An insurer is considering a rate change for semi-annual policies that will be written from 08/01/CY5 to 07/31/CY6. The experience period used to determine the rate change is policy year 1. If loss cost inflation is 4% per year, what is the trend factor ?

• 1.17
• 1.1853
• 1.1867
• 1.201
• 1.2167

Since the policies are semi-annual policies, some policies written in calendar year 1 may give coverage until 06/30/CY2. In particular, the midpoint of the experience period is 10/01/CY1. Similarly, the forecasting period is 08/01/CY5 to 01/31/CY7 and the midpoint is 05/01/CY6. Hence the trend factor equals 1.04 ^14/3 = 1.201.