CAS Exam 5 Fall 2017, Question 9
Study guide: Exam 5
An actuary is developing a rating algorithm for a new product covering professional liability for nurses working in hospitals.
Characteristics considered:
- Age of nurse
- Gender of nurse
- Hours worked per week by each nurse
- Number of nurses employed by the hospital
- Specialty of the nurse (Cardiac or General)
Given the following:
- 20% of customers will switch insurers based on price.
- The company's competitor uses specialty of nurse in their rating algorithms and charges the true expected cost.
- At the start of the program the company and the competitor each write 100 policies for Cardiac Nurses and 100 policies for General Nurses.
- There are no underwriting expenses or profit.
| Specialty | True Expected Cost |
|---|---|
| Cardiac | $500 |
| General | $200 |
Part a (0.5 points)
For one of the characteristics, briefly discuss two reasons why it would be an appropriate exposure base.
Part b (0.5 points)
Assess if age of nurse is an appropriate rating variable using two social criteria.
Part c (0.75 points)
The company decides not to use specialty of nurse in their rating algorithm. Quantify the effect on profitability for the company after one renewal cycle.
Answer this question and see the worked solution