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CAS Exam 5 study materials
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CAS Exam 5 practice questions

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Question 1Basic Ratemaking

An insurer writes a book where the pure premium for each class is $400. Class A has 60% of the exposure and Class B has 40%. If the insurer applies a uniform 10% expense loading to the pure premium for every class, what is the resulting gross rate for Class B?

  1. $360
  2. $480
  3. $440 Correct answer.
  4. $400

Explanation

Under a pure premium method with a uniform expense loading, each class rate equals pure premium times (1 + loading). Here $400 x 1.10 = $440, and because the loading is uniform, both classes get the same gross rate despite differing exposure volumes.

Question 2Basic Ratemaking

Which component of a gross rate is designed to fund the cost of investigating, defending, and settling claims but excludes the actual indemnity paid to claimants?

  1. Permissible loss ratio
  2. Loss cost
  3. Loss adjustment expense Correct answer.
  4. Fixed expense

Explanation

Loss adjustment expense (LAE) covers the costs of handling claims, distinct from the indemnity itself. In ratemaking, LAE is often split into allocated (defense, investigation) and unallocated (overhead) portions and loaded onto the loss cost.

Question 3Basic Ratemaking

An actuary is computing an indicated rate change using the loss ratio method. Which formula correctly expresses the indicated change where the experience loss ratio is compared to the permissible loss ratio?

  1. Experience loss ratio - Permissible loss ratio
  2. (Experience loss ratio / Permissible loss ratio) - 1 Correct answer.
  3. (Permissible loss ratio / Experience loss ratio) - 1
  4. (Experience loss ratio + Permissible loss ratio) / 2

Explanation

The loss ratio method indicates a change by dividing the actual (trended and developed) loss ratio by the permissible loss ratio and subtracting one. A result above zero signals a rate increase is needed because losses exceed what the current rate can support.

Question 4Basic Ratemaking

In the pure premium method, which item is subtracted from the indicated average gross rate to convert it into an indicated change to the current rate level?

  1. The permissible loss ratio
  2. The fixed expense per exposure
  3. The current average gross rate Correct answer.
  4. The trended pure premium

Explanation

The pure premium method produces an indicated average gross rate, which is compared against the current average gross rate to express the change as a percentage. Dividing the indicated rate by the current rate and subtracting one yields the indicated change.

Question 5Basic Ratemaking

Which statement best describes the purpose of the permissible loss ratio in ratemaking?

  1. It measures the ratio of incurred losses to surplus
  2. It caps the maximum loss ratio an insurer may report to regulators
  3. It sets the minimum combined ratio required for profitability
  4. It expresses the portion of each premium dollar available to pay losses and loss adjustment expenses Correct answer.

Explanation

The permissible loss ratio equals one minus the expense ratio (including profit and contingency provision), representing the share of premium available for losses and LAE. It is the benchmark against which the experience loss ratio is compared in the loss ratio method.

Question 6Basic Ratemaking

An insurer's trended and developed loss ratio is 0.72 and its permissible loss ratio is 0.60. Using the loss ratio method, what is the indicated rate change?

  1. +12%
  2. +20% Correct answer.
  3. +16.7%
  4. -16.7%

Explanation

The indicated change equals (0.72 / 0.60) - 1 = 1.20 - 1 = +20%. Because the experience loss ratio exceeds the permissible level, rates must rise by 20% to bring the ratio into balance.

Question 7Basic Ratemaking

Which of the following best explains why ratemaking uses a prospective, expected-cost approach rather than simply recovering past costs?

  1. Rates must match the accounting losses reported in the prior year
  2. Rates must fund future losses and expenses under the policies being written now Correct answer.
  3. Rates are set to guarantee a profit in every calendar year
  4. Rates are fixed by statute to equal last year's incurred losses

Explanation

Rates are prospective because they must cover the expected costs of the exposure period being insured, not the costs already incurred. Historical experience is used only as a guide, adjusted for trend, development, and other changes.

Question 8Basic Ratemaking

In the loss ratio method, why is the experience loss ratio adjusted for premium on-level before comparison to the permissible loss ratio?

  1. To eliminate the need for loss development
  2. To remove the effect of reinsurance recoveries from losses
  3. To convert written premium into earned premium
  4. To restate historical premiums at current rate levels so the ratio reflects current rates Correct answer.

Explanation

On-leveling adjusts historical premiums to what they would have been under current rates, removing the distortion caused by prior rate changes. Without it, the loss ratio would mix losses at current cost levels with premiums at obsolete rate levels.

