CAS Exam 5 Spring 2013, Question 11
Study guide: Exam 5
An insurance company is researching three new rating variables to include in its homeowners risk classification system. The insurer has determined the following information about the existing book of business.
Credit Score:
| Credit | Exposures | Pure Premium | Competitor's Rating Plan Factor | Base Class |
|---|---|---|---|---|
| Excellent | 1,500 | $116.67 | 0.85 | No |
| Good | 2,500 | $128.00 | 1 | Yes |
| Fair | 1,000 | $155.00 | 1.3 | No |
| Total | 5,000 | $130.00 |
Age of Homeowner:
| Age of Homeowner | Exposures | Pure Premium | Competitor's Rating Plan Factor | Base Class |
|---|---|---|---|---|
| Under 30 years | 800 | $150.00 | 0.7 | No |
| 30 to 40 years | 1,200 | $116.67 | 1 | Yes |
| Over 40 years | 3,000 | $130.00 | 1.2 | No |
| Total | 5,000 | $130.00 |
Loss Prevention:
| Loss Prevention | Exposures | Pure Premium | Competitor's Rating Plan Factor | Base Class |
|---|---|---|---|---|
| Fire extinguisher | 100 | $100.00 | 0.9 | No |
| Smoke detector | 4,700 | $128.72 | 1 | Yes |
| None | 200 | $175.00 | 1.5 | No |
| Total | 5,000 | $130.00 |
Additional information:
- Credit is determined using the credit score for the primary homeowner.
- Age of homeowner is determined using the age of the primary homeowner.
- A homeowner with both a fire extinguisher and a smoke detector would be classified with a smoke detector.
- Full credibility claim standard = 400.
- The square root rule is used to determine partial credibility.
- A competitor's rating relativities are used as the credibility complement.
- Frequency for every risk classification = 10%.
- Assume that the insurer can implement only one new rating variable at this time.
- Assume that each variable is independent.
Part a (1.5 points)
For each potential rating variable, briefly describe two possible concerns of adding it to a risk classification system.
Part b (0.75 points)
Without performing any calculations, recommend and justify which rating variable the insurer should implement in a risk classification system.
Part c (1.25 points)
Develop the indicated credibility-weighted rating factors for the variable recommended in part b above.
Answer this question and see the worked solution