CAS Exam 5 Spring 2017, Question 2
Study guide: Exam 5
Given the following policy year information:
| Effective Date | Overall Average Rate Change |
|---|---|
| October 1, 2015 | 5% |
| April 1, 2016 | 10% |
| October 1, 2016 | 5% |
- All policies are annual.
- Policy year 2016 written premium = $100,000.
- Policy year 2016 earned premium = $100,000.
- Policy year 2016 ultimate losses including LAE = $80,000.
- Loss trend = 0%.
- Premium trend = 0%.
- There are no fixed expenses.
Part a (1 point)
Calculate the policy year 2016 earned premium at current rate level using the parallelogram method.
Part b (0.25 points)
Calculate the variable expense ratio that would earn an underwriting profit of 5% at the current rate level.
Part c (0.5 points)
Assume the company rapidly increased exposures throughout 2016. Explain whether the parallelogram method would overstate or understate a rate level indication.
Part d (0.25 points)
Briefly describe a scenario in which policy year premium is not fixed at the completion of the policy year.
Answer this question and see the worked solution