EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

GENERALCOMMENTS:

Candidatesshouldnotethattheinstructionstotheexamexplicitlysaytoshowallwork;graders
expecttoseeenoughsupportonthecandidatesanswersheettofollowthecalculations
performed.Whilethegradersmadeeveryattempttofollowcalculationsthatwerenotwell
documented,lackofdocumentationmayresultinthedeductionofpointswherethe
calculationscannotbefollowedorarenotsufficientlysupported.
Incorrectresponsesinonepartofaquestiondidnotprecludecandidatesfromreceivingcredit
forcorrectworkonsubsequentpartsofthequestionthatdependeduponthatresponse.
Candidatesshouldtrytobecognizantofthewayanexamquestionisworded.Theymustlook
forkeywordssuchasbrieflyorfullywithintheproblem.WerefercandidatestotheFuture
FellowsarticlefromDecember2009entitledTheImportanceofAdverbsforadditional
informationonthistopic.
Somecandidatesprovidedlengthyresponsestoabrieflydescribequestion,whichdoesnot
provideextracreditandonlytakesupadditionaltimeduringtheexam.
Generally,candidateswerefairlywellpreparedforthisexam.However,candidatesshouldbe
cautiousofrelyingsolelyonstudymanuals,assomecandidateslostcreditforfailingtoprovide
basicinsightsthatwerecontainedinthesyllabusreadings.

EXAMSTATISTICS:

NumberofCandidates:785
AvailablePoints:59.75
PassingScore:42.5
NumberofPassingCandidates:305
RawPassRatio:38.85%
EffectivePassRatio:41.90%

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:1
TOTALPOINTVALUE:3.5
LEARNINGOBJECTIVE(S):A3
SAMPLE/ACCEPTEDANSWERS:
Parta:1point

1.0

1.042

1.04513
1.02736

1.03763

2010

2011

2012

2013

OLFforCY2011EarnedPremium
=

1.03763
(5/6)(5/6)(1/2)(1.04513)+(125/72)(1.042)

= 1.03763/1.04309
= 0.99477

*Candidatesmayignorethe+4.2%ratechangethatexistsinboththenumeratoranddenominatorand
stillreceivefullcredit.
Partb:2points

1.042
1.04513
1.02736

2011

2012

2013

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
OLFforInforcepoliciesonFeb1,2012
=

1.03763
(0.75)(1/12)(1.042)+(10/12)(0.75)(1.04513)+0.25(1.02736)+(0.75)(1/12)(1.02736)

= 1.03763/1.03938
= 0.99832

*Candidatesmayignorethe+4.2%ratechangethatexistsinboththenumeratoranddenominatorand
stillreceivefullcredit.
Partc:0.5point

1.0

1.042

1.04513

2010

2011

2012

Theportionof"1"comesinandtheportionof1.04513decreases.ThustheOLFincreases.
EXAMINERSREPORT:
GeneralCommentary

Candidateswereexpectedtobeabletocalculateonlevelfactorstorestatevariouspremiums
atthecurrentratelevel,usingtheparallelogrammethod.Thisincludescalculationsforcalendar
yearpremiumandinforcepremium,andalsoincorporatingspecialearningpatterns.
Overall,candidatesperformedasexpectedonthisquestion.Whilemostcandidatesscoredat
least1/3ofthepossiblepoints,therewasafairlyevendistributionofscoresbetween1/3ofthe
creditandfullcredit.
Partb.requiredthecandidatestoincorporatespecialearningpatternsandtheuseofinforce
premiumratherthanacalendaryearpremium.Alargenumberofcandidatesstruggledto
incorporatethespecialearningpattern(25%ofpolicieswrittenonJanuary1st).Alargenumber
ofcandidatesstruggledtocalculatetheaverageratelevelforinforcepremium.Some
candidates,ratherthancalculatinganonlevelfactorusingaverageratelevels,attemptedto
multiplythepremiumsbytheratechangesthathavenotyetbeenfullyearned.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Parta

Candidateswereexpectedtobeabletocalculateonlevelfactorstorestatecalendaryear
premiumatthecurrentratelevel,usingtheparallelogrammethod.
Candidateswereexpectedtobeabletousetheparallelogrammethodtocalculateweightsof
differentratelevelsearnedinacalendaryear,andusethemtocalculatetheonlevelfactor
necessarytorestatethecalendaryearpremiumatthecurrentratelevel.
Themostcommonerrorsinparta.wereassumingtheMarch1stratechangewasoftheway
throughtheyear,andcalculationerrors.

Partb

Candidateswereexpectedtobeabletocalculateonlevelfactorstorestateinforcepremium
atthecurrentratelevel,usingtheparallelogrammethod.Thisincludescalculationto
incorporateaspecialearningpattern.
Candidateswereexpectedtobeabletousetheparallelogrammethodtocalculateweightsof
differentratelevelsforinforcepremium(includingthespecialearningpattern),andusethem
tocalculatetheonlevelfactornecessarytorestatetheinforcepremiumatthecurrentrate
level.
Alargenumberofcandidatesstruggledtoincorporatethespecialearningpattern(25%of
policieswrittenonJanuary1st).Alargenumberofcandidatesstruggledtocalculatethe
averageratelevelforinforcepremium.Somecandidates,ratherthancalculatinganonlevel
factorusingaverageratelevels,attemptedtomultiplythepremiumsbytheratechangesthat
havenotyetbeenfullyearned.

Partc

Candidateswereexpectedtobeabletoarticulatehowachangetothepolicyterm(2year
policiesvs.annual)wouldchangetheonlevelfactorwithoutperformingadditionalcalculations.
Candidateswereexpectedtostatethattheonlevelfactorwouldincreaseandgivecorrect
rationaleastowhy(theaverageratelevelin2011woulddecrease).
Themostcommonerrormadeinpartcwasthatcandidatesignoredtheimpactofthe1/1/2010
ratechange(+4.2%).Occasionally,candidateserroneouslyrespondedaboutfutureratechanges
havinganimpact.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:2
TOTALPOINTVALUE:3.25
LEARNINGOBJECTIVE(S):A3,A4
SAMPLE/ACCEPTEDANSWERS:
Premium:
Year
2011
2012
2013

Premium
2100
2500
2600

Payrollchg
X1.02x1.01
X1.01

Mod
X.98/.99
X.98/.98
X.98/.97

Trend
X1.015^2
X1.015^2
X1.015^2
Total

Total
=2206.296
=2601.318
=2706.199
=7513.813

Loss&LAE:
Year
2011
2012
2013

Loss
850
670
460

Benefitchg
X1.015x1.005
X1.005

Dev
X1.2
X1.8
X2.7

Trend
X1.01^2
X1.01^2
X1.01^2

TotalIndem
=1661.39
=1236.392
=1266.964

Medical
+735
+834
+900

LAE
=x1.15
=x1.15
=x1.15
Total

Total
=2065.849
=2380.951
=2492.009
=6938.809

6938.809/7513.8153=92.35%
Note:Forthetrendingadjustments,atrendingperiodofeither2.0or2.5yearswasconsidered
acceptable,aslongasthesametrendingperiodwasusedforbothcalculations.
EXAMINERSREPORT:
Thecandidatewasexpectedtoknowhowtoadjusthistoricaldatatocurrentlevelandthentoexpected
futurebenefitlevels.Forpremiums,thisincludedanadjustmenttoreflectthecurrentpayrolllevel,the
currentexperiencemodificationlevel,andanadjustmentforexpectedfuturewagelevels.Forlosses,
thisincludedlossdevelopmentandadjustmentstocurrentandfuturebenefitlevels(forindemnity
claims).Thecandidatewasalsoexpectedtoincorporatemedicalclaims(withoutdevelopmentor
trend),selectareasonable(adjusted/trended)lossratioforthefuture,andapplyaloadingforLAE.
Ingeneral,candidatesstruggledwiththenumberofrequiredadjustmentstobringhistoricalresultsto
currentandprojectedlevels;thisquestioninvolvedasynthesisofvariouslearningobjectives.Most
candidateswereabletoapplythegivenlossdevelopmentfactorstothehistoricalindemnitydataand
makeproperadjustmentsforexpectedfuturetrend(onbothpremiumandlosses).Therequired
adjustmentstobringhistoricaldatatocurrentbenefit/payrolllevelsandmakeanadjustmentforthe
changeintheexperiencemodlevelwerethemostchallenging;mostcandidatesfailedtocalculatethe
appropriateadjustmentsincolumns(2)and(11)above.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Commonmistakesincluded:

Includingcurrentyearspayrolllevelchangeinthebenefitleveladjustment
Multiplyingthehistoricalandfutureexperiencemodstodeterminethecurrentyears
experiencemodadjustment
Calculatingfuturebenefitlevelsbytrendingeachhistoricalyearfordifferentperiods(i.e.,
trending2011for4years,2012for3years,etc.)
Trendingordevelopingthemedicalclaimdata(whichwasalreadyatultimate)
FailingtoapplytheLAEloadingtothecombinedmedicalandindemnityultimates
Failingtoselectagoingforwardlossratio

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:3
TOTALPOINTVALUE:2.25
LEARNINGOBJECTIVE(S):A2
SAMPLE/ACCEPTEDANSWERS:
Parta:1point
Sample1:
Policyiseffectivein2012sinceA<0.SinceC>Bandthisisanannualtermtheremustbenolessthan6
monthsleftinthepolicytermon2/1/13.Validrange8/2/1212/31/12.8/2/12wasusedsinceC
strictlygreaterthanB.
Sample2:
8/2/201212/31/2012
Hadtobewrittenin2012as2013writtenexponegativeduetocancel(notjustlessthan1)
Hadtobelessthan6monthspriorto2/1/13asunearnedexpo>earnedat2/1/13
Sample3:
Moreexposureunearnedat2/1/13thanearnedbefore2/1/13.
PolicyCanceledbefore12/31/13
Writtenbefore12/31/12
Possibleeffectivedates8/2/1212/31/12
Partb:0.5point
Sample1:
MustbewrittennolaterthanDec31,2012=>latestcancellationdate=Dec30,2013
InforceatFeb1,2013=>earliestcancellationdate=Feb2,2013
SoFeb2,2013throughDec30,2013
Sample2:
D>0,C>0,soneedstobecancelledafterFeb1st,2013.
A<0,soneedstobecancelledby12/31/2013
Validcancellationdates=Feb2nd,2013>December31st,2013
Sample3:
Hastobecancelledafter2/1/2013,butbeforepolicyendsandbeforeendof2013.2/2/1312/31/13

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partc:0.75point
Sample1:
IfB,C,Dwereasof7/1/2013andgiventhepolicywaswrittenin2012(A<0)andcancelledin2013but
wasstillineffecton7/1/2013(D>0):thenB,totalportionofthepolicyearnedasof7/1/2013is1/2.
Inthatcase,C(portionofpolicyunearned)cannotbegreaterthanB,sinceB+C=1.
Sample2:
TosatisfyDandAunderthenewconditions,thepolicymustbewrittenbetween7/2/12and12/31/12.
HoweverthiswouldbreaktherequirementofB<C.TryingtosatisfyB<Cinthisscenariowouldmean
thatthepolicyneedstobewrittenanytimeafterJan2nd,2013butthenthatwouldbreakthe
requirementofA<0.Notpossibletosatisfythenewrequirementswithwhatweregiven.
Sample3:
BecauseofA,thepolicyhastobewrittenin2012andcancelledin2013.Therefore,by7/1/13atleast
halfoftheexposuresareearnedmakingthestatementB<Cinvalid.
EXAMINERSREPORT:
GeneralCommentary
Manycandidatesskippedthisquestionorreceivedlittlepartialcredit.Candidatesneededa
comprehensiveunderstandingofWritten,Earned,UnearnedandInForceExposures.Thedifficultyin
thisquestionliesintheneedtoquicklycomprehendandsynthesizetheprovidedinformationtoapply
thegivenrestraintstodeducethepossibledates.
Parta
Successfulcandidateswereabletoidentifythepertinentpiecesofinformationtocorrectlyidentifythe
startandenddateofthepossiblerange.Oftencandidatesmissedvitalpiecesofinformationto
determineoneoftheendpointsoftherange.Forexample,oftencandidatescorrectlyidentified8/2/12
asthecorrectbegindateofthepossiblerangebutfailedtointerpretthatA<0limitstherangeto
12/31/12.AverycommonerrorwasthefailuretocorrectlyinterprettheinequalityB<Ctorecognize
that8/2/12andnot8/1/12wasthecorrectstartdate.Thismistakewasnotheavilypenalizedif
candidatesdemonstratedthecorrectlogicindeterminingarange.
Partb
Candidatesoftenincorrectlyinterpretedmidtermcancellationtomeantheexactmidpointofthe
policytermcausingthemtodetermine6/30/13or7/1/13asthelastpossiblecancellationdate.Many
timescandidatesincorrectlyentered2/1/13asthebeginningofthecancellationrangewhenthe
questionclearlystatesthatthepolicyisstillinforceon2/1/13.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partc
Thisquestionseemedtobethemostchallengingtothecandidates.Themostcommonmistakesonthis
partinvolvedalackofsupport.Forexample,candidateswouldrecognizethatthepolicywillbemore
than50%earnedasof7/1/13withoutmentioningthatA<0constrainsthepolicyeffectivedatetoCY
2012.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:4
TOTALPOINTVALUE:2
LEARNINGOBJECTIVE(S):A6
SAMPLE/ACCEPTEDANSWERS:
Parta:0.5point

Iwouldusedevelopedtoultimateandtrendedlosses,dividedbytrendedexposures.Untrended
andhistoricallossesandexposureswillnotgiveanaccuratelosscostfortheprojectedperiodin
whichtherateswillbeineffect.
Oktouseloss/expifdoingpurepremiummethodbutlossesshouldbetrendedandfully
developed.Ifnot,rateswillbedistorted.(understated)

Partb:0.5point

Loss,LAEprovisionwillbeoverstatedsinceincreaseinmindeductiblewillleadtofewercovered
losses.RestatehistoricallossesandLAEwith$1000mindeductible.
Theindicatedrateisbasedonhistoricallossesprojectedtofuturelevel.Ifthetrendusedto
projectthelossesalreadyincorporatestheexpectedchangeofdeductibles,thennoadjustment
isneeded.
Shouldevaluatetheappropriatenessofthedeductiblefactorsused.Ifcorrect,thetrendshould
notbeaproblem.

