CASUALTY

ACTUARIAL
SOCIETY
Mary Frances Miller Examinabon Commiftee
Vice President-Admissions Genera/ Ofricers
Jeffrey A. Englander
Thomas G. Myers Beth E. Fitzgerald
Chairperson
Examination Committee Exam 5 Larry A. Haefner
Glenn G. Meyers
Arlene F. Woodruff
Richard P. Yocius
Introduction to Property and
April 30, 2001 Casualty Insurance and Ratemaking 4 HOURS

INSTRUCTIONS TO CANDIDATES
1. This 100 point examination consists of 48 questions divided into two sections. Section I contains
17 multiple choice questions worth one point each. Section II contains 3 1 problem and essay
questions worth a total of 83 points.

2. To answer the multiple choice questions, use the short-answer card provided and a number 2 or
HB pencil. Mark your short-answer card during the examination period. No additional time will
be allowed for this after the exam has ended. Please make your marks dark and fill in the spaces
completely. Fill in that it is Spring 200 1, and the exam number 5.

Darken the spaces corresponding to your Candidate ID number. Five rows are available. If your
Candidate ID number is fewer than 5 digits, include leading zeros. (For example, if your
Candidate ID number is 987, consider that your Candidate ID number is 00987, enter a zero on
the first row, a zero on the second row, 9 on the third row, 8 on the fourth row, and 7 on the fifth
[last] row.) Please write in your Candidate ID number next to the place where you darken the
spaces for your Candidate ID number. Your name, or any other identifying mark, must not appear
on the short-answer card.

For each of the multiple choice questions, select the one best answer and fill in the corresponding
letter. One quarter of the point value of the question will be subtracted for each incorrect answer.
No points will be added or subtracted for responses left blank.

For the problem and essay questions, the number of points for each full question or part of a
question is indicated at the beginning of the question or part. Answer these questions on the lined
sheets provided in your Examination Envelope. Use dark pencil or ink.

Write your Candidate ID number and the examination number, 5, at the top of each answer sheet,
Your name, or any other identifying mark, must not appear.

Do not answer more than one question on a single sheet of paper. Write on onlv the lined side of
the paper, and be careful to give the number of the question you are answering on each sheet.

The answer should be concise and confined to the question as posed. When a list of a specific
size is requested, do not offer more items in your list than the number requested. For example, if
you are requested to list three items, only the first three responses will be graded.

CONTINUE TO NEXT PAGE OF INSTRUCTIONS

C2001 Casualty Actuarial Society

 In order to receive full credit or to maximize partial credit on mathematical and computational
questions, you must clearly outline your approach in either verbal or mathematical form, showing
calculations where necessary.

4. Do all problems until you reach the last page of the examination where END OF
EXAMINATION is marked.

5. Your Examination Envelope is pre-labeled with your Candidate ID number, name, exam number,
and test center. Do not remove this label. Keep a record of your Candidate ID number for future
inquiries regarding this exam.

6. At the beginning of the examination, check through the exam booklet for any missing or defective
pages. The supervisor has additional exams for those candidates who have defective exam
booklets.

7. Candidates must remain in the examination center until two hours after the start of the
examination. You may leave the examination room to use the restroom with permission from the
supervisor. To avoid excessive noise during the end of the examination, candidates may not leave
the exam room during the last fifteen minutes of the examination.

8. At the end of the examination, place the short-answer card and all answer sheets in the
Examination Envelope. Please insert your answer pages in your envelope in question number
order. Insert a numbered page for each question, even if you have not attempted to answer that
question. BEFORE YOU TURN THE EXAMINATION ENVELOPE IN TO THE
SUPERVISOR, BE SURE TO SIGN IT IN THE SPACE PROVIDED ABOVE THE CUT-OUT
WINDOW.

Anvthing written in the examination booklet will not be graded. Onlv the short-answer card and
the answer sheets will be graded.

9. If you have brought a self-addressed, stamped envelope, you may put the examination booklet and
scrap paper inside and submit it separately to the supervisor. It will be mailed to you. (Do not
put the self-addressed stamped envelope inside the Examination Envelope.)

