The Effect of Changing Exposure Levels on Calendar Year Loss Trends

This purpose of this paper is to illustrate the impact that changing exposure levels have on calendar year loss trends by creating a situation where the calendar year loss trends are inaccurate. The results show that the calendar year loss trends can be distorted significantly by exposure level changes, with the potential to affect rate levels if not accounted for. However, the effect of changing exposure could be accounted for. The proposed method of data organization will allow the impact of changing exposure levels to be negated, allowing actuaries to set more precise rates. Due to the significant impact that changing exposure levels can have on the calendar year loss trends, it would be beneficial to organize the data in a similar fashion to what is proposed in this paper. This would reduce the chance of increasing market share at an inadequate rate or decreasing market share with an excessive rate. Keywords: Calendar year, loss trends, data organization, exposure level change.