CAS Exam 8 Fall 2012, Question 19
Study guide: Exam 8
The following applies to a retrospectively rated policy with a $500,000 loss limitation. The insured has elected to include a premium element to stabilize premium adjustments.
| Standard premium | $2,000,000 |
|---|---|
| Minimum premium | $1,000,000 |
| Maximum premium | $3,000,000 |
| Expected loss | $1,400,000 |
| Actual unlimited losses at second adjustment | $1,700,000 |
| Actual limited losses at second adjustment | $1,500,000 |
| Excess loss factor | 0.15 |
| Loss conversion factor | 1.10 |
| Retrospective development factor at second adjustment | 0.07 |
| Provision for expenses and profit exclusive of taxes | $400,000 |
| Converted insurance charge | $100,000 |
| Tax factor | 1.05 |
Part a (2 points)
Calculate the policy's retrospective premium at second adjustment.
Part b (0.5 points)
Describe one reason an insurance company would include retrospective development factors in a policy.
Answer this question and see the worked solution