Partc:0.5point

Datahaslowcredibilityduetolownumberofexposures.Extendexperienceperiodtoinclude
morethanoneyeartoincreasecredibility.
IncludemorerelevantdatafrombenchmarkssuchasISOorusecompetitorsinfotocalculatea
complementofcredibility.The25earnedcaryearsand1yearofhistoricaldataisnotenoughto
provideastableandaccurateforecastforfutureexperience.
Thereisinsufficientdatatoproduceacredibleclassification(bothintermsofnumberofcarand
intermsofnumberofyear).Theclassificationcanbepooledwithothersimilar,largergroupsto
formamorestatisticalsignificantgroup.

Partd:0.5point

Thelossesabove$100,000stillneedtobeaddedbackinasalargelossload.Iftheanalysis
excludestheselargelossesalltogether,thenlosseswillbeunderestimatedandrateswillbe
inadequate.
Sincethecompanyhasasignificantnumberofclaimsinexcessof$100,000,weshoulduse
uncappedhistoricallossesdatatocalculatetheindicationrate.Thecappeddatadoesnotreflect
thetrueexperience,andtheratemightbetoolowbyusingthecappeddata.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

Iwouldusethehighercappingthan100K.Thegoalofratemakingistoincludeasmanylossesas
possibleintotheprojectprocessaslongitdoesntintroducetomuchvolatility.Iwouldincrease
thecappingandfortheshocklossesaboveahighercappingsay250Kor500K.Iwouldaddan
ILFfactororlargelossload.

EXAMINERSREPORT:
GeneralCommentary
CandidateswereexpectedtouseknowledgefromtheCASStatementofPrinciplesRegardingProperty
andCasualtyInsuranceRatemakingandBasicRatemakingtoprovideanassessmentoftheproduct
managersanalysisandrecommendanadjustmentifneededineachsubpart.
Parta
Candidateswereexpectedtoassessthatusingunadjustedhistoricaldatawillnotproduceanaccurate
prospectiveestimateoftheratebeingcalculated.Candidateswereexpectedtosuggestadjustinglosses
byanappropriatetrendanddevelopinglossestoultimate.
Fullcreditwasalsogivenforstatingthatthisusedthepurepremiummethodandprovidingthe
appropriateadjustment.
Candidatesgenerallydidwellrecommendingtheappropriateadjustmentsneededforthisanalysis.
Mostcandidateswholostcreditonthisquestiondidnotgiveanappropriateassessmentoftheproduct
managersproposal.
Themostcommonerrorswere:

Providingtheappropriateadjustments,withoutcompletingtheassessmentportionofthe
question.
Statingthatthehistoricalexperienceneedstobebroughttothecurrentlevelinsteadofthe
prospectivelevel.
Recommendingadjustingthedataforpriorratechanges.Sincethequestionclearlyindicates
exposuresareused,notpremium,historicalratechangesdonotneedtobeaccountedforinthe
indicationcalculation.

Mostcandidatesalsoappropriatelystatedthattheexposuresneedtobetrendediftheexposurebaseis
inflationsensitive;howevercreditwasnotsubtractedfornotincludingthispiecesinceexposuresdonot
alwaysneedtobetrendeddependingonthelineofbusinessbeingrated.
Partb
Candidateswereexpectedtoassessthat,withtheincreaseddeductible,losseswouldbeoverstatedin
thefutureperiod.Candidatesshouldhaverecommendedadjustingthehistoricalexperienceforthe
deductiblechange.Candidatescouldalsoreceivefullcreditforgivingacompletediscussiononno
changebeingnecessaryifthedeductiblerelativitiesarepricedappropriately.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Mostcandidateswholostcreditonthisquestiondidnotgiveanappropriateassessmentoftheproduct
managersproposal.
Afewofthecommonsuggestedadjustmentsthatwerenotgivencreditinclude:

Adjustmentstopremiumbutnocommentonlosses
Theonlyrecommendationbeingtousepolicyyeardata
RecommendingtouseILFsinsteadofdeductiblefactors

Manycandidatessaidthatpolicyyeardatashouldbeused.Whilethiswasnotwrong,itwasnot
relevantforthequestionsincethiswouldonlybeapplicableiftheminimumdeductiblechangeoccurred
inthepast,notwillbeoccurringinthefuture.Nocreditwasgivenortakenawayforcommentingon
usingpolicyyeardata.ThesubpartstartswithTheindicatedrate.Thissuggestsapurepremium
approach,whichusesexposureinsteadofpremium.However,nocreditwasgivenortakenawayfor
commentingonadjustingpremium.Thisisdifferentfromparta,wherelossdividedbyexposurewas
explicitlystatedinthequestion.
Partc
Candidateswereexpectedtoassessthatthedatagivenwasnotcredibleenoughtobeusedonitsown.
Theyshouldhaverecommendedaspecificwaytoadjustthisdatagiventhelackofcredibility.
Mostcandidatesreceivedfullcreditforthissubpart.Candidateswholostcreditonthisquestion
generallydidnotgiveaspecificcredibilitycomplement.Othersmisreadthequestiontobeusing25
yearsofhistoricalexperience.
Afewofthecommonrecommendationsthatweregivencreditforbeingacomplementofcredibilityor
addingtothegivendatainclude:

Moreyearsofexperience
Industry/benchmarkdata
Largergroup/class
External/outsidedata
Internaldata

Answersthatwerenotgivencreditinclude:
Complementofcredibility(withoutgivinganexamplesimilartotheabove)
Otherdata
Moredata
Increaseddatavolume
Partd
Candidateswereexpectedtoassessthatnotincludingthelosseswouldmaketherateinadequate.They
shouldhaverecommendedincludingthelossesabovethecapinsomeway,eitherthroughalargeloss

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
provision,orusinguncappedlosses.Alternatively,candidatescouldhavestatedthatthemethodology
wasokayassumingthatalargelossprovisionwasalsoincluded.
Candidatesgenerallyprovidedanappropriateadjustmentforthissubpart.
Appropriateassessmentsinclude:

Statingthattheratewillbeinadequate/understated.
Detaileddiscussiononwhythe$100,000limitmaybeinappropriatesinceacappinglevelshould
beselectedtoincludeasmuchdataaspossiblewhilereducingvolatilityintroducedfromlarge
losses.

Themostcommonmistakesonthisquestionwere:

Noappropriateassessmentoftheprojectmanagersproposal.
Recommendingincreasingthecap,butnottakingintoaccountlossesthatwerestillabovethe
increasedcap.
Addinginlossesabovethecap,butalsomovingtheearnedpremiumdowntothe$100,000
levelasthiswouldnowoverstatetheindication.
Commentingonhowtrendsanddevelopmentbasedonlimiteddataarenotappropriatefor
uncappeddata,withoutassessingthattheratewillbeinadequateandthattheexcesslosses
needtobeaccountedforsomehow.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:5
TOTALPOINTVALUE:6.5
LEARNINGOBJECTIVE(S):A3,A4,A5,A6,A12
SAMPLE/ACCEPTEDANSWERS:
Parta:5.5points
Sample1:
Premium
2012:1250*(1.075/1.00)*1.04^3.5=1541
2013:1400*(1.075/((1/8)*1.075+(7/8)))*1.04^2.5=1645
TrendusingCLAPP=4%
Trendperiod7/1/##to1/1/2016

Losses
2012:750*1.30295(24ult)*1.03^3.5(losstrend)*1.1(ULAE)=1192
2013:2.3453*10.3^2.5*1.1=1389
Trend7/1/##to1/1/2016

Agetoage
1224:1.8used3yr.avgbecauseofnewsoftwareimpact(pastnolongerind.offutureorsimilar)
2436:1.152009andpriorisdifferentduetonewsoftware
3648:1.10usedavgxHi/Lowasexperienceseemstobesimilarevenwithsoftwarechange
4860:1.03
60Ult:1.00notail

FixedExpense
exclude2010(likelyhighduetonewsoftware)
simpleavg=11.75%

LR2012:0.774
LR2013:0.844
Avg:0.809

Ind=(0.809+0.1175)/(1.05.2)1=23.5%

Sample2(fixedexpense):
Thereisaspikeinfixedexpensein2010duetopurchaseofnewsoftware.Thusselectavg(20112013)
topreventdistortion.
(0.15+0.12+0.10)/3=0.123

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partb:1point
Sample1:
Usinglargegroupscontainingsubjectexperienceforrateindicationsmakessense,solongasthestate
datadoesnotrepresentalargeportionofCWlosscostsothatthereissomeindependencein
complement.AlsoCWdataisusuallyavailable,easytocompute
Sample2:
Twoqualitiestoassessapproachby:

A.Independencefrombasestatisticdependingonhowlargethestateisbyvolumeof
businesscomparedtoCWitmaybemostlyindependent,butnotcompletelyindependentas
CWincludesthestate.
B.BiasIfstatelosscostsaresystematicallydifferentfromCWthenthiscomplementof
credibilityisbiasedastheCWcomplementwillnotreflectthissystematicdifference.

Sample3:
Onecriterionisavailabilityofcomplementdata.Usingcountrywidelosscostswouldmeetthissinceit
seemswehavethisdata.Anothercriterioniseasytocompute.Againusingcountrywidelosscostsarea
fairlyeasymetrictocomputecomparedtosomeothercomplementslikeHarwaynesmethod.This
meetsthiscriterion.
Sample4:
Shouldconfirmcomplementiseasytocomputeandstatisticallyindependent.

1.Easeofcomputationmakesiteasiertoexplaintoaregulator,whohasfinalapprovalonarate
change.Alsoacomplementthatiseasytocomputewillcostthecompanyless.
2.Itshouldbestatisticallyindependentfromthedatausedtocalculatetheratechangesoas
nottodistorttheindication.
Usingcompanycountrywidelosscostssatisfies1above(assumingcompanyhastheabilityto
obtaincountrywidedataeasily)butnot2(sincethecountrywidedatawouldalsoincludethis
state).Iwouldremovethisstatefromthecountrywidedataandthencalculatethecomplement.

