CAS Exam 5 Spring 2017, Question 8

Study guide: Exam 5

A company's current rating plan for fire coverage for personal property insurance only includes territory. The following GLM outputs and experience are from a recent analysis of pure premium:

Exhibit 1 — "Number of Occupants GLM Relativities." A combination chart over the four occupancy levels 1-2, 3-4, 5-8 and >8. Grey bars show earned exposures against a right-hand axis running 0 to 2,500; a solid line with round markers shows the indicated relativity against a left-hand axis running 0 to 2; two dotted lines with triangular markers show the indicated relativity plus and minus two standard errors. Exposures fall away sharply after the 3-4 level, and the two standard-error lines fan out as they do — narrow and nearly on top of the indicated relativity at 1-2 and 3-4, but very wide at >8, where the band spans roughly 0.83 to 1.86.

Exhibit 2 — "Number of Occupants GLM Relativities by Year." The same four occupancy levels on the horizontal axis, with one line per accident year 2013 through 2016 showing that year's fitted relativity, on a left-hand axis running 0 to 2. The four years lie almost on top of one another at 1-2, 3-4 and 5-8, then diverge violently at >8, where the 2013 line rises to about 1.72 while the 2016 line falls to about 0.90.

• Number of occupants chi-squared percentage (entire variable) = 3.2%

Part a (0.75 points)

Fully justify whether number of occupants would be an appropriate addition to the rating classification plan.

Part b (1 point)

Identify and briefly describe two types of insurance environments which may discourage use of multivariate methods.

Answer this question and see the worked solution

Concepts tested

• Generalized Linear Model
• Classification Ratemaking
• Variable Selection
• Risk Classification Restrictions
• Predictive Analytics

More questions from this set

• CAS Exam 5 Spring 2017, Question 7
• CAS Exam 5 Spring 2017, Question 9