Finance Department

 

Date of this Version

1993

Document Type

Article

Citation

Journal of Actuarial Practice 1 (1993), pp. 97-110

Comments

Copyright 1993 Absalom Press

Abstract

There are two distinct stages in the property and casualty ratemaking process. First, there is the portfolio average rate change. Second, there is the adjustment of classification relativities. It is well known that the loss ratio and pure premium (also called the loss cost) methods are algebraically equivalent in the stage called the portfolio average rate change. This paper reviews the proof of this equivalence. Further, it is proved algebraically that the loss ratio and pure premium methods are also equivalent in calculating classification relativities (or differentials) if certain data requirements can be met. A short numerical example of this equivalence is included.

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