If you do not have a self-addressed, stamped envelope, please place the examination booklet in
the Examination Envelope and seal the envelope. You may not take it with you. Do not put
scrap paper in the Examination Envelope. The supervisor will collect your scrap paper.

Candidates may obtain a copy of the examination by contacting the CAS Office.

All extra answer sheets, scrap paper, etc., must be returned to the supervisor for disposal.

10. Candidates must not give or receive assistance of any kind during the examination. Any cheating,
any attempt to cheat, assisting others to cheat, or participating therein, or other improper conduct
will result in the Casualty Actuarial Society disquali@ing the candidates paper, and such other
disciplinary action as may be deemed appropriate within the guidelines of the CAS Policy on
Examination Discipline.

CONTINUE TO NEXT PAGE OF INSTRUCTIONS

11. An examination survey and postage-paid reply envelope are included with the examination. No
postage is necessary for surveys mailed within the United States. Candidates mailing the survey
outside the United States should use the courtesy reply envelope distributed by your exam
supervisor. Please complete the survey and leave it with the examination supervisor, or take the
survev and envelope with YOUwhen leaving the examination center. Please submit the survey to
the CAS Offtce bv Mav 25, 2001, Please do not enclose the survey in the Examination Envelope.

END OF INSTRUCTIONS
 EXAM 5, SPRING 2001, SECTION I

SECTION I, QUESTIONS 1 - 17, MULTIPLE CHOICE QUESTIONS (1 POINT EACH).

1. Based on McClenahan, Ratemaking, chapter 2, Foundations of Casualty Actuarial Science,

and the following data, determine the indicated rate per unit of exposure.

Developed & Trended

Accident Year Loss 81ALAE Earned Exposures
1998 $15,180 210
1999 $20,340 260
2000 $25,870 370

l Fixed expense per exposure $20

0 Variable expense factor 15%
0 Profit and contingencies factor 2%

A. Less than $107

B. At least $107, but less than $109
C. At least $109, but less than $111
D. At least $111, but less than $113
E. At least $113

2. Based on McClenahan, Ratemaking, chapter 2, Foundations of Casualtv Actuarial Science,

and the following information, answer the question below.

Assume:
l Experience period is accident year 1999.
l Indicated rates will become effective July 1, 2001.
l The next scheduled rate increase is expected to become effective April 1, 2002.
l All policies are expected to have an 18-month period.
l There are no seasonal effects on the frequency of accidents.
l Policies are evenly written throughout the year.

How many months are there between the midpoint of the experience period and the midpoint
of the exposure period?

A. Less than 22 months

B. At least 22 months, but less than 28 months
C. At least 28 months, but less than 34 months
D. At least 34 months, but less than 40 months
E. At least 40 months

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 EXAM 5, SPRING 2001, SECTION I

3. According to the Statement of Principles Reqardinq Property and Casualtv Insurance

Ratemakinq, which of the following statements is true?

A. Unallocated loss adjustment expenses are the claim settlement costs directly assignable
to specific claims.
B. Taxes, licenses, and fees exclude federal income taxes.
C. Policyholder dividends are a return of premium not assigned as an expense.
D. Allocated loss adjustment expenses include all costs associated with the settlement of
claims.
E. General administrative expenses are all costs, except commission and brokerage costs,
associated with the acquisition of business.

4. According to the Statement of Principles Regarding Propertv and Casualty Insurance

Ratemakinq, which of the following statements is true?

A. Consideration should be given to changes in case reserving that affect the continuity of
the experience.
B. Consideration should be given to the determination of an appropriate exposure unit or
premium basis, although it is not essential.
C. Ratemaking is retrospective because the property and casualty insurance rate must be
developed after the transfer of risk.
D. Credibility is generally increased by making groupings more heterogeneous due to the
diversification benefit from combining uncorrelated items.
E. Changes in policy provisions, such as coordination of benefits and second injury fund
recoveries, are outside the scope of ratemaking data and thus need not be considered in
ratemaking methodologies.

