CAS Exam 8 Fall 2018, Question 12
Study guide: Exam 8
An insured is considering an incurred loss retrospective rating plan and a paid loss deductible plan with the following characteristics:
Incurred Loss Retro
| Per Occurrence Limit | $150,000 |
|---|---|
| Maximum Ratable Loss | $500,000 |
Paid Loss Deductible
| Per Occurrence Deductible | $150,000 |
|---|---|
| Aggregate Deductible | $500,000 |
The following apply to both plans:
| Expected Ultimate Losses | $450,000 |
|---|---|
| Expected Ultimate Losses limited by occurrence | $350,000 |
| Expected Ultimate Losses limited by occurrence and aggregate | $325,000 |
| Fixed underwriting expenses including commission & profit | $100,000 |
| LAE as a percentage of Loss | 8.0% |
| Tax Multiplier | 1.030 |
Part a (1.5 points)
Compare the expected total cost of insurance of the two plans, taking into account both premium and deductible payments, from the perspective of the insured.
Part b (0.5 points)
Recommend and briefly justify one of the two plans above from the perspective of the insured.
Part c (1 point)
Propose two changes to the recommended plan in part b. above and briefly explain why each would be beneficial for the insured.
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