CAS Exam 5 Fall 2015, Question 11
Study guide: Exam 5
A homeowners insurance company uses only two rating variables, territory and amount of insurance. The company wishes to accomplish the following as part of an upcoming rate filing:
- Achieve an indicated average rate increase of +15%.
- Update class plan relativities based on indicated results.
- Adopt a minimum premium requirement of $800.
- Keep the same base classes.
The following information applies to the company's current book of business:
- Current base rate per exposure is $1,250.
| Amount of Insurance | Current Relativity | Indicated Relativity |
|---|---|---|
| Less than $100,000 | 0.750 | 0.600 |
| Greater than or Equal to $100,000 | 1.000 | 1.200 |
| Territory | Current Relativity | Indicated Relativity |
|---|---|---|
| Territory 1 | 0.800 | 0.850 |
| Territory 2 | 1.000 | 1.000 |
In-force Exposure Distribution:
| Amount of Insurance | Territory 1 | Territory 2 |
|---|---|---|
| Less than $100,000 | 1,500 | 4,000 |
| Greater than or Equal to $100,000 | 1,500 | 3,000 |
Using the extension of exposures method, calculate the base rate that satisfies all of the company's objectives.
Part a (4 points)
Answer this question and see the worked solution