CAS Exam 9 Spring 2014, Question 19
Study guide: Exam 9
An insurance company is reviewing a new line of business using the present value offset method for calculating the underwriting profit provision. Expected payment patterns for the reference line and the reviewed line are as follows:
| Year | Reference Line of Business | Reviewed Line of Business |
|---|---|---|
| 1 | 50% | 10% |
| 2 | 30% | 40% |
| 3 | 20% | 30% |
| 4 | 0% | 20% |
- All loss payments are made at the end of the year.
- The underwriting profit provision for the reference line of business is 5.0%.
- The underwriting profit provision for the reviewed line of business is 2.5%.
- The historic investment rate of return is 6.5%.
- The new money rate of return is 4.0%.
Part a (1.25 points)
Calculate the permissible loss ratio for the reviewed line of business.
Part b (1 point)
The present value offset method was used to determine the underwriting profit provision for rates filed in a state. The state's insurance department responds with the following:
- Please indicate what discount rate is used in the calculation of the underwriting profit provision and if a discount rate was used that is less than the investment rate of return, justify why this is acceptable.
- Please provide the target return on surplus that was used to generate the filed rates.
Respond to both of these items in support of the rates filed.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution