CAS Exam 8 Fall 2017, Question 15
Study guide: Exam 8
The following applies to an incurred loss retrospectively rated policy effective January 1, 2017.
| Per occurrence limit | $150,000 |
|---|---|
| Maximum ratable loss | $600,000 |
| ULAE as a percentage of loss & ALAE | 8% |
| Expected Loss & ALAE limited to $150,000 | $400,000 |
| Basic Premium | $375,000 |
| Tax Rate | 3% |
The expected loss & ALAE limited to $150,000 is used to determine the initial premium. Retrospective rating adjustments start at 18 months and occur every twelve months thereafter.
The following loss experience occurs during the policy period. All claims are closed at 42 months.
| Maturity (months) | 18 | 30 | 42 |
|---|---|---|---|
| Unlimited Incurred Loss & ALAE | $425,000 | $650,000 | $950,000 |
| Incurred Loss & ALAE Limited to $150,000 | $375,000 | $475,000 | $700,000 |
| Incurred Loss & ALAE Excess of $150,000 | $50,000 | $175,000 | $250,000 |
Part a (1.75 points)
Determine the amount and timing of each incremental cash flow payment made by the insured for this policy beginning with time 0.
Part b (1 point)
Propose and justify an alternative policy that would increase the insured's cash flow benefit without the insured retaining any additional excess loss risk.
Part c (0.5 points)
Identify and briefly describe one disadvantage to the insurer of the proposed plan in part b. compared to the existing retrospectively rated plan.
Answer this question and see the worked solution