constructing incremental triangles for a specified range (e.g., 2012–2015), always include rows for all accident years (AY12, AY13, AY14, AY15), even if the latest years have zero values.
• Case Reserves: Ensure you account for claim counts/numbers correctly to calculate the change in case reserves accurately.
• Benktander Method: Avoid shortcut formulas to calculate unpaid/IBNR. Calculate the unpaid losses step-by-step to prevent calculation errors.

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Classification & Relativities

Credibility Weighting

• Credibility Basis: Verify the base of the credibility calculation (e.g., number of claims vs. number of exposures).
• Loss Ratio Approach: When credibility-weighting:
  • Weighting the indicated factor change: $\text{Credibility (C)} = 1.0$ (weighting the indicated change against no change).
  • Weighting the percentage change: $\text{Credibility (C)} = 0.0$ (representing the complement).

Indicated Rate Change by Class

• If the rating algorithm has zero additive fees, the indicated rate change factor is: $$\text{Indicated Rate Change} = \Delta\text{Relativity} \times \text{OBF}$$ (where OBF is the Offset Base Factor, reflecting the overall premium change offset).
• If the additive fee is non-zero, you must calculate the average premium under the full rating algorithm (including the fee) and compare the resulting premiums directly.