5. According to Bouska, Exposure Bases Revisited, which of the following reasons is given for
ISOs changing of General Liability exposure base from area to receipts?

A. Sensitivity to inflation
B. Eliminated interpretive mismatch
C. Receipts provide a more uniform exposure base to losses than area
D. Eliminated temporal mismatch
E. Eliminated sensitivity to economic cycles

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 EXAM 5, SPRING 2001, SECTION I

6. Bouska, Exposure Bases Revisited, notes that two serious problems arise from insurance
company practices in the application of exposure bases. Which of the following is one of the
serious problems described by Bouska?

A. Different insurers use different exposure bases, creating confusion in the market.
B. Exposure estimates can be and are manipulated in response to the competitive situation.
C. Exposure bases change frequently, which creates distortions in ratemaking analyses.
D. Geographic and social differences across the U.S. make exposure bases less relevant in
some areas relative to others.
E. None of A, B, C, D are true.

7. Based on Head, Insurance to Value, and the following information, calculate the ratio of the
pure premium rate per $100 for a 60% coinsurance clause to the pure premium rate per $100
for a 40% coinsurance clause.

Loss, as a Percentage of Unconditional Probability Arithmetic Mean Loss in Interval,

Total Property Value of a Loss in Interval as a Percent of Total Value
Less than or equal to 20% 0.050 12%
21% to 40% 0.025 30%
41% to 60% 0.015 52%
61% to 80% 0.007 75%
80% to 100% 0.003 95%

A. Less than 0.65

B. At least 0.65, but less than 0.75
C. At least 0.75, but less than 0.85
D. At least 0.85, but less than 0.95
E. At least 0.95

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 EXAM 5, SPRING 2001. SECTION I

8. Based on Insurance Services Office, Inc., Personal Automobile Policy (Edition 6-98) and the
following information, determine the total payment to be made by ABC Insurance Company
due to an accident in which its insured is found liable.

Costs associated with accident:

$15,000 bodily injury liability
$10,000 property damage liability
$250 bail bond
$12,000 defense costs

ABCs insured carries combined single limits of $25,000.

A. $15,000
B. $25,000
C. $25,250
D. $37,000
E. $37,250

9. According to Insurance Services Office, Inc., Personal Automobile Policy (Edition 6-98) under
which circumstance would an insureds Medical Payments coverage pay for medical
expenses?

A. The insureds son is injured when his hand is caught in the closing door of the insureds
car.
B. The insured is injured while riding a three-wheeled all-terrain vehicle on a public roadway.
C. The insured is injured while riding a three-wheeled all-terrain vehicle on his private
property.
D. The insureds neighbor is injured when he is accidentally struck by the insureds car as
the insured backs out of the driveway.
E. The insureds neighbor is injured when the insured purposefully strikes him with his car
after an altercation.

10. According to Insurance Services Office, Inc., Personal Automobile Policy (Edition 6-98), an
insured seeking coverage under Part A - Liability Coverage must do all of the following
except:

A. Cooperate with the insurer in the investigation of any claim

B. Promptly send copies to the insurer of any legal papers received in connection with the
loss
C. Promptly notify the police if a hit-and-run driver is involved
D. Submit to examination under oath
E. Authorize the insurer to obtain medical reports

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 EXAM 5, SPRING 2001, SECTION I

11. Based on Feldblum, Personal Automobile Premiums: An Asset Share Pricing Approach for
Property-Casualty Insurance, and the following information, calculate the termination rate for
the third year.

l Number of policies originally issued = 1,000

l Number of first-year lapses = 350
l Number of second-year lapses = 200
l Number of third-year lapses = 100

A. Less than 12%

B. At least 12%, but less than 16%
C. At least 16%, but less than 20%
D. At least 20%, but less than 24%
E. At least 24%

12. According to Feldblum, Personal Automobile Premiums: An Asset Share Pricing Approach for
Property-Casualty Insurance, which of the following is d
false

A. Asset share pricing determines rates, not rate revisions.

B. Life insurance policy claim rates are more certain than property-casualty policy claim
rates.
C. It is appropriate to assume the same pattern of persistency ratios for both direct writers
and independent agency companies.
D. A level commission structure is inappropriate for the persisting and profitable risks.
E. The dominant market share of the direct writers makes asset share pricing a more
appropriate model for personal automobile insurance.