Question 9Basic Ratemaking

Which ratemaking adjustment accounts for the fact that losses reported to date will continue to grow as claims are reported and settled?

  1. Benefit level adjustment
  2. Exposure trend
  3. Loss development Correct answer.
  4. Premium trend

Explanation

Loss development adjusts incurred losses from their current maturity to an estimated ultimate level. It reflects the predictable growth in reported and paid losses as claims mature over time.

Question 10Basic Ratemaking

An actuary selects a loss trend of 4% per year and needs to trend losses from an average accident date 1.5 years in the past to the average accident date of the new policy period. Assuming annual compounding, which factor should be applied?

  1. 1 + 0.04 x 1.5
  2. 1.04^1.5 Correct answer.
  3. 1.04^0.5
  4. 1.04 x 1.5

Explanation

Loss trend is applied as a compound growth factor raised to the number of years between the historical and prospective average accident dates. With 1.5 years and 4% annual trend, the factor is 1.04 raised to the 1.5 power.

Question 11Basic Ratemaking

Which of the following is the primary reason ratemaking classifies insureds into groups rather than charging each individual a unique rate?

  1. Classification balances predictive accuracy against the administrative cost of individual underwriting Correct answer.
  2. Classification guarantees that each group has identical expected losses
  3. Classification is required to satisfy statutory uniformity mandates
  4. Classification eliminates the need for expense loading

Explanation

Classification groups risks with similar expected costs to keep rates accurate while controlling administrative expense and maintaining credible group experience. Finer segmentation improves accuracy but raises cost and can create credibility problems.

Question 12Basic Ratemaking

Which criterion for a sound classification system requires that classes be defined so that risks within a class have similar expected loss costs?

  1. Incentive to loss control
  2. Homogeneity Correct answer.
  3. Mutual exclusivity
  4. Credibility

Explanation

Homogeneity means risks grouped together should have comparable expected costs so the class rate is fair to members. It is balanced against credibility, since very narrow classes may lack sufficient data.

Question 13Basic Ratemaking

A territory has 3,000 earned exposures and an observed loss ratio of 0.55. The complement of credibility is 0.40 and the complement loss ratio (from the broader state) is 0.65. What is the credibility-weighted loss ratio?

  1. 0.55
  2. 0.59 Correct answer.
  3. 0.61
  4. 0.60

Explanation

The credibility-weighted loss ratio equals Z times the observed ratio plus (1 - Z) times the complement, where Z = 0.60. So 0.60 x 0.55 + 0.40 x 0.65 = 0.33 + 0.26 = 0.59.

Question 14Basic Ratemaking

Under the standard for full credibility based on claim counts, why does the required number of claims increase when the acceptable deviation from expected losses is made smaller?

  1. The credibility standard is inversely proportional to the square root of the mean
  2. Smaller tolerances reduce the variance of the claim distribution
  3. Fewer claims are needed because the expected value becomes more precise
  4. A tighter tolerance requires more data to distinguish real differences from random fluctuation Correct answer.

Explanation

Full credibility standards are derived from the normal approximation to the aggregate claim distribution. Reducing the acceptable deviation raises the required standard, since more observations are needed to control sampling error within a tighter band.

Question 15Basic Ratemaking

Which of the following best describes the role of a trended, developed, on-level loss ratio in the loss ratio method?

  1. It measures the actual profitability of the expiring policy year
  2. It replaces the need for a permissible loss ratio
  3. It estimates the loss ratio expected under current rates for the prospective period Correct answer.
  4. It reflects only paid losses without any adjustment

Explanation

After development, trend, and on-level adjustments, the loss ratio approximates what would be expected if current rates applied to the future exposure period. It is then compared with the permissible loss ratio to indicate the needed change.

Question 16Basic Ratemaking

Which expense category is typically expressed as a percentage of premium rather than as a fixed dollar amount per exposure in a gross rate build-up?

  1. Premium tax per policy
  2. Membership fee
  3. Policy issuance fee
  4. Commission Correct answer.

Explanation

Commission is a variable expense proportional to premium and is usually expressed as a percentage. Fixed per-policy or per-exposure costs are handled as dollar loadings instead.

Question 17Basic Ratemaking

An insurer's current average gross rate is $500 and the pure premium method indicates an average gross rate of $540. What is the indicated rate change?

  1. +7.4%
  2. -8%
  3. +8% Correct answer.
  4. +40%

Explanation

The indicated change equals (540 / 500) - 1 = 0.08, or +8%. The indicated rate is compared to the current rate to express the needed adjustment as a percentage.

