CAS Exam 8 Fall 2015, Question 15
Study guide: Exam 8
An insured in a retrospectively-rated workers compensation plan currently pays a basic premium of $26,820. The following parameters apply to the insured's policy:
| Parameter | Value |
|---|---|
| Standard Premium | $100,000 |
| Expense Ratio (e) | $20,000 |
| Expected Losses | $70,000 |
| Tax Multiplier | 1.00 |
| Loss Conversion Factor | 1.17 |
| Entry Ratio @ G | 1.00 |
| Entry Ratio @ H | 0.75 |
The insured believes that the insurance charge embedded in the current basic premium is unfair and cites the following unlimited loss ratios from five similarly-sized competitors doing business in the same industry:
| Competitor | Loss Ratio |
|---|---|
| 1 | 70.0% |
| 2 | 105.0% |
| 3 | 52.5% |
| 4 | 87.5% |
| 5 | 35.0% |
Part a (2 points)
Compare the net insurance charge in the current basic premium for this policy to the net charge based on the provided competitor loss ratio experience.
Part b (0.5 points)
Discuss the appropriateness of using the basic premium derived from the competitor data to price this policy.
Answer this question and see the worked solution