CAS Exam 5 Fall 2013, Question 5
Study guide: Exam 5
Given the following information:
- All policies are annual, and rate level is reviewed annually.
- Rate change takes effect on January 1, 2013.
- Unlimited annual loss frequency trend = -1%.
- Unlimited annual loss severity trend = +5%.
- Annual average written premium trend per exposure = 0%.
- Assume the exposures are inflation sensitive.
- Annual exposure trend = +1%.
| Calendar/Accident Year | On-Level Earned Premium ($000s) | Reported Losses as of December 31, 2012 ($000s) | Reported Losses Excess of $1 Million as of December 31, 2012 ($000s) | Unlimited Loss Development Factor |
|---|---|---|---|---|
| 2003 | $60,612 | $34,054 | $456 | 1.00 |
| 2004 | $61,941 | $44,617 | $4,888 | 1.00 |
| 2005 | $66,893 | $41,086 | $5,348 | 1.00 |
| 2006 | $67,092 | $39,025 | $8,774 | 1.00 |
| 2007 | $65,960 | $45,646 | $8,134 | 1.00 |
| 2008 | $65,037 | $36,383 | $0 | 1.00 |
| 2009 | $65,242 | $38,487 | $1,398 | 1.00 |
| 2010 | $67,732 | $36,799 | $0 | 1.03 |
| 2011 | $69,450 | $38,608 | $2,002 | 1.08 |
| 2012 | $67,213 | $45,295 | $9,000 | 1.20 |
| Total | $657,172 | $400,000 | $40,000 | N/A |
Part a (1.5 points)
For accident year 2012, determine the trended ultimate loss ratio to use in the January 1, 2013 rate level analysis incorporating a large loss adjustment for claims above $1 million.
Part b (0.5 points)
Discuss the appropriateness of using a large loss adjustment in part a. above.
Part c (0.75 points)
Assume the rate associated with the first $1 million of coverage is analyzed using only the data above. Briefly discuss three modifications to loss and premium elements that would produce a more accurate rate analysis.
Answer this question and see the worked solution