CAS Exam 7 Spring 2016, Question 26
Study guide: Exam 9
An insurance company with a substantial book of long-tailed business is using a plan loss ratio model to determine premium growth targets. The plan loss ratio is also used in the reserve review process as the expected loss ratio.
Part a (0.5 points)
Identify two potential negative consequences of an optimistic plan loss ratio to the company's financial results.
Part b (0.5 points)
Explain why it is difficult to separate operational risk from underwriting risk when explaining the impact of an optimistic plan loss ratio on the company's financial results in retrospect.
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