Sample5:
Acredibilitycomplementshouldbeunbiased:CWmaybebiasedcomparedtothestate,butcanbe
adjustedifthedirectionandamountisknown.Acceptable.
Shouldhavelogicalrelationshiptothelossdata.CWislogicalasitisthesamelineofbusinessand
company,justformoreregionsthanthestate.Acceptable.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
EXAMINERSREPORT:
Parta
Premium:Thecandidatewasexpectedtobeabletobringpremiumstocurrentratelevelusingthe
parallelogrammethodandtoselectandapplyaonesteppremiumtrend.Acommonerrorwas
incorrectlycalculatingthepremiumtrendperiod.
Loss:Thecandidatewasexpectedtobeabletoselectlossdevelopmentfactorsanddeveloplossesto
ultimateandtoapplyonesteptrendingtolosses.Themostcommonerrorwasnottakingintoaccount
changingdevelopmentpatternsforthe2436monthperiod.
Fixedexpense:Thecandidatewasexpectedtomakeanappropriateselectionforthefixedexpense
provision.Toreceivecreditthecandidateneededtoexcludetheextraordinaryhistoricalratiocausedby
thenewclaimssoftware.Commonmistakeswereomittingthejustificationfortheselectedratioand
usingallhistoricalyearstocalculatetheprovision.
Indication:Thecandidatewasexpectedtocalculatetheratelevelindication.Toreceivecreditthe
candidateneededtocalculatetheprojectedlossratioand,withthecalculatedfixedexpenseprovision
andthegivenvariableexpenseandprofitprovisions,determinetheindicatedratelevelchange.A
commonmistakewasomittingtheprovidedULAEprovisionfromthecalculation.
Partb
Thecandidatewasexpectedtounderstanddesirablequalitiesofacredibilitycomplementandto
evaluatetheuseofcountrywidedatawithrespecttoeachofthetwoqualities.Acommonmistakewas
correctlyidentifyingtwodesirablequalitiesbutneglectingtoassesstheuseofcountrywidedata.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:6
TOTALPOINTVALUE:2.5
LEARNINGOBJECTIVE(S):A8
SAMPLE/ACCEPTEDANSWERS:
Sample1:
1. Thiswouldbehardtoobtainandverify.Youwouldhavetorelyonselfreportingwhichwouldbe
subjecttounintentionalmismeasurementorwouldencouragemoralhazardandpeoplewouldlie
aboutit.Oncetheyreportit,itwouldbeverydifficulttoverify.Onthiscriteria,Iwouldnot
recommendit.
2. Privacyinformationaboutsleepinghabitswouldbeconsideredapersonalandunnecessarily
intrusivequestion.Peoplemaybereluctanttodiscusssuchmatterswithaninsurancecompany.
Thiscriteriawouldnotrecommendit.
3. Thiswouldseemtohaveacausalrelationshiptoautolosses.Peoplewouldbeabletounderstand
thatnotsleepingcanincreasetheriskoflosses.Sofromthisstandpoint,itwouldseemok.
4. ControllabilityPeoplewillbemoreacceptingiftheycancontroltosomeextentwhatlevelofrating
variabletheybelongto.Becauseyoucanadjustthehoursyousleep,usingthiscriteria,itmaybe
moreaccepted.

OverallIwouldnotusethisratingvariable.Theprivacyandmoralhazardissueswouldoutweighthe
benefits.
Sample2:
Idonotrecommendthisforfourreasons:
1. Itwillbeperceivedbysomeinsuredsasaninvasionofprivacy.
2. Itisnotfeasibletoverifyitseasyforinsuredstolieaboutit.
3. Itshardtoobtaindataonitas#hourssleptpernightisnotoftenrecordedbyindividuals,letalone
reported.
4. Itsanambiguousmeasurehoursinbed?Hourswitheyesclosed?Whatifinsuredgetsupfordrink
ofwater?

Sample3:
1. StatisticalIthasbeendeterminedthatsleepisapredictiveratingvariable,soitmustbestatistically
significant,butcouldlacksomecredibilityforgroupsatthehighandlowendsandcouldbedifficult
tobehomogenousifpeoplegetmoreorlesssleepeverynight.
2. OperationalHoursofsleepiswelldefinedandobjective,howeveritwouldbedifficulttoverifyand
ifwaslefttothepolicyholdertoreportitcouldbemanipulatedtosavemoney.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
3. SocialHourssleepcouldbeperceivedasaprivacyissuebythepolicyholders,itcouldalsolack
somecontrollabilitydependingonthepolicyholdersfamilyorfinancialsituation.
4. LegalWouldneedtocheckifthisratingvariablewouldbeallowedbystatelaw.
Duetotheoperationalissueswithverificationandthesocialissuesofprivacy,IwouldNOTrecommend
usingthisratingvariableintheriskclassificationsystem.
EXAMINERSREPORT:
Candidatesneededtoknowcriteriaforevaluatingratingvariablesthatareconsideredforuseinarisk
classificationsystem.Theydidquitewellonthisquestion,andmanyvalidargumentsweremadeabout
manydifferentconsiderations.Somecommonmistakeswere:

Notmakingitclearthatcausalityisimportantfromasocialperspective,butisntnecessaryand
cannotbeprovenbythecompany.
Arguingthatthevariablelacksstatisticalsignificance,eventhoughthequestionstatesthatthe
actuaryfoundittobepredictive.
Listingdifficulttoverifyandeasytomanipulateastwoseparateconsiderations(theydonly
getcreditforthefirst,astheywereconsideredthesame).
Forgettingtomakeafinalrecommendationaboutthevariable.
Statingthat#hoursofsleepisnotanobjectivemeasurewithoutprovidinganysupport.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:7
TOTALPOINTVALUE:2.25
LEARNINGOBJECTIVE(S):A9
SAMPLE/ACCEPTEDANSWERS:
Parta:0.5point
Sample1:
Complement=((3.252.75)/2.00)*$1,500,000=$375,000
Sample2:
CC=3.25/2*$1,500,0002.75/2*$1,500,000=$2,437,500$2,062,500=$375,000
Partb:1.25points
Sample1:
Complement=0.65[300,000((3.252.75)/3.25)+200,000((3.252.75)/3.5)]=$30,000+$18,571=
$48,571
Sample2:
Complement=0.65[$400,000((2.752.75)/2.75)+$300,000((3.252.75)/3.25)+200,000((3.25
2.75)/3.5)]=$0+$30,000+$18,571=$48,571
Partc:0.5point
Acceptedanswersincludedanyoneofthefollowing:

Assumesthesameexpectedlossratioforalllevels
Notlogicallyrelatedtothelossesinthelayer
Biased
Inaccurate
Volatileandthindataintheupperlayersmaynotbereliable
Takestimetocompute
Lossesbelowtheattachmentpointmaynotbeclearlyrelatedtolossesabovetheattachment
point
Doesnotuseactuallossesincalculatingthecomplementcouldbeinaccurate
DistributionofexcesslossesmaybeverydifferentfromthelossdistributionunderlyingtheILFs
Reliesonindustryfactorsthatmaynotapplytothecompany

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
EXAMINERSREPORT:
Parta

Candidatewasexpectedtoapplytheequationdefinedbythemethodinthearticleandapplyit
correctly.Mostcandidatesreceivedfullcredit.
FullcreditwasgiventocandidatesthatusedthecorrectILFstocalculatethecomplementand
thenmultipliedthatratiobytheuncappedlosses
Commonerrorsmadebycandidates:
o MultiplyingthecorrectILFratiobypremiuminsteadoflosses
o UsingtheincorrectILFs(ILFsfromthewronglayers)
o SimplecalculationerrorwhilecorrectILFsandlosseswereused

Partb

Candidatewasexpectedtousetheequationdefinedbythemethodinthearticleandapplyit
correctly.
Candidatesneededtoknowthemethodologyfromthearticleandcorrectlyincorporateeachof
thelayersabove$500,000,knowingthatlimitsatorbelow$500,000havenocontributionto
thelayerof$500,000$750,000.Candidateswerenotrequiredtodocumenttheequationfor
fullcreditsolongastheyshowedsupportfortheircalculation.
Commonerrorsmadebycandidates:
o Including$500Klimitand/orbelowandapplyinganonzerocontributiontothe$500
$750Klayer
o Failingtoincludeboththe$750Kand$1Mlimitinthecalculation
o ApplyinganincorrectELR(60%insteadof65%forexample)
o Includingthecorrectlimitsinthecalculation,butusingawrongILFinthecalculation
o MultiplyingtheELRbylossesinsteadofpremium
o MultiplyingELRbytotalpremiumratherthanforjusttheaffectedlimits

Partc

Thecandidatewasexpectedtostatetwodistinctcriticismsofthelimitsanalysisapproach,
whichwastobeappliedinpartb.Onlyabouthalfofthecandidatesgotatleastpartialcredit.
Explanationsorjustificationsforanyofthecriticismswerenotrequired,exceptregarding
statementsregardinginaccuraciesaboutthemethodologyinputs,whichcouldbeageneric
criticismofanymethodology.
ManycandidatesstatedcriticismsofspecificmethodologiestodetermineILF's,asdiscussedin
Werner&Modlin,Chapter11,ratherthancriticismsofthelimitsanalysisapproach.While
generalcriticismsofILF'swereaccepted,sincetheyareacomponentofthelimitsanalysis
approach,criticismsthatonlyappliedtoaspecificmethodologytodetermineILF'swerenot
accepted.Forexample,anacceptedanswerwasthathigherlimitstendtohavethinand/or
volatiledata,whichcangenerallyleadtoinaccurateILF'sregardlessofthemethodology.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
However,anunacceptableanswerwasthatfrequencyorinsuredbehaviorisassumedtobethe
sameforalllimits,becauseitdoesnotapplytotheGLMapproachfordeterminingILF's&thus
doesnotgenerallyapplytotheILF'susedinthelimitsanalysisapproach.

Althoughthemethodologyassumesthesameexpectedlossratioforeachlimit,mostcandidates
omittedtheword"expected",anditwasnotrequiredtobementionedtogetcreditforthat
criticism.However,statingthattheactuallossratiocanbedifferentisnotsufficientforcredit,
asthatisnotanassumptionofthemethodology.

CriticismsstatingthateithertheILF'sortheELR'smustbeaccuratewithoutstatingwhythey
mightbeinaccuratewerenotaccepted,sinceanymethodologywouldrequirethatitsparticular
inputsbeaccurate.Examplessufficientforcreditinclude:ILF'smaybeinaccurateduetothin
dataintheupperlayers,andusingthesameELRforeverylimitmaycauseinaccuraciesbecause
itisgenerallyunrealistictoexpecteverylimittohavethesameexpectedlossratio.However,
simplystatingthateithertheILForELRmustbeaccurateisinsufficientforcredit.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:8
TOTALPOINTVALUE:2.25
LEARNINGOBJECTIVE(S):A9
SAMPLE/ACCEPTEDANSWERS:
Sample1:
Territory

Loss&LAE

AdjExp

PP

IndRel

IndRelto
Base

11,127

276

40.315

0.6953

0.7068

51,335

900

57.039

0.9837

1.0

32,983

470

70.177

1.2102

1.2303

95,445

1,646

57.986

AdjExp=MaleExp(1.0)+FemaleExp(0.8)
PP=(Loss+LAE)/AdjExp
IndRel=PP/(totalPP)
IndReltoBase=IndRel/territory2IndRel

Territory3indicatedrelativitychange:
1.2303/1.1251=9.36%
Sample2:

territory
1
2
3

adjusted
exposures
180(1)+120(.8)
=276
500(1)+500(.8)
=900
350(1)+150(.8)
=470

pureprem

IR

IR@base

11,127/276=
40.32
57.04

.6953

.707

.984

70.18

1.21

1.23

57.99

Territory3indicatedrelchange=1.231.125=.105

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Sample3:

(1)

(2)

(3)

(4)

(5)

Ter

AdjExposure

LC

IndRel

AdjCurRel

NeutralRate
Change

276

$40.32

0.6952

0.7547

7.9%

900

57.04

0.9836

1.0062

+2.2%

470

70.18

1.2101

1.1320

+6.9%

1646

57.99

1.0

1.0

0%

(6)AvgCurRel=0.9938
(6)Currentrelweightedby(1)
(2)Loss&LAE/(1)
(3)(2)/$57.99
(4)currentRel/0.9938
(5)(3)/(4)1
EXAMINERSREPORT:

Thecandidatesneededtoknowhowtousetheadjustedpurepremiummethodtocalculatethe
indicatedrelativitychangebyterritoryortocalculatetheoverallrevenueneutralratechangeby
territory.
Mostcandidateswereabletocalculatetheindicatedrelativitiescorrectly,butmanyfailedto
calculatetherelativitychange,failedtocalculatetherevenueneutralratechange,orcalculated
thebaserateoffsetincorrectly.
Candidatesusedmanydifferentacceptableapproachestocalculatingtheindicatedrelativity
changeortheindicatedrevenueneutralratechange,andwereabletoarriveatthesame
correctanswers.Manyofthesedifferenceswereduetorebalancingatdifferentpointsinthe
problem.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:9
TOTALPOINTVALUE:2points
LEARNINGOBJECTIVE(S):A9
SAMPLE/ACCEPTEDANSWERS:
Sample1:
TheGLManalysisshowsthatcreditscoreisastatisticallysignificantvariableforwindfrequency.All
levelshavestandarderrorsclosetotheindicatedrelativityandmovinginthesamedirection.Forthe
poorlevel,bothstandarderrorsarehigherthanthefairlevel,whichsuggesttheselevelsaresignificantly
different.Thepoorleveldoesnothavealotofvolume(around5%oftotalvolume),thusitisnotvery
crediblecomparedtotheothertwolevels.Thishastobetakenintoaccountwhenselectingrelativities.
Thisvariableisobjective,welldefined,easytoverify,andcannotbemanipulated.Therefore,itisvery
practicaltouseitanditisrecommendedforthiscriteria.
Theinsuredcanimprovehercreditscorewithtime,thusshewouldhavethepowertocontrolthisinthe
futureandhasafinancialincentivetodoso.Socially,thisvariableisnotalwayswellperceivedas
insuredoftenlackofunderstandingofitsrelationtoexpectedloss.Also,itmaymakeinsurancemore
unaffordableifpoorcreditrisksaresignificantlyovercharged.
Overall,strongpredictivepowerandeasinessofuseofthisvariableoutweighpotentialshortcomings,
thereforeitissuggestedthatitisused.
Sample2:
Reasonstoadd:

