CAS Exam 5 Spring 2019, Question 12
Study guide: Exam 5
Given the following outputs from a retention model:
Number of Policies Renewed by Rate Change:
| Rate Change | Territory A | Territory B |
|---|---|---|
| -20% | 11,610 | 6,825 |
| -10% | 11,475 | 6,750 |
| 0% | 11,408 | 6,600 |
| +10% | 10,800 | 6,300 |
| +20% | 9,450 | 6,000 |
Current book information:
| Territory A | Territory B | |
|---|---|---|
| Current Policy Count | 13,500 | 7,500 |
| Current Premium ($) | 2,700,000 | 1,350,000 |
| Ultimate Loss Ratio | 80% | 70% |
- All expenses are variable.
- Policy count retention level does not affect premium projections.
- Rates are set to meet management targets:
- i. 70% permissible loss ratio for total book.
- ii. 80% minimum retention ratio in each territory.
Part a (1.5 points)
Recommend rate changes for territories A and B using the loss ratio method, taking management targets into account.
Part b (0.5 points)
Describe how the rate changes recommended in part a could drive adverse selection.
Part c (0.5 points)
Identify two non-pricing solutions that could return the fundamental insurance equation to balance.
Answer this question and see the worked solution
Concepts tested
- Overall Rate Level Indication
- Permissible Loss Ratio
- Territory Ratemaking
- Classification Ratemaking
- Non-Pricing Solutions
- Loss Ratio Method
- Considerations for Implementing Rates