An insurer is considering a rate change for annual policies that will be written in calendar year 5. The experience period used to determine the rate change is policy year 3. If loss cost inflation is 2% per year, what is the trend factor ?

• 1.0301
• 1.0404
• 1.05
• 1.051
• 1.0612

The midpoint of policy year 3 is the end of calendar year 3 and the midpoint of the forecasting period is the end of calendar year 5. Hence the trend factor equals 1.02 ² = 1.0404.