Nooverlapofstandarderrorrangesindicateddifferenceisstatisticallysignificant
Largeindicatedrelativityrelativityforpoorisalmost1.5,notimplementingcouldresultin
underpricingtheserisk,adverseselection
Easytoverifybycreditcheck

Concerns:

Analysisonlyperformedononeyearofdata,couldbehighlyinfluencedbyanomaliesorshock
losses
Lowexposuresforfairandpoorrelativelylowcredibility
Nologicalrelationshipbetweencreditandwindlosses(noclearcausality)

Iwouldnotaddthisvariabletotheratingplan.Mainlybecausewedonotknowifourdataisreliable
afteronlyoneyear.Iwouldrecommendwaitingafewyearsfirst,thenrunningtheGLMagain.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
EXAMINERSREPORT:

ThecandidatewasexpectedtoknowhowtointerpretGLMoutputasprovidedinthequestion.
Inaddition,thecandidatewasexpectedtoprovidequalitativeargumentsinsupportofor
againsttheirrecommendation.
Onthewhole,manycandidatesstruggledwiththisquestion.Whilemostwereabletointerpret
muchoftheGLMoutputappropriately,somedidntincludequalitativeconsiderations(in
additiontothestatisticalGLMoutput).Giventhequestionwasworthtwopoints,afull
explanationshouldincorporateseveralsentences/pointstoreceivefullcredit.
Thisquestionwaschallengingbecauseitaskedthecandidatetointerpretdatathatcouldeasily
beusedtoeithersupportorrejectuseoftheratingvariable.Similarly,muchofthequalitative
criteriacouldbeusedtoeithersupportorrejectthevariable.Giventhequestionwasworth
twopoints,candidatesweretoprovideafulldiscussiontosupporttherecommendation;many
candidatesdidnotprovidesufficientjustificationtoreceivefullcredit.
Commonerrorsincluded:
o Discussinganintuitive/causallinkbetweencreditscoreandwindlossesbeingan
advantagetoimplementingthevariable
o Notprovidingawellroundedresponse,includingsomecandidatesnotacknowledging
anyfaultsoftheirrecommendation
o Somecandidatesdidntprovidearecommendation
o Somecandidatesprovidedavagueresponse(forexample,sayingthevariablewas
statisticallysignificant,credible,orsociallyunacceptablewithoutadditionalsupportwhy
theseweretrue/untrue)

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:10
TOTALPOINTVALUE:2.25
LEARNINGOBJECTIVE(S):A10
SAMPLE/ACCEPTEDANSWERS:
Parta:0.75point
Answersreceivingfullcreditinclude:

Regulatoryreasons.Examples:
o Theremayberegulatoryrestrictionsthatdontallowcompaniestotakeoveran8%
change.
o MaybesubjectedtoamaximumrateincreasefromDOI.
o Ifaratechangeof20%wasallowed,thecompanymayberequiredtonotify
policyholderswhoarehavingarateincreaseofx%ormore.Thiscouldimpactrenewals,
andtheaddedcostofthismaynotbeworthit.
o Regulatorsmaynotagreewithanunderlyingassumptionusedintherateindicationand
suggestadifferentassumptionthatproducesalowerrateindication.
o Mightrequirepublicdisclosureorpressconferencetoimplementa20%change.
Operationalreasons.Examples:
o Itmaybecostlytoimplementthewholeratechangeinthesystem,especiallyifthe
rateschangesubstantially.
o Therateincreasemayrequireamajorchangetoratingsystemsandthecompanydoes
nothaveresourcestodothatatthistime.
Customerimpacts/retentionreasons.Examples:
o Companymaynotwanttolosepolicyholderswhowouldbepromptedtoshopforlower
ratesifrateincreasesexcessively.
o Perhapstheywanttokeeptheratechangeatbelowdoubledigitstoavoidcustomers
fromshoppingaround,andtheyllincreaseratesmorenextyear.
Competitive/marketingreasons.Examples:
o Theymaywanttoremaincompetitivetotargetnewbusiness.
o Forcompetitivereasons,thecompanymaydecidetolimittheamountofarate
increase.
Longertermpricingreasons.Examples:
o Lifetimevalueofcustomerperhapsthefuturevalueofwritingcustomersnow
outweighsthevalueofimplementingthefullratechange.
o AssetSharePricingusedlongtermprofitabilityhasbeenpredicted,soalthoughrates
mayproduceanetlossthisrenewal,couldbeprofitableinthefutureifpoliciesare
retained.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partb:0.5point
Answersreceivingfullcreditinclude:

Expensereductions.Examples:
o Canlowertheexpenses,suchaslessadvertisingorloweringwagesofemployees.
o Theycanreduceexpensestotryandmakeupfortheshortfall.
o Decreaseexpenses(fixedorvariable).
Losscostreductions(exceedingpremiumreductions).Examples:
o Thecompanycouldofferincentivestoeducatedriversaboutsafetyfeaturesorcourses
andattempttodecreaselossesthatway.
o Thecompanycouldtryandreduceoverallcoveragewithouttakinganoffsettingrate
change.
o Implementbettersafetyincentivesforinsuredstohelpcontrollosses.
Increaseinvestmentincome.Example:
o Adoptamoreaggressiveinvestmentstrategy.
Reduceunderwritingprofittarget.Example:
o Acceptalowerprofitprovisiontobalancethefundamentalinsuranceequation.
Legalaction.Example:
o Bylegalactionstochallengeregulations
Shifttomoreprofitablebusiness.Examples:
o Focusonmarketingtogroupsthatareappropriatelypriced;avoidunderpricedgroups.
o Changeunderwritingguidelinestowritemoreprofitablebusiness.

Partc:1point
ProposedBaseRate*1.069*1.057*(10.030)+35=450*1.080
ProposedBaseRate=411.48
EXAMINERSREPORT:
Parta

LearningObjectiveA10saysthecandidateshouldbeabletodescribetheprocessfor
implementingratestoachieveanorganizationsgoals.Thispartrequiresthecandidateto
identifyconsiderationsthatacompanywouldevaluatewhentakinglessthanafullindicated
ratechange.
Thepartrequiresthreecorrectexamplestoobtainfullcredit.
Candidatesgenerallyperformedverywellonthispart.Amajorityreceivedfullcredit.
Commonerrorsmadebycandidates:
o Thecandidateprovidedanexamplethatshouldbeincorporatedintotheindication
itself.Forexample,aonetimecatastrophiclossoranatypicalexpenseshouldbe

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

o
o
o
o

adjustedintheindicationdeterminationratherthantakingasubjectivelylowerrate
increase.
Companysmanagementdecidedtotakelessratewasnotanacceptableanswer
withoutanyexplanationastowhy(i.e.retentionormarketingconsiderations).
Somecandidatesstatedthatavariablecouldnotbeused,butthisdidnotsufficiently
explainwhythecompanywouldnttakethefulloverallindicatedratechange.
Somecandidatesprovidedrenewalratecappingasaresponse.However,ratecapping
wouldnotlowertheoverallrequestedratechange,justdelayitseffects.
Somecandidatesimpliedthatchoosingalowerratechangewouldreducetheriskof
adverseselection.However,inadequateratesactuallyincreasetheriskofadverse
selection.

Partb

LearningObjectiveA10saysthecandidateshouldbeabletodescribetheprocessfor
implementingratestoachieveanorganizationsgoals,specificallynonpricingsolutions.This
partrequiresthecandidatetoidentifywaystooffsettheshortfallbetweentherequestedrate
increaseandtheindicated.
Thepartrequirestwocorrectexamplestoobtainfullcredit.
Candidatesgenerallyperformedverywellonthispart.Amajorityreceivedfullcredit.
Commonerrorsmadebycandidates
o Thecandidateequatedrelativeriskinessofaninsuredwithrelativeprofitability.For
example,ahighriskinsureddoesntnecessarilyimplythattheinsuredisunprofitable.
o Spreadingouttheindicatedratechangeovermultipleperiodswasnotanacceptable
response.Thisdoesnotoffsettherateneed,onlydelaysachievingtheindicatedrate.
Notethiswasanacceptableanswerforpart(a).
o Reducingcoveragewithoutrecognitionofimpactonpremium.Forexample,if
deductiblerelativitiesarepricedequitably,thenraisingdeductibleswouldresultinan
offsettingpremiumreductionandnochangeinoverallprofitability.

Partc

LearningObjectiveA10saysthecandidateshouldbeabletodescribetheprocessfor
implementingratestoachieveanorganizationsgoals,specificallyratingalgorithms,rating
variablesanddifferentials,andcalculationoffinalbaserates.Thispartrequiresthecandidate
tocalculatethenewbaseratetoachievethedesiredrateincrease.
Thecandidateneededtocalculatethenewbaseratetoreceivefullcredit.Thisinvolved
determininghowtheratedifferentialswouldimpactthebaserateinordertoachievethe
proposedpremium.
Candidatesgenerallyperformedverywellonthispart.Amajorityreceivedmostorfullcredit.
Commonerrorsmadebycandidates
o Somecandidateserroneouslyusedthe$450currentaveragepremiumpervehicleas
thecurrentbaserate.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Manycandidatesmanuallycalculatedtheoverallratedifferentialsforeachratingfactor
eventhoughthiswasnotnecessary.Nopointswerelostforthis,butthiscostthe
candidatestime.
o Somecandidatesappliedthe8%ratechangetothecurrentbaserateratherthanthe
currentaveragepremium.
o Theformulaprovideddirectsthecandidatetosubtracttheadditivediscount,butmany
candidatesaddeditinstead.
Asignificantportionofthecandidatesskippedthispart,eveniftheyansweredtheotherpartsin
thisquestion.
o

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:11
TOTALPOINTVALUE:2points
LEARNINGOBJECTIVE(S):A12
SAMPLE/ACCEPTEDANSWERS:
Parta:1.5points
Sample1:
BasicPremium=(15%.62%*(1.081)+.181)*695,000=195,573
convertedlosses=200000*1.08=216,000

==>retrorates=(195,000+216,000)*1.04=428,035.92
maxretroprem=1.25*695,000=868,750
minretroprem=.75*695,000=521,750
==>retropremiumasof4/1/15=521,250

Sample2:

min=.75*(695,000)=521,250
max=1.25*(695,000)=868,750

BasicPremium=0.150.62(1.081)+.0181(0.62)(1.08)<==assuming the net insuranceisaratio

=0.2216

Convertedlosses=200,000(1.08)=216,000

RetroPremium=(0.2216(695000)+216000)(1.04)
=384,812

Finalretropremiumis[521,250]subjecttominimum

Note:Thissolutionwasonlygivencreditifthecandidateexplicitlystatedtheassumptionthatthenet
insuranceisaratio.

Sample3:

basicP.=(0.150.62(1.081.0)+0.181)*695,000

=195,573
ConvertedLosses=200000*1.08=216000

RetroP=(216000+195573)*1.04=428035.95

MinPremium=695000*0.75=521250

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
SinceRetroP<minpremium,thentheminpremiumapplies.

Sample4:

RL=200000,2*10^5

CL=(2*10^5)*1.08=216000

BP=(.181+15.62(1.081))*695000=195573

(CL+BP)TM=prem=428035.95[min=521250]

Sample5:

ExpensesprovidedthroughLCF=0.62*(1.081)=0.05

BasicPremium=695000*(0.15.05+0.181)=195295

RetroPremiumcalculation
=(195295+200000*1.08)*1.04=427747

427747
=62%ofstandardpremium
695000

But62%islessthan75%whichistheminimumratio.

Soansweris0.75*695000=[521250]

Partb:0.5point
Sample1:

Itisintendedtocovernontax,nonlossrelatedexpenses,suchasthefollowing:
1. Underwritingexpenses
2. Costsassociatedwithlimitingpremiumatthemaximum,andsavingsassociatedwithmeetingthe
minimumpremiumrequirement.

