CAS CAS Actuarial Modeling and Pricing Techniques 2 — Questions and Answers
Question 1: In a loss reserve analysis, what is an 'accident year' loss triangle?
- A matrix displaying cumulative losses by the year the loss occurred and the age at which they were evaluated (Correct answer)
- A table showing the number of accidents by month within a calendar year
- A graph plotting loss frequency against loss severity for a given year
- A schedule comparing reported losses to paid losses at each quarter end
Correct answer: A matrix displaying cumulative losses by the year the loss occurred and the age at which they were evaluated
An accident year triangle organizes cumulative losses (or claims) by accident year (rows) and development age (columns), enabling actuaries to observe and project development patterns.
Question 2: What is 'trend' in the context of actuarial ratemaking for personal auto insurance?
- The change over time in the underlying loss frequency and/or severity, used to project historical losses to future policy periods (Correct answer)
- The variance in an individual insured's loss experience from year to year
- The impact of inflation on investment returns for the insurer's reserve assets
- Changes in the number of vehicles insured in the portfolio
Correct answer: The change over time in the underlying loss frequency and/or severity, used to project historical losses to future policy periods
Trend adjustments project historical loss data forward to reflect expected changes in frequency, severity, or pure premiums during the future policy period.
Question 3: What is the primary purpose of the 'schedule rating' plan in commercial lines insurance?
- To modify a standard class rate up or down based on specific physical and operational characteristics of an individual risk (Correct answer)
- To assign risks to rating classes based on their industry classification
- To allocate expenses across lines of business for rate filing purposes
- To determine the premium for risks that don't qualify for experience rating
Correct answer: To modify a standard class rate up or down based on specific physical and operational characteristics of an individual risk
Schedule rating allows underwriters to adjust individual risk premiums for factors like premises condition, management quality, and loss control that are not fully captured by class rates.
Question 4: What does 'IBNR' stand for and what does it represent in loss reserving?
- Incurred But Not Reported; losses that have occurred but have not yet been reported to the insurer (Correct answer)
- Identified But Not Reserved; claims under investigation without established reserves
- Incurred But Not Resolved; claims reported but not yet settled
- Indexed But Not Restated; losses not adjusted for inflation trends
Correct answer: Incurred But Not Reported; losses that have occurred but have not yet been reported to the insurer
IBNR reserves are set aside for losses that have occurred during the policy period but have not yet been reported to the insurer, a critical component of total reserves.
Question 5: In experience rating for workers' compensation, what does the 'experience modification factor' (EMod) measure?
- The ratio of an employer's actual loss experience to the expected losses for their industry class, used to adjust the standard premium (Correct answer)
- The percentage change in workers' comp premium from the prior policy year
- The insurer's profitability on the account relative to class average
- The frequency of OSHA citations relative to industry peers
Correct answer: The ratio of an employer's actual loss experience to the expected losses for their industry class, used to adjust the standard premium
An EMod above 1.0 indicates worse-than-average experience and results in a premium surcharge, while an EMod below 1.0 reflects better-than-average experience and earns a credit.
Question 6: What is the 'frequency-severity' method in actuarial loss projection?
- Separately projecting the number of claims (frequency) and the average cost per claim (severity), then multiplying them to estimate total losses (Correct answer)
- Analyzing the distribution of large losses versus small losses in a portfolio
- Measuring the correlation between accident frequency and accident severity
- A statistical test for goodness-of-fit in a loss distribution model
Correct answer: Separately projecting the number of claims (frequency) and the average cost per claim (severity), then multiplying them to estimate total losses
The frequency-severity method projects ultimate losses by independently analyzing trends and development in claim counts and average claim costs, then combining them.
CAS CAS Actuarial Modeling and Pricing Techniques 2
In a loss reserve analysis, what is an 'accident year' loss triangle?