CAS Exam 8 Fall 2012, Question 8
Study guide: Exam 9
An actuary decides to use the following exposure curve to price a risk and has determined that the appropriate b parameter is 0.15.
G(x) = \frac{1 - b^x}{1 - b}, \quad 0 \le x \le 1
Part a (1.5 points)
Demonstrate that this function is a valid exposure curve.
Part b (1 point)
Given that the maximum possible loss is $2,000,000, use the selected exposure curve above to determine the ratio of pure risk premium in the layer $1,000,000 excess of $500,000.
Part c (0.5 points)
Discuss the appropriateness of the ratio of pure risk premium calculated above if the b parameter that the actuary selected was too high. State whether the actuary has underestimated or overestimated the probability of a total loss.
Answer this question and see the worked solution