Note:Thephrasenontax,nonlossrelatedexpenseswasrequiredtoreceivefullcreditunderthis
solution.

Sample2:

Basicpremiumisintendedtocoveru/wprofitandexpenseexcludingthoseprovidedthroughloss
conversionfactor,excludingpremiumtax.
Basicpremiumisintendedtoprovidefornetcostassociatedwithlimitingretropremiumwithin
maximumandminimumvalues.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Sample3:

1. Expensesexcludingexpensealreadycoveredinthelossconversionfactor.
2. Insurancechargeduetoadjustingtheretropremiumtomax/min,whichwouldcreatesavingsor
shortfalls.

Sample4:

1. basicpremiumcoversthecostoflimitingtheretropremiumbyaminandmax
2. coversexpensesexceptfortheonesthatvarywiththeloss(anddonotincludethetax).

Sample5:

Oneelementisthenetinsurancechargewhichisequaltothesavingstheinsuredreceivedbyhavinga
limitonthemaximumamountofpremiumminustheguaranteedreservetheinsurerreceivesforhaving
aminimumpremium.ThesecondlimitistheexpenseallowanceminustheELR*LCF.Thisisequaltothe
administrativeofthepolicybesidesLAEbecausethatisalreadytakenintoaccountbyconverting
reportedlosses.

Sample6:

1. Basicpremiumcoversthecompanystargetprofitandtheexpensesexcludingtheexpensedueto
LCF.
2. BasicpremiumcoversU/Wexpensesandprofitprovision.Italsocoversthenetcostoflimitingthe
premiumtothemaxandmin

Note:ifthecandidatejustmentionedU/Wexpenses,theanswerwouldhavebeenwrong.The
candidateneededtomentionprofitprovisionorlessotherexpensestogetcreditforU/W
expenses

EXAMINERSREPORT:
GeneralCommentary

Thecandidatewasexpectedtoknowbasicretrospectiveratingformulasandcomponentsofthe
basicpremium
Candidatesperformedprettywellontheproblem.Themajorityofcandidatesreceivedmost,if
notall,credit.
Candidatescommonlymissedpointswhencalculatingthebasicpremiuminpartaandmissed
pointsinpartbentirelyorforonlymentioningU/Wexpenses

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Parta

Thecandidatewasexpectedtoknowthebasicretrospectiveratingformulas
Toobtainfullcredit,thecandidatewasexpectedtoplugthenumbersintotheformulaand
calculatethefinalretropremiumapplyingthemin/max
Commonerrorsmadebycandidates:
o Nettingthealreadynettedinsurancecharge(mostcommon)
o Otherformulaerrors
Mostcandidatesperformedverywellonthispart

Partb

Thecandidatewasexpectedtoknowcomponentsofthebasicpremium
o TargetU/WProfitandexpensesexcludingexpensesprovidedbythelossconversion
factorandtaxmultiplier
o Costoflimitingtheretrospectivepremiumtobebetweentheminandmaxpremium.
Toobtainfullcredit,thecandidatewasexpectedtogive2ofthecomponentsmentionedabove.
Commonerrorsmadebycandidates:
o Justmentioningexpenses(andnotincludingprofitorexcludingotherexpenses)

Candidatesperformedmorepoorlyonpartbthana.Manymoreleftbblankasopposedtoa.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:12
TOTALPOINTVALUE:1point
LEARNINGOBJECTIVE(S):B1
SAMPLE/ACCEPTEDANSWERS:
Region4isgrowing(canbeseeninincreaseinearnedexposureandinc.ultimateclmcounts).Shouldbe
groupedonitsownbecausegrowthwillaffectult.Thedevelopmentisalsonotsimilartoregion1,2or
3.
Combine2&3:2mightbetoosmalltostandonitsown;bothregionsappeartobestable(nogrowth
trend)andthedevelopmenttrendssimilarly.
Region1onitsownasitappearscredibleonitsownanditsdevelopmentishigherthantheother
regionsatallvaluations.
EXAMINERSREPORT:

Candidateswereexpectedtoexplainwhyregions1&4shouldremainungroupedandregions2
&3shouldbegrouped.Forregion1,acceptablereasonsincludedthelargesize/credibilityof
theregionandthedifferenceinlossdevelopmentfromtheotherregions.Forregion4,
acceptablereasonsincludedrecognitionoftheextremegrowthintheregionandthedifference
inlossdevelopmentfromtheotherregions.Forthecombinationofregions2&3,candidates
wereexpectedtorecognizetheobvioussimilarityindevelopmentpatterns.Inaddition,they
wereexpectedtorecognizeanotherrationaleforgrouping:eitherreflectingonthelackof
credibilityforregion2orthestabilityinexposureand/orclaimcountdistribution(orgrowth)
acrosstheaccidentyears.Vagueanswersaboutaregionbeingdifferentorunusualwithout
referencetohowtheregionwasdifferentorunusualwerenotgivencredit.
Approximatelyhalfofthecandidatesreceivedfullcreditforthisquestion,andnearlytwothirds
ofcandidatesscored0.75orbetter.Thereweretwocommonareasthatcausederrors:
o Manycandidatescalculatedfrequenciesbasedonthegivenclaimcountsandexposures.
Theyoftenusedsimilarfrequenciesasarationaleforgrouping,eventhoughthatpoint
isirrelevant.Onecanencountertworegionswithsimilarfrequenciesbutdifferent
developmentpatterns(suchaswithregion4vs.2/3)onewouldnotwanttogroup
thoseregions,despitethesimilarfrequencies.
o Anumberofcandidatesbelievedthatregion4shouldbegroupedwithregions2&3
becauseofsimilardevelopmentpatternscoupledwithaconcernwith4scredibility.
Theirinterpretationofthedevelopmentpatternswascuriousasthefactorsarenot
trulysimilar.Itseemsthatcandidateswerestretchingtofindawaytoaugmentlow
volumesintheearlieraccidentyears.Theylatchedontoregions2&3astheclosest
match,fromadevelopmentperspective.Mostofthesedidnotrecognizetheeffectof

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

region4sgrowthontheirdecisionbuteventhosewhodidexpressconcernaboutthat,
chosetoignoreitforthesakeofcredibility.
o Therewereafewcandidateswhomademistakesintheirnumberingoftheregions.
Theymightdescriberegion1accuratelyandthenlaterdescriberegion4accuratelybut
callitregion1byaccident.Solongastherationalewassolidanditwasobviousthat
theyhadthewrittenequivalentofatypo,fullcreditwasstillgranted.
Asidefromblankpapers,veryfewcandidatesmisunderstoodwhatwasbeingasked.Ingeneral,
thecandidateswerequitethoroughinexplainingtheirrationale,evenwhenthatrationalewas
essentiallyflawed.Therewerenocandidateswhosimplylistedthegroupingswithno
explanationforwhytheychosethosegroups.Notethatiftherehadbeensuchanswers,no
creditwouldhavebeengrantedwithoutanyexplanationforwhythecandidatechosethose
groups.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:13
TOTALPOINTVALUE:3points
LEARNINGOBJECTIVE(S):B2,B3
SAMPLE/ACCEPTEDANSWERS:
Parta:1.5points
Thiswasacalculationquestion.Theresponsesbelowgiveexamplesofathoroughresponsewithall
necessarycomponentsaswellasaveryefficientresponsethatstillillustratesfullknowledgeofthe
requiredsteps.Thefirstresponseusesasimpleaverageandthesecondresponseusesavolume
weightedaverage.Theseweretheonlytwoaveragesusedbycandidatesthatwereaccepted.
Sample1:
CumulativeReportedClaims(000s)
AY

12

24

36
2011 25,000
45,000
56,250
2012 30,000
51,000
2013 21,000

AgetoAgeFactors

1224
2436
AY
2011

1.8

1.25
2012

1.7
Selected(2YrAvg)
1.75
1.25
Cumulative

2.188
1.25

AY2013UltClaims=21,000x2.188=45,938

36Ult

1.00
1.00

Sample2:
TriangleReported(000s)
AY

12

24

36
11

25

45

56.25
12

30

51
13

21

Ult2013=21,000x(45+51)/(25+30)x56.25/45x1.00=45,818.20
2yrvolumewtdlinkratio

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partb:0.5point
Answersreceivingfullcreditinclude:

Assumesthatclaimswilldevelopthesamewayintothefutureastheydidinhistoricalperiod.
Thepastisindicativeofthefuture.
Itassumesastablemixofclaims
Stablecasereserveadequacy
Claimshandling&processinghasnotchanged.
ClaimsobservedinanimmatureAYtellssomethingaboutclaimsyettobeobserved.
Consistentmixofpolicylimitsanddeductiblesthroughouttheexperienceperiod.

Partc:1point
Answersreceivingfullcreditinclude:

Ifyoudonotbelievelosseswillcontinuetodevelopinthefutureconsistentwithhistorical
development,youcouldusetheexpectedclaimstechniqueasitusesanaprioriassumptionof
ultimatelossesanddoesnotrelyonlossespaidtodate.
Useexpectedlossmethod.WhenselectingELR,makesureELRiscorrespondingtothenewmix
ofclaimtype.
Couldusethepaiddevelopmentmethodsinceitwillbeunaffectedbyachangeincasereserves.
TheBerquistShermanmethodforcaseoutstandingadjustmentsshouldbeused.Historicalcase
outstandingisadjustedbasedonthelevelofcasereservesafterthechanges,fromwhich
adjustedreportedclaimsarederivedandthereporteddevelopmentmethodisperformedon
theadjustedclaims.
BFmethodcanbeusedwhenreportedclaimsarenotrelatedtoIBNR.BFmethodassumesthat
IBNRismorecloselyrelatedtoexpectedclaims,independentofreportedlosses.IBNR=%
unreportedlossxExpectedLoss
Useexpectedclaimsmethod.Theunpaidclaimsrelyonaprioriestimate.Icanselectanewa
priorilossestimatefornewpolicylimit.

EXAMINERSREPORT:
Parta
Candidateswereexpectedtohaveknowledgeaboutthefullprocessforreportedclaimdevelopment
method.Thescoresweregenerallyveryhighwiththemajorityofthecandidatesreceivingfullcredit.
Commonerrorswereafailuretorecognizethetailfactorandcalculatorerrors.
Partb
Candidateswereexpectedtobeabletolistatleasttwoassumptionsofthereportedclaimdevelopment
method.ThereweremanyassumptionslistedthroughoutchaptersevenoftheFriedlandtext.There
weremanyanswersthatwereaccepted.Themajorityofcandidatesreceivedfullcredit.Therewerea

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
fewcandidatesthatgaveresponsesreferringtowhenthereportedclaimdevelopmentmethoddoesnot
workwelltheseitemsarenotallnecessarilysynonymouswithorrelatedtoanassumption,sonotall
oftheseresponseswereaccepted.
Partc
Candidateswereexpectedtoknowtwoofthemanyalternativemethodsortechniques.Accepted
responsesincludedvalidmethods(toaddresstheviolationofthepartbassumption)andeithera.)why
itwasanimprovementoverthereportedclaimdevelopmenttechniqueorb.)adescriptionofthe
method.Candidatesstruggledmorewiththispartthanparta.orpartb.Themajorityofcandidates
wereabletoidentifymethodsbutwerelesssuccessfulatprovidingvaliddescriptions.Commonerrors
includeanomissionofadescriptionafteridentificationofamethodorsimplyrestatingpartb.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:14
TOTALPOINTVALUE:2.75points
LEARNINGOBJECTIVE(S):B3

SAMPLE/ACCEPTEDANSWERS:
Parta:1.25points
PaidClaims=(1%Unpaid)*UltimatePaidClaims
(10.8)*(95,000)=19,000
IncurredClaims=19,000+22,000=41,000
%unreported=1(41,000/102,500)=0.6
BFUltimateClaim=41,000+.6*100,000=101,000

Partb:0.5point
Answersreceivingfullcreditinclude:

Foraccidentyears,whenthe%unreportedis0,thereportedBFwillequalthereportedclaim
developmenttechnique
or
WhentheCDF=1orwhenCDF<1anduse1.

