CAS Exam 5 Fall 2019, Question 8
Study guide: Exam 5
An insurer's retention model predicts the following:
| % Change in Premium | Retention Ratio — First Renewal | Retention Ratio — Second Renewal |
|---|---|---|
| 0% | 85% | 0% |
| 5% | 75% | 0% |
The following information is known:
| Value | Item |
|---|---|
| 0.00% | Discount rate |
| $0 | Fixed expenses |
| $0 | Implementation costs |
| $1,000 | Premium per policy |
| $800 | Loss & LAE per policy |
- Senior management will consider only the following at renewal:
- i. No rate change
- ii. +5% rate change
Part a (1.25 points)
Select the rate change that will maximize the insurer's profit.
Part b (0.5 points)
Briefly evaluate the selected rate change with respect to the Statement of Principles Regarding Property Casualty Insurance Ratemaking, citing one relevant principle.
Answer this question and see the worked solution