CAS Exam 9 Spring 2013, Question 19
Study guide: Exam 9
Actuaries analyzing an annual workers' compensation policy have estimated the following:
| Item | Value |
|---|---|
| Expected losses | $1,200 |
| Expense ratio | 35% |
| Risk-free interest rate | 5% |
| Investment return of the company | 11% |
| Overall market return | 9% |
| Cost of capital | 8% |
In addition, the actuaries assume the following:
- Losses will be paid according to the following pattern:
- $420 at the end of year 1
- $780 at the end of year 3
- A loss reserve is set up on the effective date of the policy and decreases as losses are paid.
- Expenses are paid on the effective date of the policy.
- A tax rate of 35% applies to investment income.
- There is no underwriting income tax.
- The company carries surplus equal to 75% of undiscounted loss reserves.
- Equity flows occur annually.
Calculate the minimum premium necessary for this policy to be profitable.
Part a (3 points)
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