In the loss ratio method of rate making, if the actual loss ratio is 50 percent, but the expected loss ratio is 60 percent, the future rate charged would be
A) increased 10 percent,
B) decreased 10 percent,
C) increased 20 percent,
D) decreased 16.66 percent,
E) decreased 20 percent.

Question

Quizplus · Accepted Answer

The future rate is adjusted based on the difference between the actual and expected loss ratios. If the actual loss ratio is lower than expected (50% actual vs. 60% expected), rates are typically decreased to reflect the lower losses. The adjustment is calculated as (expected loss ratio / actual loss ratio) - 1 = (60% / 50%) - 1 = 1.2 - 1 = 0.2 or 20%. However, to find the percentage decrease in rates, you divide the overcharge (10%) by the expected loss ratio (60%), resulting in approximately 16.66%.

In the Loss Ratio Method of Rate Making, If the Actual