Question 18Basic Ratemaking

Which of the following is a key limitation of using a single statewide rate rather than territory-specific rates?

  1. Statewide rates cannot be filed with regulators
  2. Subsidization occurs because low-cost and high-cost territories pay the same rate Correct answer.
  3. Statewide rates eliminate the need for credibility weighting
  4. Statewide rates always produce higher loss ratios

Explanation

A uniform statewide rate forces low-cost territories to subsidize high-cost ones, creating equity and adverse-selection concerns. Territory rating addresses this by reflecting geographic cost differences.

Question 19Basic Ratemaking

In ratemaking, what does the term 'off-balance' refer to when comparing experience loss ratio to permissible loss ratio?

  1. The written premium differs from the earned premium
  2. The experience loss ratio differs from the permissible loss ratio, indicating a rate change is needed Correct answer.
  3. The insurer's assets and liabilities are unequal
  4. The loss reserves exceed the unearned premium reserve

Explanation

An off-balance condition exists when the indicated loss ratio departs from the permissible loss ratio, signaling that current rates are inadequate or excessive. The size of the gap drives the indicated rate change.

Question 20Basic Ratemaking

An actuary applies a 1.10 loss trend factor and a 1.05 loss development factor to a reported loss ratio of 0.50. Ignoring other adjustments, what is the adjusted loss ratio?

  1. 0.6050
  2. 0.5775 Correct answer.
  3. 0.5500
  4. 0.5250

Explanation

The adjusted loss ratio multiplies the reported ratio by each factor: 0.50 x 1.10 x 1.05 = 0.5775. Development and trend adjustments compound multiplicatively rather than additively.

Question 21Basic Ratemaking

Which of the following best describes the purpose of a premium trend adjustment in ratemaking?

  1. To adjust for changes in the mix of business by class
  2. To adjust historical average premium to reflect expected changes in premium levels over time Correct answer.
  3. To restate losses for changes in coverage limits
  4. To convert incurred losses to an ultimate basis

Explanation

Premium trend restates historical average premium to the prospective level, accounting for gradual shifts such as increases in average insured values. It is distinct from rate-level (on-level) adjustments.

Question 22Basic Ratemaking

Which of the following statements about the relationship between the combined ratio and the permissible loss ratio is correct?

  1. The combined ratio equals the permissible loss ratio minus the expense ratio
  2. The permissible loss ratio includes the expense ratio, while the combined ratio excludes it
  3. The permissible loss ratio equals one minus the expense ratio, while the combined ratio equals the loss and LAE ratio plus the expense ratio Correct answer.
  4. The permissible loss ratio and the combined ratio are always equal

Explanation

The permissible loss ratio is the complement of the expense ratio (including profit provision), representing the share available for losses and LAE. The combined ratio adds the expense ratio back to the loss and LAE ratio, so a combined ratio of 1.00 corresponds to results at the permissible level.

Question 23Basic Ratemaking

Which of the following is the most appropriate treatment of a large, one-time catastrophic loss in experience ratemaking?

  1. Catastrophe losses are averaged into the trend factor
  2. Catastrophe losses are included at full value in the experience period without adjustment
  3. Catastrophe losses are excluded entirely and never reflected in rates
  4. Catastrophe losses are typically handled through a separate catastrophe provision rather than loaded fully into the experience period Correct answer.

Explanation

Because catastrophes are infrequent and highly variable, ratemaking usually removes them from the experience period and adds a separately estimated catastrophe provision. This avoids distorting rates with a single unusual event.

Question 24Basic Ratemaking

In the context of ratemaking, which of the following best describes the function of a base rate combined with class relativities?

  1. Relativities are used only for expense loading
  2. The base rate sets the overall rate level while relativities adjust for class differences in expected cost Correct answer.
  3. Both the base rate and relativities are set by statute
  4. The base rate adjusts for class differences while relativities set the overall level

Explanation

Rates are often structured as a base rate times a class relativity, where the base rate controls the overall level and relativities distribute it among classes. This separation simplifies filing and adjustment of the overall rate level.

Question 25Basic Ratemaking

An actuary is deciding whether a class has sufficient data for its own rate. Which concept governs whether the class experience can be relied upon or must be blended with a broader group?

  1. Credibility Correct answer.
  2. Homogeneity
  3. Adverse selection
  4. Trend

Explanation

Credibility determines how much weight to give a class's own experience versus a complement such as a broader group. Low-credibility classes are blended with more stable data to reduce random fluctuation.

