CAS Exam 7 Spring 2016, Question 3
Study guide: Exam 7
Given the following information as of December 31, 2015:
| Accident Year | On-level Premiums | Cumulative Paid Loss | Fitted Paid Emergence Pattern |
|---|---|---|---|
| 2012 | $500,000 | $210,000 | 65% |
| 2013 | 600,000 | 150,000 | 40% |
| 2014 | 550,000 | 70,000 | 20% |
| 2015 | 650,000 | 30,000 | 10% |
Cape Cod Method:
- Parameter standard deviation: 250,000
- Process variance/mean scale parameter (
\sigma^2): 4,000
LDF Method:
- Parameter standard deviation: 325,000
- Process variance/mean scale parameter (
\sigma^2): 4,500
Part a (1.25 points)
Calculate the total standard deviation of the total loss reserve indication resulting from the Cape Cod method.
Part b (0.75 points)
Calculate the total standard deviation of the total loss reserve indication resulting from the LDF method.
Part c (0.5 points)
Explain why \sigma^2 for the LDF method is higher than \sigma^2 for the Cape Cod method.
Answer this question and see the worked solution