Whenactuallossestodateareequaltoexpectedlossestodate
or
Whenactualcumulativelossesareequaltoexpectedcumulativelosses
or
Whentheactuallossratiotodateisequaltotheexpectedlossratiotodate

Partc:1point
Answersreceivingfullcreditinclude:

HighlyleveragedLDF:Forsomelongtaillineofbusiness,theLDFscanbecomesobigthatthe
ultimateclaimestimatecanvarygreatly.TheBFtechniquemitigatesthisbyrelyingmoreon
expectedclaimsforearlyyears.
Whenthedataisvolatile,thinorboth.BFtechniqueislessinfluencedbyfluctuationsinactual
datasinceitreliesonexpectedclaimsforIBNRcalculation.
Ifoperatinginnewlineofbusiness,canusebenchmarkLDFsusageofexpectedLRandreflect
actualexperience.
Inearlymaturities,BFispreferablesincelargeorunusual(CAT)claimswilldistorttheclaim
developmentmethodwhileBFisbasedonexpectedaprioriaddedtotheactualwhichwillbe
morestable

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

Incaseofstrengtheningthecasereserves,thedevelopmentmethodwillbeveryaffectedand
projectultimateclaimsthataretoohigh.TheBFtechnique,becauseitisweightedwiththe
expectedclaimswillalsotendtooverstateultimateclaimsbutnotbyasmuchasthe
developmentmethod.

EXAMINERSREPORT:
Parta

CandidateswereexpectedtoknowhowtocalculatetheBFmethod
Commonerrorsmadebycandidates:
o Assumed80%paidinsteadof20%paid
o DidnotcalculateareportedCDF
o Used80/20asthereported%andnotasthepaid

Partb

Candidateswereexpectedtounderstandandcommunicatewhenthetwomethodsareequal
Twoscenarioswereneededforfullcredit
Commonerrorsmadebycandidates:
o Manycandidatesmistakenlyrestatedthequestioninanswerform

Partc

CandidatewasexpectedtoidentifytwosituationswheretheBFtechniqueispreferabletothe
reportedclaimdevelopmenttechniqueandbrieflyexplainwhy.Haveabasicunderstandingof
whentheBFismostuseful
Commonerrorsmadebycandidates:
o Situationwithoutanexplanation
o Gavesamesituationtwice

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:15
TOTALPOINTVALUE:2.75points
LEARNINGOBJECTIVE(S):B3
SAMPLE/ACCEPTEDANSWERS:
Parta:0.5point
%unreported=1=50%
.5x.57x1800=513,000
Partb:1.75points
(1)
Year

(2)
OLEP

(3)
%Rep

10

1100x1.35
=1485
1690
1680
1800

91%

11
71%
12
58%
13
50%
Total

ECR=2912/4445=65.5%

(4)
UsedUpPremium
(2)x(3)
1350

(5)
(6)
Reported Trend
Claims
700
1.05^3

(7)
TrendedClaims
(5)x(6)
810

1207
988
900
4445

750
500
750

827
525
750
2912

1.05^2
1.05^1
1.00

IBNR=1800*.5(%unreported)*.655=590,000
Partc:0.5point

CapeCodisbettersinceitusesreportedclaimstoderivetheECR,itwillcapturethechangein
theclaimsratio,whileBFwillnot.
or
BFismoreappropriateaswecanmakeaselectiontoaccountforthedecreaseinunderlying
claimsratio.TheExpectedClaimsRatiocalculatedbyCapeCodwillbetoohigh.

BFisbetter;ifthedataisvolatile,itsbettertouseanaprioriestimateoftheclaimsratio(BF),
ratherthancalculatingECRfromthedata(CC)

EXAMINERSREPORT:
Parta

CandidatewasexpectedtoknowhowtocomputeaBFestimateforIBNR,givenallthe
necessaryinputsforthecalculation.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

Themajorityofcandidatesscoredfullcredit,withnearlyallcandidatesscoringatleasthalfof
thepoints;overallcandidatesscoredverywell.
Allinputsneededforthecalculationweregiven;nospecialassumptionsorconsiderations
relatedtotheBFmethodwerepresentinthequestionstatement
Commonmistakesincluded:
o Calculationerrors
o DerivingultimatelossinsteadofIBNR

Partb

CandidatewasexpectedtoknowhowtocomputeaCapeCodestimateforIBNR,givenallthe
necessaryinputsforthecalculation.
Overallcandidatesscoredwell;approximatelyonethirdreceivedfullcredit,andnearlyall
candidatesscoredatleasthalfoftheavailablepoints.
CandidatescommonlystruggledwithbeinggivenaPurePremiumtrend.Manyappliedthe
trendtoEarnedPremium.
Mosterrorsrevolvedaroundtrendandlossdevelopment;candidatesfailedtotrendlosses,
trendedpremiuminstead,ordevelopedlossestoultimate.Lesscommonwasincorrectly
selectingtheECR,calculationerrors,andgivingUltimateLossinsteadofIBNR.Evenless
commonweremistakeswiththeconceptofUsedUpPremium

Partc

CandidatewasexpectedtoknowwhetherBForCapeCodwouldyieldbetterestimatesof
IBNRundertwodifferentscenarios
Themajorityofcandidatesscoredfullcredit,withnearlyallcandidatesscoringatleasthalfof
thepoints;overallcandidatesscoredverywell.
ScenarioswerecommonplaceexamplesinCASexamliterature
Candidatestypicallylostpointsforfailingtoprovideenoughsupportforthemethodselected

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:16
TOTALPOINTVALUE:2.75points
LEARNINGOBJECTIVE(S):B3,B4
SAMPLE/ACCEPTEDANSWERS:
Sample1:
Itssafetousethegroundupclaimcountsandldfin2013tocalculatetheultimate2013groundup
claims,sinceCDFultwasdevelopedpriortochange.
UltGroundupcounts:1500x1.2=1800
Forexcesslevel,therptclaimscountisdistortedfor2013duetocasestrengthening.Iwillusetrended
2011and2012experience.

RevenueTrend

ClmCtsLDF

FreqTrend

(1)

(2)

(3)

(4)

(5)

2011

3400

1.03^2

220

1.5

1.05^2

0.101

2012

3500

1.03

140

2.5

1.05

0.102

ProjFreq=(3)x(4)/[(1)x(2)]x(5)

AverageSelected:0.1015
Excessclaimcounts=3600x0.1015=365
Theclaimcountsnotexceedingattachmentpointis1800365=1435
Sample2:
GroundUp

Excess

1750x 1.0x 1.02^2 =

1821

220x 1.5x 1.05^2 =

364

1700x 1.04x 1.02

1803

140x 2.5x 1.05

367.5

1500x 1.20x 1

1800

90x 6.0x 1

540

364/1821=.2
367.5/1803=.2038
Avg.2017(exclude2013)
1800Ult2013groundupx.2019=363.4excess

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
1436.6belowattachmentpoint
EXAMINERSREPORT:
Thisquestionwassomewhatchallengingasitaskedforcandidatestoconsidertheimpactofachangein
reservingprocessandhowitimpactsclaimcountdevelopmentdifferentlyforgroundupvs.excess
claims.Candidatesneededtorecognizethatusingastraightforwarddevelopmentmethodwouldnot
beappropriateforcountsabovetheattachmentpointandthatinsteadtheyneededtousethesecond
frequencydevelopmentapproach.Inordertoreceivefullcredit,candidatesneededtousethetwo
olderaccidentyears(2011and2012)toprojecttheexcessclaimsfor2013asthereportedexcessclaims
wereoverstatedduetothereservingchange.
Candidatesperformedasexpectedonthisquestion.Themajorityofthecandidatesrecognizedthe
needtousethesecondfrequencydevelopmentapproach.Roughlyhalfofthecandidatesthat
attemptedthequestionproperlyrecognizedtheneedtousethetwoolderyearstoproject2013excess
claimcounts.
Themostcommonmistakethecandidatesmadewasusingallthreeyearstoprojectthe2013excess
claimcounts.Thesecandidatesgenerallyperformedthesecondfrequencydevelopmentmethodfairly
accuratelybutfailedtoconsiderwhichyearstousegiventhechangeincasereservingprocessgiven.
Anothercommonmistakewasthatcandidatesrecognizedtheneedtotrendthepayroll,butnever
actuallyusedthetrendedpayrollinthesecondfrequencydevelopmentapproach.Somecandidates
simplytooktheaverageclaimcountsacrosstheyearswithoutregardforchangeinexposure(revenue).
Afairnumberofcandidatesderivedanalternativeapproachwhereratherthandeterminingtheexcess
andgroundupfrequencies(whichrequirestrendedpayroll),theyinsteaddeterminedtheratioofexcess
togroundupclaimcountsfor2011and2012andthenappliedthisratiotothe2013groundupclaim
countstoderivethe2013excessclaimcounts.Fullcreditwasgivenforthisapproachwhendone
accurately.
Thereappearedtobesomeconfusionaroundthedefinitionoffrequencytrendgiveninthequestion.
ThemajorityofcandidatesviewedfrequencytrendasdefinedintheFriedlandtextwherethetrendin
exposureisnotincluded,howeverafairnumberofcandidatesassumedfrequencytrendincludedthe
underlyingtrendinpayrollasisoftenthecaseineverydayactuarialwork.Creditwasgivenforboth
approaches.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:17
TOTALPOINTVALUE:2points
LEARNINGOBJECTIVE(S):B4
SAMPLE/ACCEPTEDANSWERS:

ReportedDevelopmentmethod
o ThistechniquewilloverstateIBNRbecausetheCDFwillbehigheranditismultipliedby
areportedlossthatisatahigherlevel.
ExpectedClaimMethod
o ThistechniquewillproduceaccurateIBNRsinceitisbasedonanaprioriestimateof
futureclaims.Changeincaseadequacywillnotchangeitsresult
ReportedBornhuetterFerguson
o ThistechniquewilloverstateIBNRbecauseincreasedcaseadequacywillproducehigher
CDFswhichwillthenresultinhigher%unreported.ThiswillgiveahigherIBNRestimate.
o Overestimatebutlessthanreporteddevelopmentmethod,sinceitistheweighted
averageofreporteddevelopmentandexpectedclaimmethod.
ReportedCapeCod
o ThistechniquewilloverstateIBNRforthesamereasonasBFmethod:thehigherCDFs
willgiveahigher%unreportedandlower%reportedwhichwilloverstateIBNR.
o OverestimatedsincemethodusestheECRwhichiscalculatedbytheratioofreported
claimsanduseduppremium.ReportedclaimsoverestimatedandECRoverestimated.

EXAMINERSREPORT:

Asthisisafundamentalpartofunpaidclaimestimates,candidateswereexpectedtoscorevery
wellandgenerallydidsoonthisquestion.Overhalfofexamtakersscoredfullcreditonthis
question.
Whencandidateslostcredit,itwastypicallyfornotprovidingrationaletotheiranswers.Other
candidatesconfusedtheapriorinatureoftheexpectedclaimsmethodwiththefirsthalfofthe
CapeCodmethodthatdeterminesanELRbasedoncurrentreportedclaimactivity.
SomecandidatesseemtohavefocusedontheconceptoftheBornhuetterFergusonasa
credibilityweightedaverageofdevelopmentandexpectedclaims,butwereunclearonthe
mechanicsofthemethod,confusingchangesincredibilityweightswithincreasesanddecreases
intheultimatelossprojectedbythetechnique.
Somecandidatesnotedthetriangleshouldbeadjusted,withoutspecifyingthenatureofthe
adjustmentorwhattheadjustmentwasintendedtocorrect.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:18
TOTALPOINTVALUE:4points
LEARNINGOBJECTIVE(S):B5
NOTEFROMTHEEXAMINATIONCOMMITTEE:
ThephraseCumulativeOpenClaimCountsasprintedintheexamwasintendedtoreadCumulative
ReportedClaimCounts.Ingradingthequestion,gradersaccountedforallpossibleinterpretationsof
theCumulativeOpenClaimCountstriangle,including:

CandidatestreatingitasbeingtheOpenClaimCountstriangle
CandidatestreatingitasbeingtheCumulativeReportedClaimCountstriangle

SAMPLE/ACCEPTEDANSWERS:
Sample1:
avgpaid=paidclaims/closedcnt
12
24
36
11 1,111
1,389
1,571
12 1,133
1,417
13 1,156

>2%yrtoyrchange
2%
2%
2%

closedcnt/total
cnt
11
12
13

12
0.474
0.474
0.474

24
0.485
0.485

avgcaseo/s=case/open
12
24
11
0.1
0.136
12
0.2
0.272
13
0.3

36
0.5

>Consistent

36
0 >verylargeyrtoyrchanges>above
inflationitwouldseem.

