Actuarial Notes

CAS Exam 5 Spring 2014, Question 5

Study guide: Exam 5

A countrywide insurer's rate filing for a state contains the following:

  • All policies are annual.
  • The filed rates are planned to be in effect for policy year 2015.
  • There was a rate change of +7.5%, effective 7/1/2013. The prior rate change before that was in 2009.
  • Loss trend is 3% annually.
  • ULAE as a ratio of loss and ALAE = 10%.
  • Profit and contingencies provision = 5%.
  • Variable expense ratio = 20%.
  • The company purchased new software in 2010 to assist with the processing of claims.
  • Use an average of 2012 and 2013 for the rate level indication.
Calendar Year Earned Premium ($000)
2012 1,250
2013 1,400
Accident Year Reported Loss and ALAE ($000)
2012 750
2013 500
Calendar Year Current Level Average Policy Premium Fixed Expense Ratio
2009 $500 10%
2010 $520 23%
2011 $540 15%
2012 $560 12%
2013 $583 10%

Reported Loss and ALAE Development Factors

Accident Year 12-24 Months 24-36 Months 36-48 Months 48-60 Months 60+ Months
2006 1.45 1.35 1.10 1.02 1.00
2007 1.50 1.30 1.15 1.08 1.00
2008 1.40 1.35 1.10 1.03 1.00
2009 1.50 1.30 1.08 1.02
2010 1.85 1.15 1.10
2011 1.75 1.15
2012 1.80
All Year Average 1.61 1.25 1.11 1.04 1.00
5 Year Average 1.66 1.23 1.11 N/A N/A
3 Year Average 1.80 1.20 1.09 1.04 1.00
Average Excluding High/Low 1.60 1.25 1.10 1.03 1.00

Part a (5.5 points)

Calculate the indicated rate change. Justify the selections of premium trend, all development factors, and the fixed expense ratio.

Part b (1 point)

The chief actuary is concerned about the credibility of company data in this state and would like to begin using credibility weighting with the company's countrywide loss costs. Assess this approach, considering two desirable qualities of a credibility complement.

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Concepts tested

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