SOA Exam FAM Sample Question 107
Study guide: Exam FAM
You are given the following information to calculate a new average rate, which will be in effect for one year:
(i) The current average rate is 300, which includes an allowance for the following variable expenses:
| Commissions | 10% |
| General Expenses | 12% |
| Taxes | 2% |
| Profit and Contingencies | 5% |
| TOTAL | 29% |
(ii) The indicated rate change uses two years of data, weighted as shown:
| Accident Year | Earned Premium at Current Rates | Ultimate Loss and ALAE | Weight |
|---|---|---|---|
| AY1 | 300,000 | 190,000 | 0.4 |
| AY2 | 330,000 | 230,000 | 0.6 |
(iii) Annual effective loss trend: 5%
(iv) Effective date of the new rate (one-year policies): October 1, CY3
(v) New legislation, also effective October 1, CY3, mandates that commissions be a fixed rate of 30 per exposure, which gets loaded for general expenses, taxes, and profit and contingencies.
Calculate the new average rate that combines the indicated rate change and new mandated commission level.
- A) 313
- B) 316
- C) 320
- D) 323
- E) 327
Answer this question and see the worked solution
Concepts tested
- Overall Rate Level Indication
- Loss Ratio Method
- Trend
- Variable Expenses
- Ratemaking
- Profit and Contingency Provision