CAS Exam 9 Spring 2017, Question 21
Study guide: Exam 9
Given the following:
- An insurance company writes only two lines of business.
- All policy terms are one year.
- Surplus is $25 million.
- The after-tax investment yield is 5%.
- Regarding the company's surplus:
- 100% of surplus is allocated by line
- surplus is committed when premium is written and is released when the policy expires
- surplus is committed in proportion to premium
- The company's pricing actuary is recommending to change the surplus allocation method to be:
- committed when losses are incurred
- released when losses are paid
- committed in proportion to reserves
- The company sets rates for each line to achieve a 12% internal rate of return.
| Line A | Line B | |
|---|---|---|
| Written Premium | $30 million | $20 million |
| Loss Ratio | 65% | 60% |
| Average time from loss to payment | 2.5 years | 0.5 years |
Part a (0.25 points)
Calculate the allocated surplus for each line of business based on the current allocation method.
Part b (0.5 points)
Calculate the allocated surplus for each line of business based on the pricing actuary's proposed allocation method.
Part c (0.5 points)
For Line A, describe qualitatively whether the rate level should increase or decrease if the pricing actuary's recommendation is implemented.
No current syllabus covers this question; it is kept for the record.
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