CAS Exam 5 Spring 2019, Question 6

Study guide: Exam 5

Given the following countrywide information:

	2016 Expense Ratio	2017 Expense Ratio	2018 ($000s)
Direct Premium Written			6,100
Direct Premium Earned			5,920
Commission and Brokerage Expenses Incurred	12.0%	13.0%	945
Other Acquisition Expense Incurred	12.8%	12.7%	760
General Expenses	15.0%	5.5%	325
Taxes, Licenses, & Fees Incurred	2.1%	2.2%	130

Part a (1.25 points)

Select and justify a total expense ratio for use in ratemaking assuming all expenses are variable.

Calculate the variable permissible loss ratio using the expense ratio from Part a.

Briefly discuss two potential distortions from using the results in Part b to determine rates in a new state.

Calculate the variable permissible loss ratio if 100% of the taxes, license & fees and 75% of the general expenses do not vary by premium.