CAS Exam 8 Fall 2019, Question 11
Study guide: Exam 8
Consider the following sample of five insurance risks which have been experience rated:
| Risk | Mod | Manual Loss Ratio | Standard Loss Ratio |
|---|---|---|---|
| 1 | 0.60 | 0.60 | 1.00 |
| 2 | 0.79 | 0.80 | 1.01 |
| 3 | X | 0.96 | Y |
| 4 | 1.10 | 1.10 | 1.00 |
| 5 | 1.14 | 1.15 | 1.01 |
The actual claims for Risk 3 in the experience period are as follows:
| Claim # | Incurred Loss Amount |
|---|---|
| 001 | 3,200 |
| 002 | 3,000 |
| 003 | 2,800 |
| 004 | 2,700 |
| 005 | 3,300 |
| 006 | 2,900 |
| 007 | 10,000 |
| 008 | 3,100 |
| 009 | 3,000 |
| 010 | 3,100 |
| Total | 37,100 |
- Expected Losses for Risk 3 in the experience period = 32,000
- Credibility factor = 0.75
Part a (0.5 points)
Calculate the modification factor, X, for Risk 3.
Part b (0.5 points)
Provide a recommendation to improve the effectiveness of experience rating for Risk 3 and briefly justify.
Part c (2.75 points)
Show, quantitatively, that the recommendation in part b. above improves the plan. Assume no other risks are impacted by the recommendation.
Answer this question and see the worked solution