Trend

Study guides: Exam FAM, Exam ASTAM, Exam CP-321, Exam GH-201C, Exam GH-201U, Exam GI-101, Exam GI-301

Trend is the systematic change in loss costs or exposures over time, applied in ratemaking to project historical experience forward to the future rating period.

\text{Trend Factor} = (1 + r)^n

\text{Trend Period} = \text{Midpoint of future rating period} - \text{Midpoint of historical period}

• Loss trend captures inflation, social inflation, and severity changes; it is applied in both the Loss Ratio Method and the Pure Premium Method
• Exposure trend (e.g., wage growth for workers comp payroll) is applied only in the Pure Premium Method to adjust the denominator of the pure premium calculation
• The trend period runs from the average date of historical losses (midpoint of the accident year) to the average date of future losses (midpoint of the prospective rating period)

Applying Loss and Exposure Trend AY 2023 ultimate losses = \$1{,}000{,}000; payroll exposures = \$50{,}000{,}000. Historical midpoint = 7/1/2023; rating period midpoint = 7/1/2026. Loss trend = 4\%/\text{yr}; exposure trend = 2\%/\text{yr}.

Answer Trend period = 3.0 years. \text{Trended losses} = 1{,}000{,}000 \times 1.04^{3} = 1{,}124{,}864 \text{Trended exposures} = 50{,}000{,}000 \times 1.02^{3} = 53{,}060{,}400 \text{Trended pure premium} = 1{,}124{,}864 / 53{,}060{,}400 = \$2.12 \text{ per } \$100 \text{ payroll}