CAS Exam 5 Spring 2014, Question 10
Study guide: Exam 5
A company is implementing a recently approved private passenger automobile rate revision. The indicated rate change was 20% while the requested rate change was 8%.
Part a (0.75 points)
Briefly describe three reasons the company may have decided to propose a rate increase substantially lower than the indicated rate change.
Part b (0.5 points)
Briefly discuss two actions the company could take to offset the pricing shortfall.
Part c (1 point)
Calculate the proposed base rate to achieve the overall 8% rate increase assuming no change in any rate differentials. Use the following information from the company's rate filing:
| Multiplicative Rating Factor 1 (R1) | Exposures (000) | Rate Differential |
|---|---|---|
| 1 | 150 | 1.350 |
| 2 | 500 | 1.000 |
| 3 | 100 | 0.990 |
| Overall | 750 | 1.069 |
| Multiplicative Rating Factor 2 (R2) | Exposures (000) | Rate Differential |
|---|---|---|
| A | 250 | 0.870 |
| B | 300 | 1.250 |
| C | 200 | 1.000 |
| Overall | 750 | 1.057 |
| Additive Discount | Exposures (000) | Rate Differential |
|---|---|---|
| Yes | 450 | 0.050 |
| No | 300 | 0.000 |
| Overall | 750 | 0.030 |
- Current average premium per vehicle = $450.
- Indicated rate change = 20%.
- Requested rate change = 8%.
- Fixed expense per vehicle = $35.
Vehicles are rated as follows:
P_P = [B \times R_1 \times R_2 \times (1 - D) + A_P]
Where P_P = Proposed policy premium, B = Base rate, R_1 = Multiplicative Rating Factor 1, R_2 = Multiplicative Rating Factor 2, D = Additive Discount, A_P = Additive Per Exposure Expense Fee.
Answer this question and see the worked solution
Concepts tested
- Considerations for Implementing Rates
- Rate Change
- Underwriting Profit
- Lifetime Value
- Non-Pricing Solutions
- Rating Algorithm