CAS Exam 8 Fall 2017, Question 19
Study guide: Exam 9
A primary insurer wants to institute a swing plan with the following terms:
- Layer: $500,000 xs $500,000 per claim
- Premium = Layer Losses * 1.3
- Minimum Premium = $100,000
- Maximum Premium = $325,000
The reinsurer has analyzed the insurer's experience. All claims are closed and trend has been applied.
| Accident Year | On-Level Premium | Claim #1 | Claim #2 | Claim #3 | Claim #4 |
|---|---|---|---|---|---|
| 2012 | 400,000 | 465,899 | 230,567 | 512,017 | |
| 2013 | 420,000 | 240,785 | 125,766 | 80,154 | 470,666 |
| 2014 | 1,200,000 | 704,895 | 106,528 | ||
| 2015 | 2,000,000 | 45,988 | 349,145 | 376,011 | 1,246,852 |
| 2016 | 2,200,000 | 437,100 | 654,158 | 250,000 | 156,750 |
Part a (1.5 points)
Calculate the expected loss ratio for the reinsurer based on the empirical distribution model using equal weights for each year.
Part b (0.5 points)
Determine if an empirical distribution model is appropriate for this account and give one reason in support of your answer.
Part c (1 point)
The use of a collective risk model is an alternative approach. Explain two concerns when using this type of model.
Answer this question and see the worked solution