CAS Exam 7 Spring 2015, Question 22
Study guide: Exam 9
An actuary is modeling the variability of an insurer's homeowners ultimate losses for the next accident year as part of an internal solvency model.
Part a (1.5 points)
Identify and briefly explain three key elements of uncertainty inherent to the loss modeling process.
Part b (0.75 points)
The actuary uses a normal distribution to model the losses, with the parameters selected using five years of internal loss history. The actuary has just learned of a recent court ruling affecting homeowners coverage triggers in the state where the insurer writes the most premium.
For each of the three elements of uncertainty identified in part a. above, suggest an improvement to the actuary's modeling process that would decrease the overall uncertainty in modeled losses.
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