ClaimSettlement&paymentsseemstablesopaiddevelopmentmethodworks.
Claimcountsverystabledidn'tshowtriangle,butequaldowneachcolumn
SowilluseaFxSmethodwithdevelopedcountsanddevelopedpaid

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Severity

paiddevfactors>usingweightedavg

1224 2436
11
1.5
1.21
12
1.5
A:A
1.5
1.21
A:U
1.815
1.21

Ult=1040x1.815=1,887,600
ClosedCnt
AY
12
24
36
11
900
1080
1155
12
900
1080
13
900
Sel
1224
2436
36ult
A:A=
1.2
1.069
1 >basedonstavg
A:U=
1.283
1.069
1
avgpaidA:Atri>see1stpageforavgpaidtriangle
AY
1224
2436
36ult
11
1.25
1.131
12
1.251
13
SelA:A=
A:U=

1.25
1.414

1.131
1.131

1 >stavg
1

ultcount=900x1.283=1155
ultsev=1.156x1.414=1.635
ultclaims=ultcountxultsev=1155x1.635=1,888,425

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Sample2:
AVGCasePerOpen

12
1000
2000
3000

24
7500
15000

36
0

2
2
1,5
=300000/(11001080)

*Assumecumulativeopenclaimcounts
shouldbecumulativereportedClaimCounts
espifnodevelopmentafter36months,Reported
=ClosedCountsandnoneopen@36months
&nocase@36months.

AVGPaidPerClosed
12

1111,11
1133,33
1,02

1155,56
1,02

24
1388,89
1416.67

36
1571,428
1,02

=1530000/1080

ClosedClaimCnts:Report
12
24
36
0,9
0,98
1

0,9
0,98
1
0,9
>indicatesnoclaimsettlementincreases/speedupinpayment.

averagecaseperopenisincreasingatagreaterratethanaveragepaidperclosedindicating
increasedcasestrengthening.
UseReportedBerquistShermanmethodw/2%severitytrendfrompaidtrendrate.

AdjustedCasePerOpen

12
24
36
2883,5
14705
0
2941.176
15000
3000
=3000/1.02
UseBStoadjustalldiagnosofreportedtriangletocurrentlevelofcaseadequacy.
AdjustedReptriangle($000s)
12
24
36
1288,4
1794,1
1815
1314
1830
1340
2941.174*100/1000+1020
100isopencounts,1020ispaid$.
linkratios
1224
2436
36ult
selectvolumewtdaverages
1,3926
1,0116
1
2013:
1340*1.3926*1.0116=$1887.857K

UsePaidDevelopmentmethodb/citisnotaffectedbychangesincase.
1224
2436
36toult

1,5
1,21
1
2013:
1040*1.5*1.21=1887.6K

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
EXAMINERSREPORT:
Themethodsthatcanbeappliedinthisquestionare:
1.BerquistShermanmethodtoadjustcasereserveadequacy
2.Paiddevelopmentmethod
3.FrequencySeverity(paid)method1
4.FrequencySeverity(paid)method3.
Candidateswereexpectedtoidentifytheincreaseincaseadequacypatterninthedata.Fromthere,it
wasexpectedthatthecandidatewouldusetheBSmethod.Candidateswerealsoexpectedtopointout
thestabilityintheclaimcountsordisposalrates.Inorderforthecandidatestoreceivecredit,itwas
expectedthattheywouldfirstcalculatediagnosticsfromthedata,interpretitandlinkthattotheuseof
theappropriatemethodbasedonthediagnosticgiven.
Thisquestionisconsideredtobeabitchallengingbecausethecandidateneedstounderstandmultiple
reservingtechniquesinordertocalculatethediagnosticsandchoosethecorrectmethod.
MostcandidatesselectedtheBerquistShermanmethodandthepaiddevelopmentmethod.
Somecandidatesusedtherightmethodsbutdidntprovideenoughdiagnosticstosupporttheselected
methods.
InutilizingtheBerquistShermanmethodtoadjustthecasereserves,almostallthecandidatesknewto
trendtheaveragecaseoutstandingfromthecurrentleveltopreviousyears.Mostcandidatescorrectly
calculatedandidentifiedthepaidseveritytrendastherighttrend.Acommonerrorforsomecandidates
wastousethereportedseveritytrend,averageoutstandingtrend,orsomearbitrarytrend.
Inthepaiddevelopmentmethod,sincetheLDFsarestableandthecalculationsaresimple,almostall
candidatesreceivedfullcreditwhenselectingthismethod.
AsmallgroupofcandidatesselectedtheFrequencySeverity(FS)methods.Mostreceivedfullcreditfor
usingthepaidFS,althoughsomeofthemincorrectlyusedthereportedseverityinstead.Somewere
confusedbytheseverityofcumulativepaidlossesandtheseverityofincrementalpaidamountateach
age.Almostallcandidatescalculatedtheclaimcountscorrectlyiftheydidselectthismethod.
ThereportedLDFsarestablecoincidentallywhichleadsafewcandidatestowronglyselectthereported
developmentmethod.Veryfewcandidatesincorrectlyselectedthecaseoutstandingmethod.
Overall,candidatesperformedwellonthisquestion;despitetheprintederrorinthequestionitself,
mostcandidatestreatedthereportedcounttriangleasintended.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:19
TOTALPOINTVALUE:1.75points
LEARNINGOBJECTIVE(S):B3
SAMPLE/ACCEPTEDANSWERS:
Sample1:
Ageto
Age
1224
2436
3648
2010 2.144 1.835 1.192
2011 1.998 1.718
2012 2.067

Average
2.070
1.777
1.192
2013Level:
2010LR=
2011LR=
2012LR=
Average=

(3118*0.98^3)/5000=0.587
(3140*1.192*0.98^2)/6000=0.599
(1840*1.777*1.192*0.98)/6500=0.588
0.591=2013LR

8,000,000*0.591=4,730,666.667
Sample2:
AY

10

(1)
OLEP
5000

(2)
Claims
3118

(3)
CDFtoUlt
1

(4)
Trend
.98^3

(2x3x4)
CR
0.587

11

6000

3140

1.192

.98^2

0.599

12

6500

1840

(1.769)(1.192)

.98^1

.0.585

Selected:(st.Avg)

1224

2436

3648

SelectedUlt.Factor
2.062
1.769
(wtg.Avg)

AY13UltClaims=EP*SelectedRatio

1.192

=(8,000,000)(.59)=4,722,667

.0.59

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
EXAMINERSREPORT:
Thecandidatewasexpectedtounderstandhowtoapplytheexpectedclaimstechniquetoestimate
ultimateclaims.Toapplythetechnique,thecandidatewasexpectedtoknowhowtodevelopageto
agefactors,cumulativedevelopmentfactors,correctlyapplythedevelopmentmethodandtrendto
reportedclaims,anddetermineanappropriateexpectedclaimsratio(lossratio).
Thiswasastandardexpectedclaimstechniquequestionandcandidatesgenerallyscoredwell.
Candidatesgenerallylostcreditbyfailingtocalculateclaimsratiosbyaccidentyear,byincluding2013in
determiningtheselectedclaims(loss)ratio,forusingatechniqueotherthantheexpectedclaims
techniqueorformatherrors.The2013cumulativedevelopmentfactorishighlyleveragedandthe
resultingclaim(loss)ratioisnotinlinewithprioryears,soitisnotappropriatetobeconsidered.Claim
(loss)ratiosbyaccidentyearareneededtodetermineifanytrendsexistovertimeandtodeterminean
appropriateselection.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:20
TOTALPOINTVALUE:2.25points
LEARNINGOBJECTIVE(S):B6
SAMPLE/ACCEPTEDANSWERS:

2011
2012
2013

2011
2012
AA

Cumulative
Paid
12
4,000
4,500
5,000
AA
12
1.25
1.25
1.25

24
5,000
5,625

36
5,500

24
1.10

36
1.00

1.10

1.00

AU
12
1.375

24
1.1

UltLoss

6,875

(5,000*1.375)

2011
2012
2013

Cumulative
S&S
12
800
900
1,250

24
1,750
2,509

36
2,200

2011
2012
2013

PaidtoPaid
12
0.200
0.200
0.250

24
0.350
0.446

36
0.400

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

2011
2012
AA

AA
12
1.75
2.23
1.99
AU
12
2.274

UltS&S
3,909

EXAMINERSREPORT:

24
1.14

36
1.00

1.14

1.00

24
1.143
(6,875*0.25*2.274)

Thisquestioncoveredstandardmaterialfromthetextandfollowedasimilarformatandpresentation.
Candidateswererequiredtodeveloplossestoultimate,andalsotobeabletoapplytheRatioApproach.
Candidatesdidverywellonthisquestion.Themostcommonmistakesincludedforgettingtodevelop
lossestoultimateandcalculatorerrors.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:21
TOTALPOINTVALUE:1.5points
LEARNINGOBJECTIVE(S):B7
SAMPLE/ACCEPTEDANSWERS:
Parta:0.5point
Answersreceivingfullcreditinclude:

HistoricallythedefenseALAEwasspreadoutoveralongerperiodoftime.Thedevelopment
ratiocalculatedfromthesewillbetoolargeforthenewfrontloadingoflegalexpenses.Until
newdefensestrategyisreflectedinexperiencelongenoughtogenerateaccurateALAECDFs,
ALAEdevelopmentmethodwilloverstateunpaidALAE.
Asthecompanychangedthewayclaimsarebeinghandled,i.e.moreresourcesatthebeginning
oftheclaimcycle,wewillexpecttherewillbemorepaidALAEattheearlierdevelopment
period.UsingpaiddevelopmenttechniquetoestimateunpaidALAEwillthenoverstatethe
unpaidALAE(historicallystablepatternisappliedtolargerALAEtodate),evenifwedoexpect
theultALAEtobehigherduetothisinitiative.

Partb:0.5point
Answersreceivingfullcreditinclude:

InitialALAEatearlymaturitieswillbehigher.Expectultimateclaimstodecreaseduetoincrease
inlitigation.UltimateestimatedALAEtopaidclaimsratiowillbedistortedbythesetwoeffects.
InitialALAEtopaidishigherthanusual
o DevelopedtohigherultimateALAEtopaidratio
o Applyratiotolowerultimatepaid
o Questionableultimateeffect
ThehistoricalpaidALAEtopaidclaimratioswillagainshowtoolongofadevelopmentCDF.At
earlymaturitiesratiowillbelowerthannowanddevelopmentfactorswillbetoolarge.
Moreover,theeffectofthenewstrategymayreduceultimateclaims,sowewouldexpecta
changingultimateALAEtoclaimratioaswell.
Priortotheinitiative,wecanexpectstableALAEtopaidclaimsratio.However,theinitiative
willlikelyresultinhigherpaidALAEandlowerultimateclaimpaid.Herewewillseetheratio
producedwillbehigherascomparedtohistoricalposition.Again,thehigherratiowillthenbe
multipliedwiththedevelopmentfactorsanddependingontheaccuracyofultimateclaimpaid
estimated,theunpaidALAEmaybeoverstatedaswell.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partc:0.5point
Answersreceivingfullcreditinclude:

Frequencyshouldremainmostlyunchanged.Mayseeadditionalclaimswithnopaydueto
better,fasterdefense,loweringoverallfrequency.
UltimateseverityofALAEexpensemayremainsteady,justincurredatearlierstages.
Itmaybeappropriatetousethefrequencyseveritytechnique,ifproperadjustmentsaremade
toavailabledataforoperationalchangesandbothfrequencyandseverityaremonitoredonan
ongoingbasis.
Idonotthinkusingafrequencyseveritytechniquewouldbeappropriatetoestimateultimate
ALAEforthecompany.Frequencyandseveritytechniqueworksbestwhenthereisstable
claimspracticesandmixofbusinessandconsistentclaimsdefinition.TOestimatetheupcoming
ALAEusingfrequency&severitytechniquewouldbeinappropriateaschangestoclaimssettling
haverecentlybegunandthiswillresultininaccurateultimateandinaccurateALAEreserves.
Yes.Claimcountswillbestablebecausethechangewillnotaffectthenumberofclaimsbeing
reported.Thechangeinseveritywillhavetheisolatedchangeinlegalpracticeswhichwecan
incorporateintotheestimate.

EXAMINERSREPORT:
GeneralCommentary

Thecandidateisexpectedtohaveathoroughunderstandingofthedevelopmentmethodfor
ALAEandtheratiomethod,aswellasafairlystrongunderstandingofthestrengthsand
weaknessesofthesetechniques.
Candidatesdidnotgenerallyscorewellonthisquestion,thoughthemajoritywasabletoget
partialcredit.
Parta
Overall,candidatesdidwellonthispart.Manyreceivedfullcreditandmostreceivedatleastpartial
credit.

Thecandidatewasexpectedtohaveathoroughunderstandingofthedevelopmentmethodfor
ALAE.
Forfullcreditthecandidateshouldrecognizethatthehistoricaldevelopmentfactorsarenot
appropriateforestimatingfuturedevelopmentandexplainwhy.
Commonerrors:
o ManycandidatesansweredthisquestionforlossinsteadofALAE
o Manycandidatesdidnotrecognizethatthehistoricalpatternwasnolonger
appropriate

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partb
Overall,candidatesdidnotdoaswellonthispart.Mostreceivedpartialcreditwithsomereceivingfull
credit.