Question 26Basic Ratemaking

In ratemaking, which component of a gross rate is intended to cover the expected cost of losses and loss adjustment expenses per unit of exposure?

  1. The premium tax provision
  2. The pure premium Correct answer.
  3. The profit and contingency loading
  4. The fixed expense provision

Explanation

The pure premium equals expected losses plus loss adjustment expenses divided by exposures, so it represents the loss-and-LAE portion of the rate. Variable expense and profit provisions are added on top to build the gross rate.

Question 27Basic Ratemaking

An actuary computes a pure premium of $180 and expects variable expenses of 20% of premium, fixed expenses of $10 per exposure, and a profit and contingency provision of 5% of premium. What average gross rate is indicated?

  1. $240
  2. $225 Correct answer.
  3. $254
  4. $200

Explanation

The gross rate must satisfy rate = (pure premium + fixed expense) / (1 - variable expense ratio - profit provision). Here ($180 + $10) / (1 - 0.20 - 0.05) = $190 / 0.75 = $253.33, which rounds to about $254, so the closest listed value is $254.

Question 28Basic Ratemaking

Which statement correctly distinguishes the pure premium method from the loss ratio method of ratemaking?

  1. The pure premium method requires current rates as an input, while the loss ratio method does not
  2. The pure premium method produces a rate level directly from loss costs and expenses, while the loss ratio method adjusts current rates by comparing experience to a permissible loss ratio Correct answer.
  3. The pure premium method can only be applied when exposure data are unavailable
  4. The loss ratio method produces a dollar rate level directly, while the pure premium method produces only a relative change

Explanation

The pure premium method builds a rate from expected loss cost plus expense loading, so it does not require existing rates. The loss ratio method compares the experience loss ratio to the permissible loss ratio and applies the resulting indicated change factor to current rates.

Question 29Basic Ratemaking

A class has 1,200 earned exposures and incurred losses of $900,000. Using the pure premium approach, what is the indicated pure premium before any expense loading?

  1. $900
  2. $1,333
  3. $1,080
  4. $750 Correct answer.

Explanation

Pure premium is incurred losses divided by earned exposures: $900,000 / 1,200 = $750 per exposure. Expense and profit loadings would be applied afterward to convert this to a gross rate.

Question 30Basic Ratemaking

Which of the following best describes the purpose of the permissible loss ratio in ratemaking?

  1. It states the portion of each premium dollar available for losses and loss adjustment expenses after all other rate components are provided for Correct answer.
  2. It is the loss ratio at which the insurer breaks even on invested assets
  3. It sets the maximum loss ratio an insurer may report to regulators without penalty
  4. It represents the historical average loss ratio of the insurer's book of business

Explanation

The permissible loss ratio equals 1 minus the expense, profit, and contingency provisions expressed as fractions of premium. It is the target loss ratio the expected experience must meet for the rate to be adequate.

Question 31Basic Ratemaking

An insurer's expense ratio is 22%, its profit and contingency provision is 6%, and its premium tax is 3%. What is the permissible loss ratio?

  1. 0.75
  2. 0.69 Correct answer.
  3. 0.78
  4. 0.72

Explanation

The permissible loss ratio is 1 minus the sum of premium-based provisions: 1 - (0.22 + 0.06 + 0.03) = 0.69. Fixed per-exposure expenses would be handled separately in the rate build.

Question 32Basic Ratemaking

Which of the following best describes how credibility weighting is used in ratemaking?

  1. The class rate is set entirely from the class's own experience whenever any losses are observed
  2. The complement of credibility is always assigned to the largest class in the state
  3. The indicated rate is a weighted average of the class's own experience indication and a complement such as the overall rate change Correct answer.
  4. Credibility weighting replaces the need for loss development and trend adjustments

Explanation

Credibility weighting blends the class indication with a complement of credibility, typically the indicated change for the broader book, according to the credibility of the class data. This stabilizes rates for small classes.

Question 33Basic Ratemaking

A class indication is a +12% change and the complement indication is +4%. If the class is assigned 30% credibility, what overall indicated change results?

  1. 8.0%
  2. 4.0%
  3. 9.6%
  4. 6.4% Correct answer.

Explanation

The credible weighted change is 0.30(12%) + 0.70(4%) = 3.6% + 2.8% = 6.4%. The complement receives the remaining 70% credibility.

Question 34Basic Ratemaking

Which of the following best explains why ratemaking uses expected future costs rather than simply recovering past incurred losses?