13. Based on Tiller, Individual Risk Rating Study Note, and the following data, calculate the
Adjusted Expected Loss & ALAE Ratio.

0 D-ratio 0.624
. Off-balance factor 1.050
l Subject Premium ! 80,000
0 Total Limits Earned Premium $100,000
0 Expected Basic Limits Losses & Unlimited ALAE $ 60,000
0 Expected Total Limits Losses & Unlimited ALAE $ 74,500

A. Less than 42.0%

B. At least 42.0%, but less than 44.0%
C. At least 44.0%, but less than 46.0%
D. At least 46.0%, but less than 48.0%
E. At least 48.0%

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 EXAM 5, SPRING 2001, SECTION I

14. According to Actuarial Standard of Practice No. 13: Trending Procedures in

Property/Casualty Insurance Ratemaking, which of the following items should be considered
in the trending procedure used in ratemaking for private passenger automobile insurance?

A. A decrease in automobile usage due to rising gas prices

B. The introduction of higher policy limits
C. A recently enacted tort reform that strengthens the verbal threshold for lawsuits
D. Changes in price levels in the economy as measured by external indices such as the
Consumer Price Index
E. All of the above should be considered.

15. Based on Feldblum, Workers Compensation Ratemaking, and the following information,
compute the policy year reported premium development factor from 12 to 24 months.

. Final audit occurs 3 months after policy expiration.

0 On average, audits result in 15% additional premium.
a Premium writings are even throughout the year.
0 All policies are annual.

A. Less than 1.050

B. At least 1.050, but less than 1.075
C. At least 1.075, but less than 1.100
D. At least 1.100, but less than 1.125
E. At least 1.125

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 EXAM 5, SPRING 2001, SECTION I

16. According to Moncher, Study Note: NCCI Data Collection Calls and Statistical Plans, which
of the following types of costs is considered ALAE in the NCCI Workers Compensation
Statistical Plan?

A. Medical exams incurred for the benefit of the claimant

B. Vocational rehabilitation evaluation expenses, if these services are purchased from an
outside vendor
C. A carriers penalties for reasons beyond its control that accrue as benefits to the claimant
D. A carriers penalties for reasons within its control that accrue as benefits to the claimant
E. None of the above

17. Based on Boor, The Complement of Credibility, and the following information, calculate the
complement of credibility for class 2.

Indicated Loss Current Loss Complement of

Class Cost Rate Cost Rate Credibility
1 150 120 140
2 160 150

A. Less than 155

B. At least 155, but less than 170
C. At least 170, but less than 185
D. At least 185, but less than 200
E. At least 200

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 EXAM 5, SPRING 2001, SECTION II

SECTION II, QUESTIONS 18-48, WRITTEN ANSWER QUESTIONS.

18. (4 points)

According to Wiening and Malecki, Insurance Contract Analvsis, exclusions are said to serve
at least six legitimate purposes. State four of these purposes, and for each one, describe an
exclusion used for that purpose.

19. (3 points)

According to Hamilton and Malecki, Personal Insurance: Property and Liability, answer the
questions below.

a. (1 point)

State two weaknesses in the traditional tort recovery process that contributed to the
development of no-fault insurance.

b. (1 point)

Describe one of the two options for determining whether an injured party can file suit for
non-economic damages in no-fault states, and give one weakness of this option.

c. (1 point)

State four benefits commonly provided in a modified no-fault state.

20. (2 points)

Hamilton and Malecki, Personal Insurance: Property and Liabilitv, discuss the two types of
compensatory damages.

a. (1 point)

Describe each of the two types of compensatory damages.

b. (1 point)

Give an example for each of the two types of compensatory damages described in your
answer to part a.

