CAS Exam 8 Fall 2016, Question 16
Study guide: Exam 8
An actuary is given the following expiring policy information for a Workers' Compensation Large Dollar Deductible policy:
| Item | Value |
|---|---|
| Expected Total Loss & ALAE | $500,000 |
| Deductible | $100,000 |
| Percentage of Loss & ALAE Excess of $100,000 | 40% |
| Percentage of Loss & ALAE Excess of $200,000 | 20% |
| ULAE | 5% |
| Loss Based Assessment Factor | 3% |
| Profit and Variable Expenses | 17% |
| Fixed Expense | $15,000 |
| Aggregate Deductible | $300,000 |
There are no changes to these expenses and profit provision. The table of Insurance Charges is displayed below:
Modified Table M for Similarly Sized Policies:
| Entry Ratio | Deductible $100,000 | $200,000 | $300,000 | $400,000 |
|---|---|---|---|---|
| 0.5 | .450 | .480 | .495 | .505 |
| 1.0 | .330 | .350 | .365 | .370 |
| 1.5 | .270 | .303 | .325 | .350 |
| 2.0 | .185 | .240 | .260 | .286 |
The insured would like to retain more risk and requests the price of the following options:
Option 1: Deductible of $200,000 with an aggregate deductible of $400,000.
Option 2: Excess Policy with self-insured retention of $200,000 on a per occurrence basis.
Part a (2.75 points)
Calculate the difference in price between Option 1 and the expiring structure. Use linear interpolation as needed.
Part b (1 point)
The insurer observed an upward trend of ground up losses in the insured's industry for the most recent year, but is unsure if this trend will continue in the future. Based on this observation, recommend one of the two options for the insurer and fully support the recommendation.
Answer this question and see the worked solution