CAS Exam 9 Spring 2016, Question 24

Study guide: Exam 9

Assume the following for a property and casualty insurance company writing Workers Compensation insurance:

All policies are annual policies written on January 1st.
Initial premium is collected at inception in the amount of $1,000.
Expenses are paid at inception in the amount of $200.
Expected loss ratio is 60% relative to initial premium collected at inception.
35% of losses are paid at the end of the first year, and the remainder are paid at the end of the third year.
The company allocates surplus to maintain a 2:1 undiscounted loss reserve-to-surplus ratio.
Cost of Capital is 5%.
Investment yield is 7.5%.
Investment income is paid at the end of each year.
Ignore taxes.
An exposure audit is performed three months after all policies expire.
An audit premium or credit is expected as the result of the exposure audit.

Calculate the amount of audit premium that will result in an IRR of 10%.

Part a (3.25 points)

No current syllabus covers this question; it is kept for the record.