Adjust Loss Ratios for an Endorsement

Question

We have an Endorsement have provides additional coverage. We have 10%, 20%, 50%, and 100% options for this coverage. The average selected endorsement is 30.2%.

Our loss ratio with the endorsement is 90%. Our loss ratio without the endorsement is 101%.

i) Is is possible the loss ratios would differ if we could see the loss ratios for the endorsements for 10%, 20%, 50%, and 100%? I answered Yes because it seems possible they could

ii) Can we use the average endorsement being 40.2% to adjust the aggregate loss ratio? I have no idea how to answer this?

Answer 1

To address the first part of the question, we need to analyze the potential for differing loss ratios based on the various endorsement coverage levels (10%, 20%, 50%, and 100%). The current average selected endorsement is 30.2%, and the loss ratios are 90% with the endorsement and 101% without it. Given the different levels of coverage, it is indeed plausible that the loss ratios could vary significantly for each specific endorsement percentage. Each level of coverage may lead to different claims experiences and thus different loss ratios. Therefore, the answer to the first part is correct: Yes, it is possible that the loss ratios would differ

For the second part, regarding the use of the average endorsement of 30.2% to adjust the aggregate loss ratio, we need to consider the implications of using an average. The average endorsement percentage does not directly reflect the specific loss ratios associated with each individual endorsement level. Adjusting the aggregate loss ratio using an average could lead to inaccuracies, as it does not account for the variations in claims that might occur at different coverage levels. Therefore, it is not advisable to use the average endorsement to adjust the aggregate loss ratio without further analysis of how each specific endorsement impacts the loss ratios

In summary, the answers are:

i) Yes, it is possible the loss ratios would differ

ii) No, we cannot accurately use the average endorsement of 30.2% to adjust the aggregate loss ratio