CAS Exam 5 Spring 2015, Question 13
Study guide: Exam 5
An automobile insurance company uses the following information for ratemaking:
Earned Exposures:
| Vehicle Symbol | Driver Age: Under 25 | Driver Age: 25 and Older |
|---|---|---|
| A | 250 | 100 |
| B | 75 | 200 |
| C | 75 | 500 |
| Driver Age | Incurred Loss and ALAE |
|---|---|
| Under 25 | $235,800 |
| 25 and Older | $482,560 |
| Current Rating Factors | |
|---|---|
| Symbol A | 0.80 |
| Symbol B | 1.00 |
| Symbol C | 1.30 |
| Under 25 | 1.00 |
| 25 and Older | 0.75 |
Part a (0.5 points)
Briefly discuss the use of driver age as a rating variable in the insurer's risk classification system with respect to two relevant considerations.
Part b (2 points)
Calculate the indicated driver age relativities and the corresponding base rate that would achieve a revenue neutral change. Justify the selection of a methodology.
Answer this question and see the worked solution