An Introduction to Premium Trend

A fundamental aspect of insurance ratemaking is the calculation of the indicated rate level change for a segment of an insurer’s book of business. The indicated rate level change is simply the difference between the current rate level and the indicated rate level. So how do we determine the indicated rate level? Since ratemaking is prospective, the indicated rate level is the rate level that achieves a balance between the expected premium income and the expected losses and expenses (including a profit provision that considers investment income) for a future policy period. While it may be clear that losses and expenses are subject to continuous change from economic forces such as inflation, the average premium per exposure can also change significantly over time, even in the absence of rate changes. In the calculation of the indicated rate level change, we recognize the continuous change in the frequency and severity of claims when projecting a future loss level. Similarly, our projection of the future average premium level may be quite different from the historical or current level. There are several factors that can influence the average premium level and two main methods of properly accounting for the effect on the indicated rate level change.