How to Determine Sources of Error in the Frasier Method

By Mindy Epstein | March 30, 2022

Reinsurance analysts usually fear the Frasier method because of the potential for errors. But what is the best way to address fear? Take it head-on (at least for some!). When it comes to Frasier, this means understanding where the most common errors can occur. Before you dive in, make sure to start with an understanding of how to master the Frasier Method.

Where can the most common errors occur in the Frasier method?

First Year Premium – Since each subsequent duration in the Frasier calculation is based on the probability of the prior duration, a mistake in duration one will impact all the following durations. First year premium is frequently handled in two different ways, depending on the treaty. A first year premium rate can be 0, or it can have a rate, but it is subject to a 100% allowance. The Frasier calculation will produce a different rate in subsequent durations, depending on whether a zero or non-zero rate is used for the first year. An illustration is provided below:

Frasier with Zero as the First Year Premium:
Policy Year Insured 1 Rate Insured 2 Rate Frasierized Rate
1 0.00 0.00 0.00000
2 4.41 8.98 0.15000
3 4.86 9.89 0.15000
4 5.40 10.93 0.25697
5 5.98 12.05 0.41366

* Assume NAR is $15,000 – Premium would be 0.0000 * (15,000/1,000) = $0.00

Frasier with Non-Zero as the First Year Premium – 100% Allowance:
Policy Year Insured 1 Rate Insured 2 Rate Frasierized Rate
1 9.17 19.05 0.17643
2 4.41 8.94 0.20199
3 4.86 9.89 0.30978
4 5.40 10.93 0.44750
5 5.98 12.05 0.41366

* Assume NAR is $15,000 – Premium would be .17463 * (15,000/1,000) = $2.62 Allowance – 100% = -$2.62 Net Premium Owed = $0.00

The Net premium owed in both cases is the same, but as you can see, the premium rates for durations 2 through 5 differ. These differences compound and can become significant at later durations. Knowing which method to use is crucial for obtaining accurate results throughout the life of a policy.

Insured Ages – In most cases, the issue age for each insured is used in the Frasier calculation. In some instances, a blended age or the oldest of the two insureds is used for both insureds. Knowing how age is calculated helps ensure that the information reported and used is correct.

Uninsurable Life – If one of the lives is uninsurable at issue, there are several ways to account for it. In some treaties, the Frasier calculation is not performed, and a single life rate is used based on the characteristics of the insurable life. The second life is not taken into consideration for premium-rate purposes. In other treaties, a flat rate is used for each duration rather than the actual rate based on the characteristics of the uninsurable life. A third possibility is that the information on the uninsurable life is used with a high mortality rating factored into the Frasier calculation.

Change/Update of Insured Information – The one potential problem that can arise is if the insured’s data used to generate the Frasier premium rates is initially inaccurate or has changed. These are usually uncovered during a premium review. The rates used do not match the reported insured’s characteristics; therefore, the premium rate is questioned. Within the TAI system, a function updates the premium rates based on the current cession information.