ThecandidatewasexpectedtohaveanunderstandingoftheratiomethodforALAE,
recognizing:
o thecurrentALAEtolossratioishigherthanthehistoricalratio
o thehistoricaldevelopmentfactorsarenotappropriateforestimatingfutureratio
development
o thenewinitiativemayimpacttheestimateofultimateloss,whichwoulddistortthe
ultimateALAEunderthismethod.
Commonerrors:
o Pointingoutissueswiththemethod,butnotconnectingthemtothesituationstatedin
thequestion
o Manycandidatesdidnotreferencethatthehistoricalpatternwasnolonger
appropriate
o Providinganinsufficientdiscussionoftheissue
o RespondingfortheULAEratiomethod.

Partc
Overall,candidatesstruggledonthispart.Manyreceivedpartialornocredit,withveryfewfullcredit
responses.

ThismethodwasnotspecificallyaddressedinthetextforALAE.However,thecandidatewas
expectedtohaveanunderstandingofalllossmethods,andbeawarethattheycanbeapplied
toALAE.
Forfullcreditthecandidateshouldaddressbothfrequencyandseverityinrelationtothe
situationspecifiedinthequestion.Bothresponsesfororagainstusingthefrequencyseverity
methodweregivencredit,aslongastherewassufficientexplanationprovided.
Commonerrors:
o ManycandidatesansweredthisquestionforlossinsteadofALAE
o Manycandidatesreferencedonlyfrequencyorseverity,notboth.
o Pointingoutissueswiththemethodbutnotconnectingthemtothesituationstatedin
thequestion.
o Suggestingothermethods,withoutexplainingwhythefrequencyseveritymethod
wouldnotbeappropriate.

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:22
TOTALPOINTVALUE:3.5points
LEARNINGOBJECTIVE(S):B8
SAMPLE/ACCEPTEDANSWERS:
Parta:1.25points
Sample1:

Age
ReportedCDF Reported%
12
1.54
64.94%
15
1.33
75.19%
18
1.25
80%
21
1.18
84.75%
24
1.11
90.09%
Asof3/31/14IBNR=30002200=800
Linearinterpolatedreported%atmonth17:75.19%

80%

@17CDF=1.276
Expectedloss3/31~5/31:800

. %

.
.

%
%

103.51

Cumulativeexpectedasof5/31:2200+103.51=2303.51
Actualasof5/31:2500
Difference:2303.512500=196.49
Sample2:

3/31=15months
5/31=17months
Unreportedat3/31/14=30002200=800
Expectedreportedbetween3/31and6/30
1
1 1.33
800 1.25
155
1 1 1.33
Sofor5/31,expect2 3ofthis=103
Actualreported=25002200=300
Significantlymorereportedthanexpected
Sample3:

AY13
ReportedfromMarch31May31:+300
March31,2014=15months

75.19% 2 3

78.49%

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
May31,2014=17months
Assumelinearinterpolation
Expectedemergence=Ultimate*{%reported@May31,2014%reported@March31,2014}
1.33
Expected 3000 1.25
2 3 96.24
Difference=203.76
Sample4:

Letsassumethatbetweenmaturities15monthsand18months,claimsemergenceisuniform(sincewe
arenotgiven17UltCDFs)
Expectedclaimsemergencefrom1518:2200

.
.

140.8

from1517:2 3 140.8 93.8667

Expectedreportedclaims@5/31/14:2200+93.8667=2293.87
Actual=2500
Moreclaimswerereportedthanexpectedby206.13
Partb:1.25points
Sample1:

Age
PaidCDF
Paid%
12
2.22
45.05%
15
1.82
54.95%
18
1.5

66.67%
Asof3/31/14Unpaid=30001650=1350
66.67%

Linearinterpolatedpaid%atmonth17:54.95%
Expectedlosspaid3/31~5/31:1350

.
.

234.04

Cumulativeexpectedasof5/31:1350+234.04=1884.04
Actualasof5/31:1875
Difference:1884.041875=9.04
Sample2:

Unpaidat3/31/14=30001650=1350
Expectedpaidbetween3/31and6/30
1
1 1.82
1350 1.5
351
1 1 1.82
Sofor5/31,expect2 3ofthis=234
Actualreported=18751650=225
Actualpaidslightlylowerthanexpectedbutmostlyinline

54.95% 2 3

62.76%

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Sample3:

AY13
PaidfromMar31May31:+225
March31,2014=15months
May31,2014=17months
Assumelinearinterpolation
Expectedemergence=Ultimate*{%paid@May31,2014%paid@March31,2014}
Expected 3000 1.5
1.82
2 3 234.43
Difference=9.43
Sample4:

Assumeclaimsettlementuniformbetween1518
Expectedclaimsemergencefrom1518:1650
ExpectedPaidClaims@5/31/14:1650

.
.

3 352

352
1884.67

Actual=1875
Fewerclaimspaidthanexpectedby9.67
Partc:0.5point
Answersreceivingfullcreditinclude:

Ifitwasfoundthatthehigherthanexpectedreportedclaimswasduetoactualchangesin
underlyinglossratiothatjusthadntyetshownupinthedataat15monthsthentheactuary
shouldchangetheestimateof2013ultimate.
Iftherewasaninfluxofclaimsexplainingtheincrease(suchasunusuallystormyseason)would
havetoadjusttheultimatestoreflecttheexpectedincreaseinultimateclaims.
Itcouldbealargelossreportedbutnotpaid.Sincethisisnotanticipated,increaseestimate.
Ifyouthinktherehasbeenamaterialchangecausingreportedtocomeinhigherthanexpected
suchaschangeinlawstoincreaseminimumlimitswhichmaynotshowinpaidclaims
immediately(willshowinreportedbeforepaid)wemaywanttoincreaseourultimateto
reflectthehigherultimateimpliedbyactualreportedemergence.

Partd:0.5point
Answersreceivingfullcreditinclude:

Actuarywouldnotrevisetheestimateiftherewasachangeincasereservephilosophy
(strengthening).Paidlosses(actual)wereinlinewithexpected,andreportedincreaseisdueto
casestrengtheningwithnoexpectedimpactonultimatesettlementvalue.
Claimsreportingpatternchangebutnoimpactonultimatesettlement(iemorereported
earlier)

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

Iftherewasachangeintheclaimsdepartmenttogetclaimsintothesystemquicker(claimsin
transitwaspreviouslyhigher)therewouldbenoreasontochangetheultimate.

EXAMINERSREPORT:
GeneralCommentary

Candidateswereexpectedtoperformanactualversusexpectedcalculation,including
interpolationoflossdevelopmentfactors,andinterprettheresults,citingexamplesofscenarios
thatmaycausesuchresults
Candidatesgenerallyperformedwellonpartsa&banddidnotperformaswellonpartsc&d.
Partsa&brequiredrelativelystraightforwardcalculations(withtheaddedcomplexityof
interpolation)whilepartsc&dweremoreopenended.

Partsa&b

Candidateswereexpectedtounderstandactualversusexpectedformulae,includingthe
calculationofaccidentyearageandinterpolationoflossdevelopmentfactors.
Multiplemethodsofcalculatingexpectedreportedandpaidwereacceptedascorrect
calculations.
Candidatesgenerallyperformedwellonthesepartsofthequestion.Commonmistakes
included:
o Usingtheincorrectlossdevelopmentfactors(incorrectagesorconfusingpaidand
reported)
o Notinterpolatingthelossdevelopmentfactorsorinterpolatingincorrectly
o Mistakesinapplyingtheactualversusexpectedformula
o Failingtocompareactualandexpectedresults

Partsc&d

Candidateswereexpectedtointerprettheresultsderivedinpartsa&bandidentifylogical
scenariosthatmayexplainthoseresultsandwhetheranactuarywouldconsidermodifying
originalselectedultimateclaims.
Candidatesdidnotperformwellonthesepartsofthequestion.Commonmistakesincluded:
o Identifyingchangesincaseadequacyorclaimsettlementduringthequarteras
situationstoreviseultimateestimatedclaims(asopposedtosituationstoleave
ultimateestimatedclaimsasoriginallyselectedsincechangesinoperationsdonot
necessarilychangetheultimateclaimsvalue)
o Identifyingdeterioratinglossratioorunexpectedlargeloss(es)assituationstoleave
ultimateestimatedclaimsasoriginallyselected(asopposedtosituationstorevised
ultimateestimatedclaims)
o Speakingtotheresultsfroma&bincorrectly:
Citingcasereserveweakeningwhenpartashowedhigheractualreportedthan
expected

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

Citingchangesinsettlementprocess/speedwhenpartbshowedactualpaid
closetoexpected

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
QUESTION:23
TOTALPOINTVALUE:1.75points
LEARNINGOBJECTIVE(S):B8
SAMPLE/ACCEPTEDANSWERS:
Parta:0.75point
IBNR
433

1150 500
0.8
1

650

0.66615

0.8
1

0.66615

0.66615

0.33385

650

0.8

0.13385

0.40
Partb:1point
Sample1:
=Case

(ReportedCDF1)(PaidCDF)
+1
PaidCDFReportedCDF

500

433

250

394

1
0.8

1
0.55

289 1.8
$520.20
Sample2:
Reportedasof12/31/2014=500+433=933
Paidasof12/31/14=250+394=644
Casereserveasof12/31/14=933644=289
Unpaid

289 1

IBNR

CASE

1
0.55 +1
1
0.8

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT

289 1

Unreported%

Reported%Paid%

289 1

10.8

0.80.55

520.2 Unpaid
EXAMINERSREPORT:
GeneralCommentary

Candidatesweretestedonactualvs.expecteddevelopmentconcepts,aswellastheIBNRto
caseoutstandingreservingtechnique
Approximatelyhalfofthecandidatesscoredfullcreditonparta,andapproximatelyonethirdof
candidatesscoredfullcreditonpartb.
Forpartb.,amajorityofthecandidateswerefamiliarwiththeformula,mostofthemcitingit
correctly.However,under20%receivedfullcredit.Pointsdeductedwereusuallybasedon
incorrectcalculations,useofwrongdata(suchasatthewrongevaluationage),orformulaic
errors.
Parta.requiredsomethought,asitwasbackingintoanoriginalselectionratherthanstarting
withtheselectionandcalculatingasubsequentresult.Partb.wasastraightforwardcalculation,
usinganevaluationwherealloftheinputshadbeensupplied.

Parta

Thecandidatewasexpectedtoknowhowtoapplyexpectedemergencetodeterminepercent
reported,whichisavariationonstandardactualvs.expectedcalculations
Candidateswereexpectedtousereportedat12months,expectedreportedemergenceforthe
1224monthperiod,andthecurrentIBNRtosolveforthepercentreportedat12months
Candidatestookavarietyofapproaches:
o Thesampleanswer(fullcredit)
o Analternativeapproachinwhichtheycalculatedpercentofultimatebasedon
emergenceofincurredlossestobringfromAat12monthsto80%at24months.This
earnedpartialcreditasitdidnotincludeanyreferencetoIBNR
o AnotheralternativeapproachwhichcalculatedbasedondifferencebetweenAand80%
usingtheselectedultimate.Thisearnedpartialcreditasitwasbasedonultimateloss
andnottheIBNR.
o Asimplecalculationofreportedlossdividedbyultimatelossthisscoredminimal
creditsinceitwasusinganultimateselectiontoimplyapercentreportedratherthan
calculatingaselectedpercentreported.Inaddition,itmadetheassumptionthat
ultimatelosswasbasedsolelyuponreportedlossdevelopment
o Typically,pointsdeductedwerepredicatedontheapproachtaken,withrelativelyfew
instancesofcalculationerrors

EXAM5SPRING2014SAMPLEANSWERSANDEXAMINERSREPORT
Partb

Thecandidatewasexpectedtoknowthecaseoutstandingdevelopmenttechniqueandbeable
toapplyit.Thiswasexplicitlystatedinthequestion.
Thecandidatewasexpectedtoknowtheformulaforthetechnique,andsubstitutethe
appropriatevalues.
Commonmistakesincluded:
o Omittingthe+1factorintheformula,inessencecalculatingIBNRandnotunpaid
o Calculatingcaseoutstandingincorrectly,eitherbyusingincorrectperiods,using
incremental1224insteadofcumulative,orsomeothermethod
o Usingincorrectdevelopmentfactors,particularlythatatage12andnotage24
o AttemptingtosolvetheproblembyreplicatingthetablesinFriedlandsApproach#1,
butnotrecognizingthecorrectmethodofutilizingtheUnpaid/CaseOutstanding
calculation