Exam MAS-I Practice Question 21
Study guide: Exam MAS-I
A bonus-malus system has three levels with annual premiums:
| Level | 1 | 2 | 3 |
|---|---|---|---|
| Premium | $250 | $350 | $500 |
After a claim-free year a driver moves down one level (staying at level 1 if already there). After any year with a claim the driver goes to level 3. A driver's annual claim count is Poisson with mean 0.25.
A driver at level 1 has an at-fault loss on the last day of an otherwise claim-free year. If the loss is reported, the driver is at level 3 next year; if the driver pays it, the driver stays at level 1. Ignore interest.
Part a (1 point)
Calculate the expected additional premium the driver will pay over all future years as a result of reporting the loss. Give your answer to two decimal places.
Part b (1 point)
The loss is $300. Using the criterion of lower expected total cost to the driver, what should the driver do?
- A) Report the loss
- B) Pay the loss itself
- C) Either, since the two choices cost the same
Part c (1 point)
A second driver at level 1, facing the same choice, believes her own claim rate is 1.0 a year rather than 0.25. Explain how this changes the largest loss she should be willing to pay herself, and why.
Answer this question and see the worked solution