In our Preferred company, we use tiers to further segment our business. In order
ID: 409633 • Letter: I
Question
In our Preferred company, we use tiers to further segment our business. In order to have the same loss ratio in each tier, we apply a tier rating factor to the premium charged. When the loss ratios for the tiers shift, we must reevaluate the rating factors. Fill in the Proposed Rating Factors for the tiers below in order to realign the loss ratios. Note that the loss ratios shown in the example have been adjusted to the tier C tier rating level of 1.000. Show your work.
Company Tier Factor Factor LR at Tier C Rate Preferred A 0.85 75.4% Preferred B 0.90 78.4% Preferred C 1.00 1.00 88.0% Preferred D 1.10 89.3% Preferred E 1.20 92.5%
Explanation / Answer
It is to be noted that :
Premium charged x Tier Rating factor = Loss Ratio
Thus,
Tier Rating factor is proportional to Loss Ratio ( i.e. increase in tier rating factor will improve loss ratio and vice versa )
The target is to have the same Loss Ratio which has been pegged 88% as for tier C
Loss ratios for others ( as displayed in the problem ) as to be brought upto 88%
Thus for any tier, the required tier rating factor = 88%/ LR at Tier C Rate
Thus , proposed rating factors :
Tier
Factor
A
88/75.4 = 1.167
B
88/78.4 = 1.122
C
1
D
88/89.3 = 0.985
E
88/ 92.5 = 0.951
Tier
Factor
A
88/75.4 = 1.167
B
88/78.4 = 1.122
C
1
D
88/89.3 = 0.985
E
88/ 92.5 = 0.951
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