CAS Exam 8 Fall 2014, Question 21
Study guide: Exam 9
Company A is pricing an umbrella policy with an effective date of July 1, 2014 for a large commercial risk that is written above Company B's underlying layer. Company A is considering various options for the treatment of allocated loss adjustment expenses (ALAE).
Part a (2 points)
Fully explain how the following options rank with respect to the relative cost of the umbrella policy:
- ALAE is included within both the underlying and umbrella limits.
- ALAE is in addition to both the underlying and umbrella limits.
- ALAE is included within the underlying layer's limit, but is in addition to the umbrella's limit.
Part b (1 point)
The following loss history of the risk is provided by Company B below:
| Date of Loss | Paid Loss | Paid ALAE | Reserved Loss | Reserved ALAE |
|---|---|---|---|---|
| September 16, 2009 | $240,030 | $324,235 | $0 | $0 |
| December 14, 2009 | 43,658 | 8,750 | 0 | 0 |
| March 1, 2010 | 2,000,000 | 140,000 | 0 | 0 |
| March 14, 2010 | 50,000 | 891,320 | 0 | 0 |
| August 11, 2010 | 0 | 75,500 | 25,000 | 174,500 |
| January 2, 2011 | 1,257,902 | 124,870 | 0 | 0 |
| March 14, 2012 | 200,000 | 45,040 | 1,800,000 | 55,960 |
| July 1, 2012 | 32,320 | 175,340 | 0 | 0 |
| November 30, 2012 | 1,000,000 | 22,430 | 1,000,000 | 250,000 |
Explain two reasons why the pricing actuary for Company A should be wary of using the historical data to determine the ALAE load.
Part c (0.5 points)
The pricing actuary has been asked to opine on the treatment of ALAE for a clash cover excess treaty. The actuary states that because penetration of high excess layers is infrequent, the calculation of ALAE is difficult and the loading is insignificant. Evaluate this statement.
Answer this question and see the worked solution