Free CAS Exam 5 (Basic Ratemaking and Reserving) Reserving Data & Development Triangles Practice Questions
Practice 76 free Reserving Data & Development Triangles questions for CAS Exam 5 (Basic Ratemaking and Reserving).
Sample Questions
Question 1
Easy
In estimating unpaid claims with the development (chain-ladder) technique, what does a tail factor represent?
Solution
C is correct. A tail factor extends development beyond the oldest maturity observed in the triangle out to ultimate, capturing the loss emergence that occurs after the latest available data point. Triangles are finite, so the tail factor accounts for development the observed link ratios cannot measure.
Question 2
Medium
In a cumulative loss development triangle organized by accident year and maturity, what does the most recent (latest) diagonal represent?
Solution
C is correct. In a run-off triangle, each accident year is a row and each maturity is a column. Because more recent accident years have been observed for fewer months, the cells that share the same evaluation (calendar) date fall along a diagonal. The latest diagonal therefore collects each accident year at its current, most-recent valuation, the data actually available today for projecting development.
Question 3
Hard
An insurer has been materially understating its unpaid claim (reserve) estimates for several years. Which combination of consequences most directly follows from this understatement?
Solution
C is correct. Reserves are a booked liability, so understating them means recorded liabilities are too low. That inflates reported surplus (equity) and, because incurred losses feed the income statement, overstates earnings as well. If those understated losses also feed the pricing analysis, indicated rates come in too low, so pricing is inadequate. When the true losses eventually emerge, the insurer books adverse development that reverses the illusory gains, potentially straining capital when it is least expected. These interlocking consequences are exactly what is at stake for the insurer and the parties relying on it.