CAS Exam 5 Fall 2015, Question 9
Study guide: Exam 5
Given the following information:
| Relativities | |
|---|---|
| Territory A | 0.60 |
| Territory B | 1.10 |
| Smoke Detector | 0.90 |
| No Smoke Detector | 1.00 |
| 2014 Earned Exposures: Territory A | 2014 Earned Exposures: Territory B | |
|---|---|---|
| Smoke Detector | 750 | 600 |
| No Smoke Detector | 150 | 100 |
| Accident Year 2014 Incurred Loss and ALAE: Territory A | Accident Year 2014 Incurred Loss and ALAE: Territory B | |
|---|---|---|
| Smoke Detector | $160,000 | $260,000 |
| No Smoke Detector | $40,000 | $52,000 |
- Base rate = $550.
- All rates are effective January 1 of each year.
- Management has decided that the relativity of the highest-rated territory will not exceed 130% of the lowest-rated territory in any future rate level change.
- Assume data for 2014 is fully credible.
Part a (2.25 points)
Considering management constraints, use the loss ratio method to calculate the territorial relativity changes for a revenue-neutral overall change.
Part b (0.5 points)
Evaluate the impact that the relativity changes may have on this book of business in the short and long term.
Answer this question and see the worked solution
Concepts tested
- Territory Ratemaking
- Adverse Selection
- Loss Ratio
- Loss Ratio Method
- Insurance Premium
- Ratemaking Constraints