CAS Exam 8 Fall 2017, Question 11
Study guide: Exam 8
A workers' compensation insurer is facing an increasingly competitive market. Its management is concerned about customer retention, premium growth, and loss ratio deterioration. The insurer's actuaries have proposed an updated experience rating plan. After grouping insureds for the purposes of an efficiency test, the projected impact of this proposal is below (values in thousands):
Current Plan
| Quintile | Manual Premium | Loss | Standard Premium | Loss Ratio to Manual | Loss Ratio to Standard |
|---|---|---|---|---|---|
| A | 4,750 | 1,978 | 3,278 | 42% | 60% |
| B | 4,825 | 2,824 | 4,005 | 59% | 71% |
| C | 4,450 | 2,915 | 4,450 | 66% | 66% |
| D | 4,845 | 3,608 | 5,378 | 74% | 67% |
| E | 4,400 | 3,520 | 5,500 | 80% | 64% |
| Total | 23,270 | 14,845 | 22,610 | 64% | 66% |
Proposed Plan
| Quintile | Manual Premium | Loss | Standard Premium | Loss Ratio to Manual | Loss Ratio to Standard |
|---|---|---|---|---|---|
| A | 4,220 | 1,494 | 2,068 | 35% | 72% |
| B | 5,100 | 2,922 | 4,233 | 57% | 69% |
| C | 4,150 | 3,088 | 4,109 | 74% | 75% |
| D | 4,950 | 3,689 | 5,346 | 75% | 69% |
| E | 4,850 | 3,652 | 5,723 | 75% | 64% |
| Total | 23,270 | 14,845 | 21,478 | 64% | 69% |
It is estimated that the upfront cost to adopt the new rating plan will be $500,000.
Part a (1.5 points)
Perform an efficiency test and evaluate the proposed experience rating plan relative to the current plan.
Part b (1 point)
In light of management's concerns, evaluate the merits of adopting the new rating plan versus keeping the current plan, and provide a recommendation.
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