CAS Exam 5 Spring 2013, Question 9
Study guide: Exam 5
An actuary develops an overall indicated rate increase of 4.5% using the following assumptions:
- All expenses are variable.
- Total permissible loss ratio = 65%.
- Profit and contingency provision = 5%.
The actuary's manager asks that the expenses be split into fixed and variable components as follows:
- Fixed = 75% of total expenses.
- Variable = 25% of total expenses.
Part a (1.25 points)
Calculate the revised overall rate indication with the new expense split suggested by the actuary's manager.
Part b (0.25 points)
Briefly explain why splitting the expenses as described above results in a different indication.
Part c (0.5 points)
Identify two reasons an actuary may want to split expenses into fixed and variable components.
Answer this question and see the worked solution
Concepts tested
- Expense Provisions
- Overall Rate Level Indication
- Loss Ratio
- Fixed Expenses
- Variable Expenses
- Permissible Loss Ratio