CAS Exam 8 Fall 2019, Question 2
Study guide: Exam 8
An actuary has built two generalized linear models to predict loss costs. Management has requested a series of model validation plots to demonstrate the appropriateness of each of the new models. Output for each model, simple quintile plots, and a double lift plot are shown below:
| Observation | Actual Loss Cost | Model A Loss Cost | Model B Loss Cost | Earned Premium |
|---|---|---|---|---|
| 1 | 1,500 | 825 | 900 | 1,800 |
| 2 | 675 | 765 | 800 | 1,450 |
| 3 | 0 | 615 | 350 | 2,375 |
| 4 | 2,250 | 900 | 3,000 | 2,625 |
| 5 | 5,000 | 1,050 | 3,700 | 4,875 |
Given the following:
- The actuary has already provided management with the simple quintile plots and the double lift chart shown above.
- The company has implemented several segmented rate changes over the last three years.
Part a (1 point)
For each model, provide a loss ratio plot that management can use to assess lift. Identify the basis of sorting the data.
Part b (0.75 points)
Briefly describe one drawback of each type of model validation plot that the actuary has provided to management, including the plot produced in part a. above.
Part c (1 point)
Using all three types of model validation plots provided to management, recommend which model should be implemented. Do not perform any calculations.
Answer this question and see the worked solution