CAS Exam 7 Spring 2018, Question 6
Study guide: Exam 7
Given the following information for an insurer's books of business as of December 31, 2017:
| Accident Year | Onlevel Premium ($000) | Cumulative Paid Loss ($000) | Estimated Reserves ($000) |
|---|---|---|---|
| 2014 | 1,000 | 275 | 400.00 |
| 2015 | 1,200 | 306 | 553.85 |
| 2016 | 1,500 | 344 | 818.18 |
| 2017 | 1,700 | 220 | 1,133.33 |
- The estimated reserves for all accident years are calculated using the Cape Cod method.
- The expected loss payment pattern is approximated by the following loglogistic function where
Gis the cumulative proportion of ultimate losses paid andxrepresents the average age of paid losses in months:G(x) = \frac{x}{x + \theta}.
Part a (1.5 points)
Calculate the expected loss ratio used in the Cape Cod method.
Part b (0.75 points)
Evaluate the appropriateness of using the Cape Cod method for this book of business.
Part c (0.75 points)
Briefly describe the two types of variance associated with a statistical model for loss reserving. Identify an approach to reduce one of the types of variance.
Answer this question and see the worked solution