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Premium Asset
- Premium that the insr expects to collect based on the expected ult loss experience less the premium that the insr has already booked
- Commonly referred to as Earned But Not Rpt P (EBNR)
- Appears on a balance sheet as the "Asset for Accrued Retro P"
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Reasons for popularity or retro rated policies
- Returns P to insd for good loss experience (attracts good customers)
- Cash flow feature - insd can hold to cash longer
- Cost of ins much harder to predict today than in the past (inflation, regulation, ...)
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PDLD Ratio
- Ratio of premium development to loss development
- PDLD ratio is applied to expected future loss dvpmt to calculated expected future premium dvpmt
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Formula approach to calculating PDLD ratios
- First adjustment period
- Pn = [BP + (CLn * LCF)] * TM / L1
- where L1 = SP * ELR * %Rpt1
- SP = standard premium
- BP = basic premium
- LCF = loss conversion factor
- TM = tax multiplier
- CL = capped losses
Second adjustment period(P2 - P1)/(L2 - L1) = (CL2 - CL1) / (L2 - L1) * LCF * TM
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Empirical approach to calculating PDLD ratios
- Selected PDLD * % Rpt loss = PDLD * Loss Emg
- (Upward cum PDLD * % Rpt) / (Upward cum % Rpt) = CPDLD ratio
- Premium Asset = (Exp fut P + P booked from prior adj) - (P booked as of ...)
- Note: PDLD usually > 1 in first retro adjustment because
- basic premium is included in the first retro computation
- only a small portion of the loss is limited
- LCF and TM results in more than $1 of premium per $1 loss
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PDLD Procedure: Adv and Disadv
- + modeled directly on retro formula, so easily explained
- + emphasis on premium sensitivity
- + useful when chgs in retro rating plan parameters
- - defn of loss may include ALAE
- - chgs in mix of business
- - collectibility of premium
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