CAS Exam 5 Fall 2014, Question 11
Study guide: Exam 5
Given the following information for a homeowners book of business:
| Territory | Earned Exposures | Earned Premium ($000) | Ultimate Losses Excluding Catastrophes ($000) | Current Relativity |
|---|---|---|---|---|
| 1 | 2,500 | 3,375 | 3,200 | 1.150 |
| 2 | 7,000 | 11,200 | 6,200 | 1.000 |
| 3 | 500 | 700 | 1,000 | 0.900 |
- Ratio of ALAE to loss = 4%.
- Full credibility standard for exposures = 5,000.
- Use square root rule for credibility calculations.
- Territory 2 is the base class.
- The rating algorithm is Base Rate × Territory Factor × Amount of Insurance Factor.
Part a (2 points)
Calculate the credibility-weighted indicated non-catastrophe relativity to the base for each territory using the pure premium method.
Part b (0.5 points)
Territory 1 has a high percentage of low-value homes relative to territories 2 and 3. Describe a possible distortion to the indicated territory 1 relativity resulting from the distribution of home values.
Part c (0.5 points)
Assume that $1,000,000 of the loss in territory 2 came from a single loss. Discuss an appropriate adjustment to the analysis.
Answer this question and see the worked solution