CAS Exam 5 Spring 2016, Question 9
Study guide: Exam 5
The following are considerations for pricing a large deductible policy:
- Deductible = $750,000 per occurrence.
- Expected total ground-up losses = $1,500,000.
- ALAE = 12% of total ground-up losses.
- Fixed expenses = $75,000.
- Variable expenses = 15% of premium.
- Underwriting profit provision = 3%.
- Risk margin = 10% of excess losses.
- Cost of processing losses below the deductible = 5% of losses below the deductible.
- Credit risk = 1.5% of expected deductible payments.
- Deductible applies to losses only and does not reduce ALAE.
- Loss elimination ratios (LER) and excess ratios are:
| Loss Limit ($000) | LER | Excess Ratio |
|---|---|---|
| $500 | 85% | 15% |
| $750 | 90% | 10% |
| $1,000 | 95% | 5% |
Calculate the large deductible premium.
Part a (2 points)
Answer this question and see the worked solution