Free CAS Exam 5 (Basic Ratemaking and Reserving) Overall Rate Level Indications Practice Questions
Practice 117 free Overall Rate Level Indications questions for CAS Exam 5 (Basic Ratemaking and Reserving).
Sample Questions
Question 1
Easy
In a rate indication, which of the following is most appropriately treated as a variable expense that scales with premium?
Solution
C is correct. Variable expenses are those that move roughly in proportion to premium. Premium taxes (like commissions) are assessed as a percentage of premium, so they rise and fall directly with premium volume and are loaded as a percentage-of-premium variable provision in the rate indication.
Question 2
Medium
An actuary must choose between the pure premium method and the loss ratio method for an overall rate level analysis. Which statement correctly contrasts the two methods?
Solution
A is correct. The pure premium method builds losses and expenses on a per-exposure basis and produces an indicated average rate, so it requires a well-defined exposure measure but not premium. The loss ratio method compares an experience loss ratio to a permissible loss ratio and produces an indicated rate change relative to current rates, so it requires on-level earned premium. This is why the pure premium method is used when premium history is unavailable, such as a new line of business.
Question 3
Hard
An indication supports a +22% rate increase, but the state regulator will not approve any single increase above 15%, the book competes in a growth-oriented market, and management prizes retention of high-lifetime-value renewals. Which final rate action best reflects sound selection judgment?
Solution
C is correct. The final selection weighs the indication against operational, regulatory, marketing, and customer-value constraints. Filing a capped increase below the 15% ceiling captures as much of the needed revenue as is currently allowable, protects retention of valuable renewals by avoiding a shock increase, and preserves competitiveness. Phasing the remaining indicated need over subsequent filings closes the gap to adequacy over time without violating the regulatory limit or spiking disruption.