ILF in Historic Exposures at Present Company Rates Method
I'm (very) confused by limits used in the wiki's example:
In the standard approach and in the Present Average Company Rates method, we start with Basic Limits premium.
In the HEPCR method, we apply an ILF to the current rates * historic exposures * ELR to arrive at BLEL. This, to me, says that the provided current rates are not basic limits rates. If we are given current level premium, but could otherwise use the standard or PACR method, should we use ILFs as we do in the HEPCR method?
However, the ILFs vary with the aggregate limit of the *historic* period: 1) if we're adjusting current rates to basic limits, why would it depend on historic limits? 2) we use the basic limits per-occurrence & historic aggregate ILFs; doesn't basic limits denote a $200k aggregate? 3) The resulting CSLC will be compared to actual basic limits losses for the period - if those are adjusted to basic limits (including aggregate limits), why would expected losses be adjusted to a different aggregate limit?
Sorry for the long post, and thanks for your help.
Comments
Great question - we should improve the wiki exposition as in the PDFs for the standard and present average company rates approaches there is a small but critical footnote.
ISO Rule 5B.1 says The term "company subject loss cost" is used to describe total basic limits company loss costs (basic limits expected losses) subject to experience modification.
ISO Rule 5B.2 says Determine the annual basic limits company premium for the policy being rated at the actual policy annual aggregate limits by subline.
So in the standard approach and present average company rates approach, when we're given the annual basic limit premium it is implicit this is at the basic per-occurrence limits (defined in Rule 5A) and actual aggregate limits.
The extract of the ISO manual included in the study kit does not say how you would price higher than basic per-occurrence limits but it seems reasonable to assume if asked to do so you would apply the ILF to the CSLC if at the basic aggregate limit, or back out one ILF and replace with the correct version if going from one non-basic aggregate limit to another.
For the historical exposures approach we do not know the annual basic limits company premium so we estimate it as the historical gross annual sales multiplied by the current company rates per exposure (for the per-occurrence limit and aggregate limit defined in Rule 5A - note this means $200,000 aggregate limit) and multiplied by the ILF which keeps us at the basic per-occurrence limit but moves it to the actual aggregate limit used at the time. Notice this puts us back in the same situation as the first two methods (because of that footnote).