CAS Exam 5 Spring 2019, Question 8
Study guide: Exam 5
Given the following pricing strategies for an insurer with two classes of business:
- Strategy 1: Make no change to current rates.
- Strategy 2: Implement a new rating variable to charge different rates for Class A and Class B.
- Strategy 3: Do not implement a new rating variable, but increase rates for all risks.
Strategy 1 – No Change
| Class | Number of Risks | Losses & Expenses per Risk | Rate per Risk |
|---|---|---|---|
| A | 5,000 | 900 | 1,050 |
| B | 10,000 | 1,000 | 1,050 |
One-time expense to implement Strategy 1: $0
Strategy 2 – New Rating Variable
| Class | Number of Risks | Losses & Expenses per Risk | Rate per Risk |
|---|---|---|---|
| A | 5,000 | 900 | 1,000 |
| B | 10,000 | 1,000 | 1,100 |
One-time expense to implement Strategy 2: $500,000
Strategy 3 – Rate Increase for All Risks
| Class | Number of Risks | Losses & Expenses per Risk | Rate per Risk |
|---|---|---|---|
| A | 5,000 | 900 | 1,100 |
| B | 10,000 | 1,000 | 1,100 |
One-time expense to implement Strategy 3: $500,000
Part a (0.75 points)
Calculate the expected total profit for the insurer under each strategy.
Part b (1 point)
Briefly evaluate the following for Strategy 2 and Strategy 3:
i. Assumption that the number of risks by class will be the same as Strategy 1.
ii. Impact this assumption has on each strategy's expected total profit.
Answer this question and see the worked solution