CAS Exam 5 Spring 2018, Question 11
Study guide: Exam 5
Given the following information:
| Risk | True Expected Cost | Company A Insured Risks | Company A Charged Rate | Company B Insured Risks | Company B Charged Rate |
|---|---|---|---|---|---|
| High | 170 | 5,000 | 160 | 5,000 | 150 |
| Low | 130 | 5,000 | 140 | 5,000 | 150 |
| Total | 150 | 10,000 | 150 | 10,000 | 150 |
- There are no underwriting expenses or profit provisions.
- Market consists of 10,000 high risk insureds and 10,000 low risk insureds.
- Both companies write only one line of business.
- 20% of all insureds shop at renewal and base their purchasing decision on price.
Part a (1 point)
Calculate the profitability for each company after one renewal cycle.
Part b (0.5 points)
Briefly describe two possible actions for the company experiencing adverse selection to reduce the risk of insolvency.
Answer this question and see the worked solution