The Responsiveness of Automobile Trend Factors

The essence of most actuarial ratemaking techniques is the adjustment o f past actual loss experience to anticipated prospective levels . One decision the actuary is confronted with as a part of this process relates to the selection of trend factors to reflect the fact that inflation (and other socio-economic factors ) will cause average claim costs to be higher during the future period covered by the revised rates than during the experience period being reviewed. This paper concerns itself with the responsiveness of current procedures used to determine these trend factors, specifically with regard to automobile insurance. First, a critical review of current techniques will be undertaken, with the conclusion being reached that the present methodology is not sufficiently responsive. Following this, an alternative approach (utilizing current cost factors and econometric models) will be suggested that should better respond to changing economic conditions which have been so characteristic in the past few years.