Theoretical Mod question
Hi,
If we were asked to calculate the experience mod factor and the question had expected development, and say we were asked what would happen to the e-mod if the loss data was evaluated 3 months after the original date (e.g. Oct 1 instead of July 1).
The e-mod would decrease since the loss evaluation date would only affect expected development, and 3 months later would decrease AER, which would decrease the mod = Z*(AER-EER)/EER. Is this correct or am I missing something?
Thank you!
Comments
Let's break this apart. Mod = Z * (AER - EER) / EER.
AER = (Expected future loss + Loss History) / CSLC.
The CSLC shouldn't change based on the extra development. The Z value and EER are determined from the tables using the CSLC so also shouldn't change.
Assuming the additional three months of development results in a positive change in the losses (i.e. not negative development due to salvage/subrogation etc.) then broadly speaking:
If the development in the additional 3 months is in line with expectations then the AER won't change because the expected future loss would reduce by this quantity and the loss history would increase by this quantity. If the AER didn't change then the e-mod didn't change.
So we have to work out what happens to the expected future loss.
The expected future loss is the basic limit company loss cost multiplied by the EER and the LDF from table 15. The basic limit company loss cost is unchanged by moving the evaluation date, as is the EER as we saw above. Table 15 contains rows in three month development intervals so we would use the new LDF which is smaller.
Therefore, given the information in your original question, we don't know what would happen to the e-mod. We have a smaller LDF after an additional three months so the expected future loss is smaller but we don't know if the reduction in the expected future loss was bigger than or smaller than the actual change in loss during this time. Without knowing that, we can't tell if the AER increased, decreased, or remained the same. Without knowing how the AER changed, we can't say how the e-mod changed.