CAS Exam 8 Fall 2013, Question 9
Study guide: Exam 8
Suppose that workers compensation risks are subject to a no-split experience rating plan under which credibility, as a function of expected loss, is calculated as follows:
Z = \frac{E}{E + 50{,}000}
During the experience rating period, a group of homogeneous risks had the following experience:
| Risk | Actual Loss | Expected Loss |
|---|---|---|
| 1 | $130,000 | $125,000 |
| 2 | $60,000 | $85,000 |
| 3 | $160,000 | $150,000 |
| 4 | $200,000 | $130,000 |
| 5 | $100,000 | $150,000 |
| 6 | $250,000 | $175,000 |
After the experience modifications were applied, the same group had the following experience:
| Risk | Manual Premium | Actual Loss |
|---|---|---|
| 1 | $50,000 | $35,000 |
| 2 | $50,000 | $25,000 |
| 3 | $70,000 | $60,000 |
| 4 | $75,000 | $50,000 |
| 5 | $65,000 | $40,000 |
| 6 | $65,000 | $100,000 |
Part a (3.75 points)
Assess how effectively the experience rating plan corrected for the differences it identified for these particular workers compensation risks. Group the risks as appropriate.
Part b (0.75 points)
Propose and justify a change to the plan that would improve its ability to correct the differences it identifies.
Answer this question and see the worked solution