CAS Exam 8 Fall 2014, Question 16
Study guide: Exam 8
A company experiences an annual level of low-severity losses totaling $500,000 and periodic loss events as shown in the table below:
| Period of Occurrence | Descriptor | Loss Amount |
|---|---|---|
| Once every Five years | Additional Low Severity Losses | $2,000,000 |
| Once every Three years | Single Large Loss | $1,000,000 |
All loss events are independent of each other.
Part a (1.25 points)
The company and their insurer agree on a Large Dollar Deductible (LDD) policy with the following characteristics:
- minimizes effect of a single large loss
- guarantees reimbursable loss will not exceed $2,000,000
- results in expected annual reimbursable loss of $1,000,000
Design an LDD plan that meets the goals of the company. Note that the expected losses can be expressed as a function of the aggregate maximum and the per occurrence limit.
Part b (1.75 points)
Construct a Lee diagram showing the effect of the designed LDD plan structure on the loss profile of the company.
Part c (1 point)
The company is also considering a retrospective policy with the following characteristics:
- no per-occurrence limit
- same maximum entry ratio as in the LDD plan above
Assume the single large loss had an expected value of $500,000 instead of $1,000,000. Describe the change to the Table M charge for the retrospective plan compared to the charge described in the LDD plan in a. above.
Answer this question and see the worked solution