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a
 EXAM 5, SPRING 2001, SECTION II

21. (2 points)

Based on the Health Insurance Association of America, Group Life and Health Insurance -
Part C, answer the questions below.

a. (1 point)

How do Health Maintenance Organizations, Preferred Provider Organizations, and

Point of Service plans use primary care providers and restrictions on in-network and
out-of-network benefits to help control costs?

b. (1 point)

Which of the three types of plans has the lowest employer costs and why?

22. (4 points)

Use the methodology presented in Burger et al., Incorporating a Hurricane Model into
Property Ratemaking, and the following information, to answer the questions below. Show all
work.

Non-Hurricane
Developed Non- Excess Losses Classification
Hurricane Losses on a $250 Earned Current and Accident
Accident on a $250 Deductible House Cost/Amount Coverage Year
Year Deductible Level Level Years Factor Factor Weiqhts
1997 300,000 0 1,400 1.02 1.185 .20
1998 372,000 22,000 1,500 1 .Ol 1.252 .30
1999 456,500 36,500 1,600 1 .oo 1.341 .50

l Loss Adjustment Expense Factor = 1.15

l Non-Hurricane Excess Wind Factor = 1.10
l Composite Projection Factor = 1.05
l Average Modeled Hurricane Loss Cost = $ 99.95
l Current Base Class Loss Cost = $300.00

a. (2 points)

Calculate the weighted prospective non-hurricane base class loss cost.

b. (1 point)

Calculate the modeled hurricane base class loss cost.

c. (1 point)

Calculate the indicated loss cost change.

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9
 EXAM 5, SPRING 2001, SECTION II

23. (2 points)

In his paper Personal Automobile Premiums: An Asset Share Pricing Approach, Feldblum
gives four reasons for the relationship between the duration of an auto policy and the claim
frequency for that policy. State and explain these four reasons.

24. (3 points)

Based on Feldblum, Workers Compensation Ratemaking, and the following information,

calculate the involuntary market burden. Show all work.

Pool premium = $1 o,ooo,ooo

Undiscounted pool losses = $8500,000
Servicing carrier allowance = $600,000
Administrative expenses = $1500,000
Producer fees = $1 ,ooo,ooo
Investment income = $350,000

. Undiscounted losses are developed to ultimate value.

l Due to higher premium deposits, 10% of the involuntary risks are expected to seek
coverage in the voluntary market.

. 5%, or $2.5 million of voluntary market premium is expected to leave for self-
insurance.

25. (2 points)

Based on Tiller, Individual Risk Rating, chapter 3 of Foundations of Casualty Actuarial

Science, briefly describe internal and external manipulation with regard to individual risk rating
systems and give an example of each.

26. (2 points)

Based on Tiller, Individual Risk Rating, chapter 3 of Foundations of Casualtv Actuarial

Science, discuss the pros and cons of prospective and retrospective individual risk rating
systems with respect to each of the following four factors:

l Responsiveness to changes in the experience period

l Stability of costs
l Incentive for risk control
l Timing of payments from the insured

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 EXAM 5, SPRING 2001, SECTION II

27. (2 points)

Boor, A Macroeconomic View of the Insurance Marketplace, describes the ultimate result of
a certain basic truth of insurance underwriting as the establishment of more and more refined
risk classification systems.

State this basic truth of insurance underwriting and briefly describe how it leads to more
refined classification systems.

28. (2 points)

According to Boor, The Impact of the Insurance Economic Cycle on Insurance Pricing, there
are two diametrically opposed strategies for responding to the insurance economic cycle.

Briefly describe each strategy and the effects each will have on the book of business insured,
the companys pricing, underwriting expenses, and profitability during the various phases of
the insurance economic cycle.

29. (2 points)

Based on Prevosto, Study Note: IS0 Statistical Plans, answer the questions below.

a. (1 point)

State the two broad categories of exposure bases used for General Liability insurance,
and give an example of each.

b. (1 point)

State the two measures of exposure for Homeowners insurance and describe how
each is calculated from the unit statistical plan information.

