CAS Exam 5 Spring 2013, Question 5

Study guide: Exam 5

A company is reviewing the rate level adequacy. Given the following information for a book of business:

All policies are annual.
Current rates have been in effect for three years.
New rates will be in effect for 18 months beginning on July 1, 2013.
Annual premium trend = -1%.
Annual loss trend = +3%.
Loss adjustment expense provision = 2.5% of loss.
Historical expense ratios:
- Fixed = 6%.
- Variable = 30%.
Underwriting profit and contingencies provision = 5%.
Ultimate losses are estimated using the reported development technique.
On January 1, 2014, the company will reduce agency commissions by 3% of premium.

Calendar Year Ending	Earned Premium ($000s)
December 31, 2011	$2,163
December 31, 2012	$2,120

Reported Losses ($000s):

Accident Year	12 months	24 months	36 months	48 months	60 months
2008	$780	$928	$1,030	$1,083	$1,094
2009	$765	$921	$1,004	$1,053
2010	$760	$920	$1,012
2011	$805	$966
2012	$890

Calculate the indicated rate change.

Part a (4 points)