Free CAS Exam 5 (Basic Ratemaking and Reserving) Recoveries, LAE & Reserve Evaluation Practice Questions
Practice 88 free Recoveries, LAE & Reserve Evaluation questions for CAS Exam 5 (Basic Ratemaking and Reserving).
Sample Questions
Question 1
Easy
A primary insurer cedes losses under a 25% quota share treaty. For an accident-year loss of $600,000, how much is ceded to the reinsurer?
Solution
C is correct. Under a quota share treaty the reinsurer assumes a fixed proportion of every loss. Ceded = 25% $600,000 = $150,000, leaving the insurer a net retained loss of $450,000.
Question 2
Medium
To judge whether an unpaid claim estimate is reasonable, an actuary examines the pure premium it implies. The estimate produces ultimate losses of $7,200,000 over 24,000 earned car-years. What is the implied pure premium?
Solution
E is correct. The implied pure premium is ultimate losses divided by earned exposures: . The actuary compares this $300 implied pure premium against historical and industry pure premiums to assess whether the underlying unpaid claim estimate is adequate and reasonable.
Question 3
Hard
An actuary must project unpaid unallocated loss adjustment expense (ULAE) for a commercial line whose claim counts have been growing rapidly while paid losses lag behind the exposure growth. A colleague proposes the classical paid-to-paid method. Which limitation of that method is most relevant here?
Solution
B is correct. The classical paid-to-paid method relates ULAE to loss dollars, implicitly assuming a stable relationship between ULAE and paid losses. When claim counts grow faster than paid losses, future maintenance and handling work is not yet reflected in paid loss dollars, so the ratio-based reserve is understated relative to the true future workload.