Free CAS Exam 5 (Basic Ratemaking and Reserving) Classification & Alternative Rating Practice Questions
Classification and alternative rating fall in the Ratemaking section of CAS Exam 5 (45-55% of the exam, CAS). Questions test class plans and territory relativities, deductible and increased limits pricing, coinsurance, commercial lines rating mechanisms such as experience and schedule rating, and interpreting what a fitted predictive model such as a GLM says about the risks being priced.
48 questions13 easy16 medium19 hard2026 syllabus
Sample Questions
Question 1
Easy
In property-casualty ratemaking, what is the primary reason an insurer refines its risk classification system into more granular classes?
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Correct Answer: D
Solution
D is correct. Classification refines premiums so each group pays a rate reflecting its own expected loss cost. If an insurer charges an average rate to a heterogeneous group, lower-risk insureds are overcharged and migrate to competitors that price them accurately, while higher-risk insureds remain. Aligning price with expected cost across classes counters this adverse selection.
Question 2
Medium
A commercial property policy covers a building valued at $1,000,000 and includes an 80% coinsurance clause. The insured carries $600,000 of coverage. A covered partial loss of $200,000 occurs. Applying the coinsurance provision, how much does the insurer pay?
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Correct Answer: A
Solution
A is correct. Under a coinsurance clause the loss payment equals the loss multiplied by the ratio of insurance carried to insurance required. The required amount is 80%×$1,000,000=$800,000. The insured carries $600,000, so the ratio is 600,000/800,000=0.75. The payment is $200,000×0.75=$150,000, which is below both the loss amount and the amount of insurance carried.
Question 3
Hard
A GLM with a log link is fitted to pure premium. The base pure premium is $500. The fitted coefficients for the risk's levels are: territory 0.2624, vehicle class −0.1054, and prior-claims 0.4055. What modeled pure premium does the GLM indicate for this risk?
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Correct Answer: A
Solution
A is correct. Under a log link the linear predictor sums, then exponentiates, which is equivalent to multiplying the level relativities. The relativities are e0.2624=1.30, e−0.1054=0.90, and e0.4055=1.50. The modeled pure premium is $500 ×1.30×0.90×1.50= $877.50.
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