CAS Exam 9 Spring 2017, Question 25
Study guide: Exam 9
An actuary is preparing a rate filing for a new line of business which has seen rapid growth. Given the following:
- An existing, related line of business uses a regulator-approved 4% Underwriting Profit Provision.
- The new money yield is 3.5%.
- Losses are paid at the end of each year.
- The permissible loss ratio for each line is 62%.
Expected Cumulative Percentage of Paid Losses:
| Year | Existing Line | New Line |
|---|---|---|
| 1 | 50% | 30% |
| 2 | 80% | 55% |
| 3 | 95% | 80% |
| 4 | 100% | 100% |
Part a (1.5 points)
Calculate the Underwriting Profit Provision for the new line using the Present Value Offset method.
Part b (0.5 points)
Provide two arguments supporting the use of the Present Value Offset method.
Part c (0.5 points)
Briefly describe how the Present Value Offset method may seem inappropriate from the shareholder's perspective and propose an alternative model that could be more appropriate.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution