Exam 7 Practice Question 2
Study guide: Exam 7
An actuary estimating the premium asset on retrospectively rated policies compares two first-adjustment PDLD ratios (premium booked through 27 months divided by loss reported through 18 months):
- The empirical ratio averages 1.46 over all policy quarters, but it has trended upward over the most recent quarters, which are well above 1.46.
- The formula ratio, computed from the average basic premium factor, loss conversion factor, tax multiplier, maximum, minimum and per-accident limitation of the plans currently being sold, is 1.43.
Which of the following is the most likely explanation for the upward trend in the recent empirical ratios?
- A) Better loss experience has kept more of each policy's loss within the retro maximum and the per-accident limitation
- B) The plans now being sold have more liberal parameters, such as higher maximums and per-accident limitations
- C) Worse loss experience has pushed more of each policy's loss above the retro maximum
- D) Upward development in high loss layers, with return premium in lower layers, distorts the recent quarters
- E) The plans now being sold assume a higher expected loss ratio, spreading the basic premium over more loss
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