CAS Exam 8 Fall 2018, Question 14
Study guide: Exam 8
The balanced plan provisions for a workers' compensation risk in the state of Alabama are given below:
| Standard Premium | $9,000,000 |
|---|---|
Minimum Entry Ratio, r_H |
0.28 |
Maximum Entry Ratio, r_G |
2.55 |
| Loss Conversion Factor | 1.30 |
| Tax Multiplier | 1.05 |
| State Hazard Group Differential | 0.90 |
| Adjusted Expected Loss | $4,860,000 |
- Using the 2008 NCCI table of expected loss ranges, the expected retrospective premium = $9,493,205.
- There is no per-occurrence loss limit.
Part a (1.25 points)
Calculate the basic premium ratio to standard premium.
Part b (1.25 points)
The insured believes that the insurance charge embedded in the current basic premium is unfair and cites the following five years of loss experience the insured had with a prior carrier:
| Year | Loss Ratio |
|---|---|
| 1 | 40% |
| 2 | 165% |
| 3 | 15% |
| 4 | 55% |
| 5 | 25% |
The insured's exposure base has remained stable over time.
Compare the net insurance charge in the current basic premium for this policy to the net insurance charge based on the prior loss experience using the plan provisions given above.
Part c (0.5 points)
Discuss the appropriateness of using a basic premium derived from the prior loss experience.
Answer this question and see the worked solution