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 EXAM 5, SPRING 2001, SECTION II

30. (3 points)

Based on Malecki and Flitner, Commercial Liabilitv Insurance and Risk Management, answer
the questions below.

a. (2 points)

There are four essential elements of negligence that a plaintiff must establish to
successfully sue for damages. State these four essential elements.

b. (1 point)

Generally, an employer is not vicariously liable for torts committed by an independent

contractor. There are two major exceptions to this rule. State these two exceptions.

31. (2% points)

According to Malecki et al., Commercial Liabilitv Insurance and Risk Manaoement, four
common types of suits are covered by employers liability coverage.

State and briefly describe three of the common types of suits covered by employers liability
coverage.

32. (2 points)

Based on Trupin and Flitner, Commercial Property Insurance and Risk Manaqement, state
four types of property insurance that can be included in a Commercial Package Policy (CPP).

33. (3 points)

Webb et al., Insurance Operations, describe four major factors constraining a companys
underwriting policy. State and describe three of these four constraints that a company should
consider before making a change to its underwriting policy.

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 EXAM 5, SPRING 2001, SECTION II

34. (3 points)

According to Webb et al., insurance Operations, the responsibility for establishing a case
reserve typically falls on the individual adjuster, supervisor, or claim examiner.

a. (1% points)

Describe the three standard methods used to establish a case reserve.

b. (1% points)

Explain what is meant by stairstepping case reserves and describe two problems with this
practice.

35. (2 points)

a. (1 point)

Based on Webb et al., Insurance Operations, and the following information, calculate the
trade basis combined ratio and the financial basis combined ratio. Show all work.

Written Premium $20,000,000

Earned Premium $18,000,000
Underwriting Expenses $6,000,000
Paid Losses $9,000,000
Incurred Losses $12,000,000

b. (1 point)

According to Webb et al., insurance Operations, explain why comparisons between

insurers using a trade basis combined ratio may be misleading.

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 EXAM 5, SPRING 2001, SECTION II

36. (7 points)

Based on McClenahan, Ratemaking, chapter 2, Foundations of Casualtv Actuarial Science,

and the following data, answer the questions below.

Current Relativity On-Level Earned Experience Loss

Class to Class 1 Premium and ALAE
1 1.00 $50,000 $30,000
2 1.25 $20,000 $10,560
3 1.50 $30,000 $16,200

l Existing base rate is $100.

l Indicated statewide rate level increase is 10%.
l Class 1 is the base class.

a. (1 point)

Calculate the indicated classification relativities for class 2 and class 3. Show all work.

b. (2 points)

Calculate the off-balance factor and revised base rate required to achieve the overall
indicated statewide rate level increase. Show all work.

c. (2 points)

Assume that regulatory restrictions limit any class rate changes to + 15%. Calculate the
revised base rate and classification relativities that will satisfy the regulatory restrictions and
still achieve the overall indicated statewide rate level change. Show all work.

d. (1 point)

Legislatures may establish restrictions on rate variations or even completely abolish the use
of certain rating variables. Finger, Risk Classification, chapter 5, Foundations of Casualty
Actuarial Science, discusses four effects of restrictions on rating variables. State two of
these and briefly describe how they would result from the regulatory restrictions in part c.
above.

e. (1 point)

Based on Finger, Risk Classification, chapter 5, Foundations of Casualty Actuarial

Science, describe two ways a company may react to counter the effects due to the abolition
of a rating variable.

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 EXAM 5, SPRING 2001, SECTION II

37. (4 points)

Based on McClenahan, Ratemaking, chapter 2, Foundations of Casualtv Actuarial Science,

and the following data, answer the questions below. Show all work.

