CAS Exam 5 Fall 2019, Question 4
Study guide: Exam 5
Given the following information for an insurance company that sells claims-made policies:
- Exposure levels are constant.
- Loss costs increase by 3% each report year.
- An equal number of claims are reported each year.
- All claims are reported within four years of occurrence.
| Report Year | Lag 0 | Lag 1 | Lag 2 | Lag 3 |
|---|---|---|---|---|
| 2014 | 100 | 100 | 100 | 100 |
| 2015 | 103 | 103 | 103 | 103 |
| 2016 | 106 | 106 | 106 | 106 |
| 2017 | 109 | 109 | 109 | 109 |
| 2018 | 113 | 113 | 113 | 113 |
(Loss Cost by Report Year Lag.)
Part a (0.75 points)
Demonstrate and briefly explain why a claims-made policy will cost less than an occurrence policy.
Part b (1 point)
Demonstrate and briefly explain whether a claims-made policy or an occurrence policy would be more underpriced if the actual loss cost trend by report year is 10%.
Part c (0.75 points)
Briefly describe one difference between occurrence policies and claims-made policies regarding each of the following:
i. Coverage trigger ii. Loss development iii. Investment income
Answer this question and see the worked solution