CAS Exam 8 Fall 2015, Question 13
Study guide: Exam 8
An actuary prices two loss-sensitive options for a workers compensation policy as follows:
Option 1: A large deductible plan with a per-occurrence deductible of $50,000
Option 2: An incurred retrospective rating plan with the following parameters:
| Parameter | Value |
|---|---|
| Per Occurrence Limit | $50,000 |
| Basic Premium | $150,000 |
| Tax Multiplier | 1.045 |
| Loss Conversion Factor | 1.100 |
| Deposit Premium (paid at policy inception) | $1,000,000 |
For each of the options above, assume that no aggregate limits or maximum premiums apply and that the first adjustment will take place 18 months after policy inception.
Additionally, the actuary has developed the following assumptions for the insured:
| Unlimited | Limited to $50,000 | |
|---|---|---|
| Expected Loss | $650,000 | $435,000 |
| 18-Ultimate Incurred LDF | 4.25 | 3.75 |
| 18-Ultimate Paid LDF | 8.80 | 6.55 |
Part a (2.25 points)
For each of the plans above, determine the expected cash flows between the insured and insurer 18 months after policy inception.
Part b (1 point)
The insured is contemplating a third option of purchasing an excess policy with a self-insured retention of $50,000.
i. Which of the three options would be least attractive to the insurer if they wish to minimize credit risk? Briefly explain your choice.
ii. Which of the three options would be least attractive to the insurer if they wish to minimize interest rate risk? Briefly explain your choice.
Answer this question and see the worked solution