Reported On- Development

Accident Earned Level Earned Loss and ALAE as of Reported Claims as of Factors
Year Exposures Premium December 31 v 2000 December 31 1 2000 Losses Claims
1998 400 $100,000 $ 90,000 60 1 .oo 1 .oo
1999 572 $110,000 $124,800 70 1.05 1.20
2000 680 $120,000 $ 88,300 70 1.80 1.40

Calendar Year 2000 Data

Written Premium $100,000
Earned Premium $ 90,000
Incurred Loss & ALAE $ 55,000
ULAE $ 2,750
Commissions $ 16,000
Taxes, Licenses, & Fees $ 4,000
Other Acquisition Expenses $ 6,000
General Expenses $ 4,500
Profit Provision 6%

l Rates will be in effect for one year.

0 Rate change effective date is October 1, 2001.
l Assume all policies are annual.

a. (l/2 point)

Calculate the target loss ratio.

b. (1% points)

Calculate the frequency and severity trends (assume trends are exponential).

c. (1% points)

Calculate the average trended experience loss ratio.

d. (% point)

Calculate the indicated statewide rate level change.

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 EXAM 5, SPRING 2001, SECTION II

38. (2 points)

Using the parallelogram method described by McClenahan in Ratemaking, chapter 2,

Foundations of Casualty Actuarial Science, determine the calendar year 1999 on-level earned
premium. Show all work.

Calendar Year Earned Premium Effective Date Rate Chanqe

1997 $10,000 July 1, 1997 +5.2%
1998 $11,500 No Change No Change
1999 $14,000 April 1, 1999 +7.4%

l All policies are 2-year policies.

l Policies are written uniformly throughout the year.

39. (2% points)

Using the coefficient of variation approach described by Finger in Risk Classification, chapter
5, Foundations of Casualty Actuarial Science, and the following information, answer the
questions below.

Class Exposures Expected Value of Losses

A 200 50
B 700 100
C 100 500

l The insured population has a coefficient of variation of 1 .OO.

0 Both the classification system and the insured population have the same mean
costs.
l Class B is the base class.

a. (I/, points)

Calculate the coefficient of variation and the efficiency of this classification system. Show
all work.

b. (/2 point)

What is the underlying key to designing a highly efficient classification system?

c. (/2 point)

Explain one social implication of using a rate structure that results in high efficiencies.

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 EXAM 5, SPRING 2001, SECTION II

40. (2 points)

Based on Graves & Castillo, CGL Ratemaking, and the following information by Type of
Policy and Class Group, determine the overall indicated rate change. Show all work.

l The overall indicated rate change for Policy Type A is 10%.

l Premium at Present Rate Level:

Type of Class Group

Policy 1 2 3 4 Total
A 100 500 300 900 1,800

l Indicated Change in Type of Policy Relativity Factor:

Type of Policy [ indicated Change

A 0.90
B 1.02
C 0.99

l Indicated Change in Class Group Relativity:

Class Group
1 2 3 4
1.10 0.90 1 .oo 0.90

41. (2 points)

Based on Kelley, Homeowners Insurance to Value - An Update, and the following

information, calculate the reduction in loss per policy in 2001 which results from non-renewing
the in-force policies with unrepaired roof damages. Show all work.

Expected 2001 statewide average loss cost per policy,

if all policies are renewed $300
Percentage of total policies with unrepaired roofs 10%
Expected percentage of total claims on policies with unrepaired
roof damages resulting from unrepaired roofs 30%
Expected ratio of severity on claims resulting from unrepaired roofs
to severity for all other claims 40%

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 EXAM 5, SPRING 2001, SECTION II

42. (3 points)

McCarthy, Premium Trend Revisited, argues that bias in rate indications can be caused by
both:

l traditional homeowners ratemaking methodologies, which rely exclusively on

external indices such as the Boeckh or Modified CPI indices to predict pure
premium trends
l premium trends that measure changes in the companys average coverage amounts

Based on McCarthys discussion, answer the following questions.

a. (1 point)

State two reasons McCarthy gives to explain why the external indices are not an
appropriate basis for pure premium trends.

b. (1 point)

Explain what is missing in the traditional premium trend procedure and what McCarthy
recommends as a solution.

c. (1 point)

Using the following data, calculate the annual premium trend that McCarthy would suggest
for the companys homeowners indications. Show all work.

