CAS Exam 5 Spring 2015, Question 11

Study guide: Exam 5

An insurer filed the following information in support of a rate change to be effective October 1, 2015:

All policies are semi-annual.
The new rates will be in effect for one year.
The indicated rate change from the prior rate review was 7%, with a target effective date of July 1, 2014.
The implemented rate change from the prior rate review was 2.5%, with an effective date of October 1, 2014.
The full credibility standard is 60,000 exposures over two years.
The insurer uses the square root rule for partial credibility.
The complement of credibility is selected using the trended present rates method.
There have been no significant changes to paid loss patterns over the past four years.
Variable expense ratio = 20%.
Fixed expense ratio = 7%.
LAE provision = 3% of loss.
Profit and contingencies provision = 6%.
Annual premium trend = 3%.
Annual loss trend = 5%.
All losses and subrogation/salvage recoveries are fully developed at 48 months.

Calendar/Accident Year	Earned Exposures	On-Level Earned Premium ($000)	Gross Reported Loss Evaluated at December 31, 2014 ($000)	Ratio of Subrogation/Salvage Received to Paid Loss Evaluated at December 31, 2014
2013	20,700	15,900	17,500	0.471
2014	23,200	17,500	18,800	0.314

Gross Reported Loss Development Factors:

Accident Year	12-24	24-36	36-48	48-Ult
2010	1.055	1.047	1.018	1.000
2011	1.052	1.043	1.020
2012	1.057	1.048
2013	1.061

Ratio of Subrogation/Salvage Received to Paid Loss Development Factors:

Accident Year	12-24	24-36	36-48	48-Ult
2010	1.012	1.006	1.006	1.000
2011	1.010	1.006	1.004
2012	1.536	1.004
2013	1.500

Calculate the indicated rate change and justify any assumptions made.

Part a (5.75 points)