  1. Rates must be adequate for the exposure period they cover, so past costs are adjusted to the cost level expected during that period Correct answer.
  2. Regulators prohibit the use of historical loss data in rate filings
  3. Recovering past losses exactly would guarantee an underwriting profit
  4. Past losses are never relevant to ratemaking and are discarded

Explanation

A rate is prospective: it applies to future policies, so historical losses must be trended and developed to the expected cost level of the exposure period. Past costs alone would be stale and would not reflect current conditions.

Question 35Basic Ratemaking

An actuary has reported losses of $2,000,000 at 12 months of development. The selected age-to-ultimate factor is 1.25. What are the estimated ultimate losses?

  1. $2,500,000 Correct answer.
  2. $2,250,000
  3. $1,600,000
  4. $2,050,000

Explanation

Ultimate losses equal reported losses multiplied by the age-to-ultimate development factor: $2,000,000 x 1.25 = $2,500,000. The factor reflects expected future emergence of claims.

Question 36Basic Ratemaking

Which of the following best describes how a change in the mix of business affects an insurer's indicated rate change?

  1. A change in mix has no effect because each class is rated separately
  2. A shift toward classes with higher expected loss costs raises the average rate level even if each class's own rate is unchanged Correct answer.
  3. Mix changes are reflected only through the loss development factor
  4. A shift toward lower-loss classes automatically increases the overall rate level

Explanation

The overall average rate depends on both the class rates and the distribution of exposures across classes. A shift toward higher-cost classes increases the average cost per exposure and therefore the average rate level.

Question 37Basic Ratemaking

Which of the following best describes the role of exposure in ratemaking?

  1. It represents the insurer's surplus available to support risk
  2. It measures the number of claims reported during the policy period
  3. It records the premium collected after all discounts are applied
  4. It provides the unit of risk over which expected losses and expenses are spread to produce a rate Correct answer.

Explanation

Exposure is the measure of risk, such as car-years or payroll, that serves as the denominator for loss costs and rates. Rates are expressed per unit of exposure so that expected costs can be spread across the insured population.

Question 38Basic Ratemaking

An insurer writes 10,000 exposures at an average rate of $400. Losses and LAE are $2,200,000 and fixed expenses are $300,000. What is the underwriting result before any variable expense or profit provision?

  1. A gain of $1,500,000 Correct answer.
  2. A gain of $2,200,000
  3. A gain of $1,800,000
  4. A loss of $100,000

Explanation

Written premium is 10,000 x $400 = $4,000,000. Subtracting losses and LAE of $2,200,000 and fixed expenses of $300,000 leaves $1,500,000.

Question 39Basic Ratemaking

Which of the following best describes the function of an increased limits factor in ratemaking?

  1. It adjusts the rate for a policy written at higher limits to reflect the greater expected severity of losses Correct answer.
  2. It spreads fixed expenses across all exposures in the class
  3. It converts reported losses to an ultimate basis
  4. It adjusts losses for inflation between the accident date and the rate effective date

Explanation

Increased limits factors reflect the higher expected loss cost per exposure when limits exceed the basic limit, driven by greater severity. They are applied to the basic limit rate to obtain the rate at the selected limit.

Question 40Basic Ratemaking

A basic limit rate is $300 and the increased limits factor for a $500,000 limit is 1.40. What is the rate at the higher limit?

  1. $440
  2. $300
  3. $214
  4. $420 Correct answer.

Explanation

The rate at the higher limit equals the basic limit rate multiplied by the increased limits factor: $300 x 1.40 = $420.

Question 41Basic Ratemaking

Which of the following best describes the purpose of a deductible credit in ratemaking?

  1. It reduces the rate to reflect that the insured bears losses below the deductible amount Correct answer.
  2. It converts the policy to a coinsurance arrangement
  3. It adjusts the rate for changes in the policy effective date
  4. It increases the rate to cover the cost of administering the deductible

Explanation

A deductible eliminates small losses that the insured retains, lowering the expected loss cost to the insurer. The deductible credit passes that reduction through to the rate.

Question 42Basic Ratemaking

Which of the following best describes the effect of an off-balance condition between the experience loss ratio and the permissible loss ratio?

  1. The indicated rate change is always zero when the insurer is profitable
  2. The indicated rate change is the ratio of the experience loss ratio to the permissible loss ratio Correct answer.
  3. The indicated rate change equals the credibility of the class
  4. The indicated rate change equals the difference between the two ratios

Explanation

In the loss ratio method the indicated change factor is the experience loss ratio divided by the permissible loss ratio. If the experience ratio exceeds the permissible ratio, rates are indicated to increase.

