CAS CAS Loss Reserving and Ratemaking Fundamentals 2

Question 1

What is the fundamental insurance pricing equation?

Accepted Answer

Premium = Losses + LAE + Underwriting Expenses + Profit

Answer

The fundamental insurance equation requires premium to cover losses, loss adjustment expenses (LAE), underwriting expenses, and a provision for profit.

Question 2

How is the loss ratio calculated?

Accepted Answer

Losses and LAE divided by earned premium

Answer

The loss ratio is incurred losses (and often LAE) divided by earned premium, expressing claims costs as a percentage of premium earned.

Question 3

What is the purpose of trend factors in ratemaking?

Accepted Answer

To adjust historical losses to current and future cost levels

Answer

Trend factors project historical loss experience to expected future levels, accounting for cost inflation, social trends, and changes in the insured population.

Question 4

What does the credibility-weighted premium formula express?

Accepted Answer

P = Z × Experience Rate + (1−Z) × Manual Rate

Answer

The credibility formula blends the insured's own experience rate (weighted by Z) with the manual class rate (weighted by 1−Z), where Z reflects statistical credibility.

Question 5

The paid loss development method is most reliable for which type of insurance lines?

Accepted Answer

Short-tail lines where claims are reported and paid quickly

Answer

Paid development is most reliable for short-tail lines (e.g., auto physical damage) because paid losses converge quickly to ultimate without long settlement delays.

(CAS) Casualty Actuarial Society Practice Test

(CAS) Casualty Actuarial Society Practice Test

CAS CAS Loss Reserving and Ratemaking Fundamentals 2