CAS Exam 5 Fall 2014, Question 7

Study guide: Exam 5

An insurance company began writing personal automobile policies in 2011. Given the following information for the insurance company:


Variable expense ratio	20%
Profit and contingency provision	5%
Fixed expense per exposure	$50

Expense and profit provisions are not expected to change.
Policies have six-month terms, are written uniformly throughout the year, and include one automobile per policy.
The company is currently charging an average premium per policy of $500.
The annual loss trend factor = 3%.
The data is fully credible.
When calculating the indication, consider data from all three years.
Rates are assumed to be effective July 1, 2014, and in effect for six months.

Calculate the overall indicated rate change, including justification for the selection of projected ultimate pure premium.

Part a (2.5 points)