Annual Change in the Boeckh index of construction costs: +lO%

Earned Premium at Earned Premium at

Calendar Year Collected Levels Present Rate Levels Exposures
1996 100,000 100,000 1,000
1997 110,000 121,000 1,050
1998 121,000 146,000 1,100
1999 133,000 175,000 1,150

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 EXAM 5, SPRING 2001, SECTION II

43. (3 points)

Based on Schofield, Going from a Pure Premium to a Rate, and the following data for Private
Passenger Auto BI Liability coverage, calculate the expense fee. Show all work.

0 The Base Rate for Territory A is $300.

Exposure Distribution
Increased Limits Factor
Territory 20140 50/l 00 100/300
A 100 250 150
B 50 100 50
C 50 150 100

Territorial Relativities
Territory Relativity
A 1 .ooo
B 1.500
C 0.800

BI Limits Factors
BI Limit Increased Limits Factor
20140 1 .ooo
50/l 00 1.250
100/300 1.600

Expense Summary
Expense Type Expense as % of Premium 1 Portion of Expense that is Fixed
Commission I 10.0 I 0%
- ._
/ Other Acausition 8.0 / 75%
General 4.0 100%
Taxes, Licenses, and Fees 3.0 0%
Profit and Contigencies 5.0 0%

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19
 EXAM 5, SPRING 2001, SECTION II

44. (3 points)

Based on Brown and Schmitz, Study Note on Deductibles, answer the questions below.

a. (1 point)

There are four reasons why the use of large deductible policies has increased over the
last five to ten years. State these four reasons.

b. (2 points)

For each of the four reasons stated in your answer to part a. above, briefly explain why
that factor caused increased use of large deductible policies.

45. (2 points)

Based on Lange, The Interpretation of Liability Increased Limit Statistics, answer the
questions below.

a. (1 point)

What are the two reasons why increased limits loss trends are greater than basic limits
loss trends?

b. (1 point)

Using the following data, calculate the total limits trend, basic limits trend, and the
increased limits trend. Show all work.

Average Annual Change in

Averaqe Claim Cost Claim Cost from Fitted Line
Total Limits $1,300 $130
Basic Limits $900 $75

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20
 EXAM 5, SPRING 2001, SECTION II

46. (2 points)

Marker and Mohl, Rating Claims-Made Insurance Policies, discuss five principles of claims-
made ratemaking. In each of the subparts of this question, one of these five principles is
listed. For each of the stated principles, briefly describe why it is true.

a. (l/2 point)

A claims-made policy should always cost less than an occurrence policy, as long as
claims costs are increasing.

b. (% point)

Whenever there is a sudden, unpredictable change in underlying trend, claims-made

policies priced on the basis of the prior trend will be closer to the correct price than
occurrence policies priced in the same manner.

c. (I% point)

Whenever there is a sudden unexpected shift in the reporting pattern, the cost of mature
claims-made coverage will be affected very little, if at all, relative to occurrence coverage.

d. (% point)

The investment income earned from claims-made policies is substantially less than under
occurrence policies.

47. (3 points)

Feldblum, Workers Compensation Ratemaking, describes three different types of

experience periods by which insurance data is compiled.

a. (1% points)

Describe how premiums and losses are compiled under each of the three experience
periods:

0 Policy Year
. Calendar Year
l Calendar/Accident Year

b. (1% points)

State one advantage and one disadvantage associated with each type of experience
period.

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21
 EXAM 5, SPRING 2001, SECTION II

48. (2 points)

Based on Feldblum, Workers Compensation Ratemaking, and the following information,

answer the questions below. Show all work.

Statewide Average Weekly Wage $900

Maximum Weekly Benefit $900
Minimum Weekly Benefit $360
Compensation Rate 66.7% of pre-injury wage

a. (1 point)

Calculate the average benefit as a percentage of the statewide average weekly wage.

b. (1 point)

Calculate the direct effect of changing the compensation rate from 66.7% to 80.0% of the
pre-injury wage.

END OF EXAMINATION
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