CAS Exam 7 Spring 2017, Question 18

Study guide: Exam 7

In evaluating the premium asset for a property and casualty insurance company's book of retrospectively rated policies as of December 31, 2016, the following methods have been considered:

Chain ladder development method on historical triangles of earned premium using Part 6 of Schedule P.
Fitzgibbon's Linear Regression method, which produced the following graph:

Premium Development to Loss Development (PDLD) method using the retro formula and average retro parameters, which produced the following graph:

Part a (0.5 points)

Briefly describe one advantage and one disadvantage of using the chain ladder development method on historical earned premium triangles.

Part b (0.25 points)

Briefly describe one disadvantage of using Fitzgibbon's linear regression method.

Part c (0.25 points)

Explain why the slope factor in Fitzgibbon's linear regression method is typically not exactly unity.

Part d (0.5 points)

Briefly describe one advantage and one disadvantage of using the PDLD method.

Part e (0.5 points)

Explain why the slopes differ between Fitzgibbon's linear regression method and the PDLD method.

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