Term Test 1_solutions

718751100x281251028125 onlevelfactor1100102812510699

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Unformatted text preview: to be re‐stated at current levels: o Terr 1: 10 x ($1,100 x 1.0 + $50) = 11,500 o Terr 2: 15 x ($1,100 x 1.5 + $50) = 25,500 • Total 2012 earned premium at current level = 11,500 + 25,500 + 6,900 + 10,200 = 54,100 54,100 = 1.064 • Therefore, on‐level factor = 50,850 Alternative solution: use parallelogram method • Rate increased April 1, 2012: area of triangle after April 1 = ¾ x ¾ x ½ = .28125 • Area of earned prior to April 1 = 1 ‐ .28125 = .71875 • Average rate level = 1000 x .71875 + 1100 x .28125 = 1028.125 • On level factor = 1,100 / 1028.125 = 1.0699 • NOTE: This solution is not appropriate for 2 reasons: o Parallelogram method assumes premium is written evenly throughout the year, which is clearly not the case in this example o Also, because there is a fixed cost component, the “average premium” level should incorporate that component an...
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