Question 43Basic Ratemaking

An actuary is selecting a loss trend. Which of the following would most appropriately be reflected in the trend selection?

  1. Changes in the frequency and severity of claims over time, including the effect of inflation on claim costs Correct answer.
  2. The number of exposures written in each territory
  3. The effect of a one-time change in the insurer's reinsurance program
  4. The difference between written and earned premium

Explanation

Loss trend captures the expected change in loss costs per exposure over time, driven by frequency and severity movements including claim cost inflation. Structural or one-time changes are handled through other adjustments.

Question 44Basic Ratemaking

Which of the following best describes why an actuary reviews loss experience by accident year rather than only by calendar year?

  1. Accident year groups losses by when they occurred, so the comparison is not distorted by changes in case reserves or by premium changes during the year Correct answer.
  2. Calendar year data are never available to ratemakers
  3. Calendar year data combine losses from different exposure periods and are therefore always inadmissible
  4. Accident year data eliminate the need for loss development

Explanation

Accident year experience assigns each loss to the period in which it occurred, regardless of when it is reported or paid. This gives a cleaner view of the underlying cost level than calendar year data, which mix reserve changes with current losses.

Question 45Basic Ratemaking

Which of the following best describes the treatment of a large catastrophe loss in experience ratemaking?

  1. It is spread over the class's exposures without any adjustment
  2. It is always included in full because every loss must be recovered through rates
  3. It is often removed from the experience and replaced with a provision for expected catastrophe losses based on a longer-term view Correct answer.
  4. It is removed and never replaced, since catastrophes are unpredictable

Explanation

A single catastrophic event can distort the experience period and is unlikely to represent the expected annual cost. Ratemakers typically remove it and load a provision based on catastrophe models or a longer historical average.

Question 46Basic Ratemaking

An actuary is combining experience from several years. Which of the following best describes why losses are trended to a common cost level before being averaged?

  1. Each year's losses reflect the cost level of its own accident period, so trending puts them on a comparable basis before combination Correct answer.
  2. Trending is required to convert paid losses to incurred losses
  3. Trending removes the effect of the deductible from each year's losses
  4. Trending replaces the need for development to ultimate

Explanation

Loss costs change over time, so losses from different accident years are not directly comparable. Trending each year to a common cost level allows the years to be averaged meaningfully.

Question 47Basic Ratemaking

Which of the following best describes the relationship between the indicated rate change and the current rate level when using the loss ratio method?

  1. The indicated change factor is applied to current rates to produce the new rate level Correct answer.
  2. The indicated change factor is ignored when the class is fully credible
  3. The indicated change factor replaces current rates with the experience loss ratio
  4. The indicated change factor is applied only to the pure premium

Explanation

The loss ratio method produces a multiplicative factor that adjusts the current rate level to the indicated level. The current rates are the starting point to which the factor is applied.

Question 48Basic Ratemaking

Which of the following best describes the role of the complement of credibility when a class has limited experience?

  1. It is the loss development factor applied to the class's losses
  2. It supplies an alternative indication, usually from a broader body of experience, to stabilize the class rate Correct answer.
  3. It is the credibility assigned to the class's own experience
  4. It replaces the class indication entirely regardless of the class's credibility

Explanation

The complement of credibility is the indication given the remaining weight when the class's own experience is not fully credible. It is commonly the indicated change for the statewide or overall book.

Question 49Basic Ratemaking

A class has an indicated pure premium of $240. Expenses and profit require a loading that makes the permissible loss ratio 0.60. What gross rate is indicated?

  1. $144
  2. $300
  3. $400 Correct answer.
  4. $384

Explanation

The gross rate equals the pure premium divided by the permissible loss ratio: $240 / 0.60 = $400. The permissible loss ratio converts a loss cost into a full rate.

Question 50Basic Ratemaking

Which of the following best explains why ratemaking requires balancing adequacy, competitiveness, and regulatory acceptability?

  1. Regulatory acceptability guarantees that rates are adequate and competitive
  2. Rates must be high enough to cover expected costs, low enough to retain business, and consistent with regulatory standards, and these objectives can conflict Correct answer.
  3. Competitiveness is the only objective regulators consider
  4. Adequacy alone determines the rate, and the other objectives are irrelevant

Explanation

Ratemaking objectives can pull in different directions: adequate rates may not be competitive, and competitive rates may not satisfy regulators. The actuary must balance them in the selected rate.