CAS Exam 8 Fall 2013, Question 16
Study guide: Exam 8
An actuary calculates the insurance charges on an aggregate deductible for a general liability policy for house painters. All the losses in the historical data used in the analysis resulted from inadequate and/or sloppy paint jobs, which were relatively inexpensive to fix. Later, it is discovered that some paint contained a toxic substance and those painters are liable for very expensive remediation of the painted properties.
The new claims are 10% as common as the historical claims. For every 10 claims that would have been expected before, there are now 11, one of which is cleaning up toxic paint.
Had this been known, the expected cost of a policy would have been twice the cost the actuary used.
Part a (0.75 points)
At an entry ratio of 2.00, with no per-occurrence loss limit, explain whether the insurance charge would increase, decrease, or stay the same.
Part b (0.5 points)
Explain how a per-occurrence limit would affect the change in the insurance charge for the aggregate deductible.
Answer this question and see the worked solution