CAS Exam 5 Spring 2017, Question 6
Study guide: Exam 5
Given the following information:
| Class | Exposures | Current Rate | True Expected Cost | Proposed Rate |
|---|---|---|---|---|
| A | 3,500 | $500 | $550 | $540 |
| B | 8,000 | $400 | $350 | $370 |
- Scenario 1: If the proposed rates are implemented, the projected number of class A exposures will decrease to 3,150; the projected number of class B exposures will remain unchanged.
- Scenario 2: If the proposed rates are not implemented, the projected number of class A exposures will increase to 4,500; the projected number of class B exposures will decrease to 7,000.
- No other expenses are changed in either scenario.
- Profit provision is 0% in the indicated rate.
Part a (1 point)
Calculate the profit in each of the two scenarios.
Part b (0.5 points)
Explain whether the proposed rates should be implemented given a $10,000 implementation cost.
Answer this question and see the worked solution
Concepts tested
- Considerations for Implementing Rates
- Underwriting Profit
- Adverse Selection
- Classification Ratemaking