CAS Exam 8 Fall 2012, Question 7
Study guide: Exam 9
A reinsurer uses the following commission structure to pay a ceding company:
| Provisional commission | 30% | |
|---|---|---|
| Minimum commission | 20% | At a 75% loss ratio |
| Sliding 1:1 to | 35% | At a 60% loss ratio |
| Sliding 0.5:1 to a maximum | 45% | At a 40% loss ratio |
The aggregate loss distribution model is as follows:
| Range of Loss Ratios | Average Loss Ratio in Range | Probability the Loss Ratio is in Range |
|---|---|---|
| 0 – 40% | 35% | 0.04 |
| 40 – 60% | 55% | 0.32 |
| 60 – 75% | 68% | 0.24 |
| 75% + | 80% | 0.40 |
Part a (1 point)
Calculate the expected loss ratio and expected sliding scale commission using the aggregate loss distribution model above.
Part b (0.5 points)
Explain what a carryforward provision is and why it is used.
Part c (0.5 points)
Assume the prior year's loss ratio was above 75%. Explain what effect a carryforward provision would have on the expected commission for the current year, all else being equal.
Part d (0.5 points)
Briefly explain two approaches used in pricing the impact of a carryforward provision.
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