Trends in the underlying parameters
When the management of a company is about to set its premium rates for the following year, an estimate of the likely parameters that go towards the make up of the premium rates will have to be made. These parameters include claims frequency, claims cost, expenses, and interest income. Here we are just considering the basic premium ignoring other factors. At its disposal, the management should have several years of basic data available. What is required is to have as good an estimate of the parameters as possible with the resulting outcome differing by pure random variation. It is not enough just to average the last few years or even longer and take the resulting figure as the one required. Some consideration should be given to the underlying trends or bias in certain directions in these parameters. A trend in any one of the parameters may be observed by considering several years data and a decision will be made on which direction this trend will take, whether by an explicit allowance or by simply doing nothing at all and lagging behind the trend.