We can then compute expected loss ratios as the ratio of expected losses to generated charged premiums, which we then compare with

actual loss ratios.

ABC earns a dividend of $7,500, which is 75 percent times the difference between the expected loss ratio of 60 percent and the

actual loss ratio of 50 percent, times the premium.

To illustrate the estimation results obtained from using the weighted moving averages and setting [alpha] according to the RMSPE criterion, in panels 1.1 to 1.5 in chart 1, the

actual loss ratios are compared with the forecasts of loss ratios for the five lines of insurance in the experiment.

Thus, by chance a looser underwriting level could have better performance than the next underwriting level; this is demonstrated in Exhibit 4 which lists the expected loss ratio,

actual loss ratio range, and expresses the expected loss ratio as a percentage of the number of policies.

The account will be priced much more on the basis of the long-term relationship and the

actual loss ratio. In a competitive bid situation, a carrier may be seeking to increase its market share.

Now, suppose that the East Coast was in fact severely hammered by hurricanes in the third quarter, causing the

actual loss ratio on the CBOT eastern pool of catastrophe policies to rise from a projected 10% to an actual 12%.

It will also be required to pre-file its rates for review every three years, and to re-file its rates for the next year if its actual rates in any year result in an

actual loss ratio of less than 40 percent for the immediately preceding calendar year.

where L/P is the loss ratio, Trend is a linear time trend variable, Age is the number of years that the cohort of contracts has been in effect, X is a vector of contractual characteristics that includes the expected loss ratio and lagged

actual loss ratio, [(L/P).sub.i,t-1], W is a vector of firm-specific characteristics, such as firm size and organizational structure, [c.sub.i] is the cohort-specific individual effect, and the error term [epsilon] is assumed to have a mean of zero.

Assuming a working year of 300 days, the

actual loss ratio was derived by dividing 23.8 by 300 and multiplying the result by 0.0173 to get 0.00137, or a little more than one-eighth of 1%.