CAS Exam 5 Fall 2016, Question 6
Study guide: Exam 5
The following information is available for a single-state, mono-line insurer:
Calendar Year ($000):
| 2013 | 2014 | 2015 | |
|---|---|---|---|
| General Expense | 4,525 | 4,175 | 3,875 |
| Other Acquisition | 5,220 | 6,000 | 6,750 |
| Commissions/Brokerage | 8,700 | 8,000 | 7,500 |
| Taxes, Licenses and Fees | 3,480 | 3,200 | 3,000 |
| Total Expenses | 21,925 | 21,375 | 21,125 |
Calendar Year ($000):
| 2013 | 2014 | 2015 | |
|---|---|---|---|
| Written Premium | 87,000 | 80,000 | 75,000 |
| Earned Premium | 90,500 | 83,500 | 77,500 |
The company's pricing actuary is asked to calculate an expense provision for 2016, and does so using a ratio of three years' total expense to three years' earned premium as follows:
\text{Expense provision} = \frac{21{,}925{,}000 + 21{,}375{,}000 + 21{,}125{,}000}{90{,}500{,}000 + 83{,}500{,}000 + 77{,}500{,}000} = 25.6\%Part a (0.75 points)
Briefly discuss three reasons why the actuary's approach is not appropriate.
Part b (0.5 points)
Identify an alternative approach to calculate the expense provision and briefly explain its benefit relative to the actuary's approach without performing any additional calculations.
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