CAS Exam 7 Spring 2014, Question 1
Study guide: Exam 7
Given the following information:
| Accident Year | Cumulative Losses Reported at 24 Months ($000,000) | Ultimate Loss ($000,000) |
|---|---|---|
| 2008 | 12 | 18 |
| 2009 | 10 | 16 |
| 2010 | 14 | 20 |
| 2011 | 12 | 18 |
| 2012 | 21 |
An insurer writes annual policies that incept on January 1. Exposure and coverage levels were constant for 2008 through 2011. On January 1, 2012, policy coverage was expanded and pricing actuaries estimated the following:
- Loss amounts will increase by 25% due to the expanded coverage.
- 75% of ultimate losses are expected to be reported by 24 months, with a standard deviation of 8% of estimated ultimate loss.
- Standard deviation of accident year 2012 ultimate loss will be $3 million.
Part a (1.5 points)
Calculate the projected accident year 2012 ultimate loss using Bayesian credibility methods.
Part b (0.5 points)
Explain why the least squares method is not appropriate for calculating the accident year 2012 ultimate loss.
Answer this question and see the worked solution