CAS Exam 5 Spring 2015, Question 10
Study guide: Exam 5
Given the following information for an insurance company:
| Territory | Premium | Ultimate Loss Ratio |
|---|---|---|
| A | $45,000,000 | 80% |
| B | $55,000,000 | 60% |
- The company sets its rates to achieve a permissible loss ratio of 65%.
- All expenses are variable.
- Due to market constraints, the company has decided to cap rate increases in any single territory to a maximum of +20%.
Part a (1.25 points)
Taking market constraints into account, use the loss ratio method to determine the rate changes for territories A and B.
Part b (0.5 points)
If the company decides to use a different permissible loss ratio due to the territorial cap, the fundamental insurance equation will not be in balance. Describe an alternative to pricing changes the company can take to achieve balance in the fundamental insurance equation.
Answer this question and see the worked solution
Concepts tested
- Territory Ratemaking
- Overall Rate Level Indication
- Permissible Loss Ratio
- Underwriting Profit
- Loss Ratio Method
- Non-Pricing Solutions
- Ratemaking Constraints