Exam 5 Practice Question 1
Study guide: Exam 5
An insurer measures average severity for its private passenger auto bodily injury book on a close-year basis: paid losses on the claims closed during a calendar year, divided by the number of claims closed during that year. During 2025 the claims department added adjusters and cleared a large backlog of small, uncomplicated claims. The cost of settling any given claim did not change.
Which statement best describes the 2025 close-year severity compared with 2024?
- A) It is unaffected, because a close-year cohort holds only settled claims and needs no development
- B) It rises, because the claims closed in 2025 are older and more mature than those closed in 2024
- C) It falls, and the decline measures a real drop in claim costs to reflect in the selected severity trend
- D) It falls, because the claims closed in 2025 are weighted toward small claims, a shift in mix rather than cost
- E) It is unaffected, because closed claim counts and the paid losses on them rise in the same proportion
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