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CAS Exam 5 Questions with 100% Verified Answers
UPDATED!!!
What are the 4 common classifications of underwriting
expense? - ANSWER 1. Commissions and Brokerage<br>2.
Other acquisition<br>3. General<br>4. Taxes, Licenses, and Fees
(not including federal income tax)
What are the two main sources of underwriting profit? -
ANSWER 1. Operating Income (pure underwriting profit)
generated from individual insurance policies<br>2. Investment
income generating by investing funds held by company
What is the Product Pricing Fundamental Equation adapted for
insurance companies? - ANSWER Price = Cost +
Profit<br><b>Premium = Losses + LAE + UW Expenses + UW
Profit<b>
What is the primary goal of ratemaking? - ANSWER The primary
goal is to have a balanced fundamental insurance equation.
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What is the first CAS ratemaking principle? - ANSWER <b>A rate
is an estimate of the expected value of future costs</b><br>
Since ratemaking is a prospective process, the cost of insurance
is unknown when the product is sold, therefore the
components of the fundamental insurance equation must be
estimated.
What is the second CAS ratemaking principle? - ANSWER <b>1.
A rate provides for all costs associated with the transfer of
risk.<br>2. Equilibrium should be achieved at the aggregate
level.</b><br> The goal of ratemaking is to have a balanced
fundamental insurance equation.
What is the third CAS ratemaking principle? - ANSWER <b>A
rate provides for the costs associated with an individual risk
transfer</b><br>A policy with more risk should cost more (E.g.
WC - steel worker on a high-rise vs. a clerical worker)
Frequency - ANSWER Frequency = # of claims/# of
exposures<br>Used to identify trends in claims occurrence or
ulitization and to measure the effectiveness of u/w actions<br>
Most commonly use reported claims to earned exposures
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Severity - ANSWER Total Losses/# of claims<br>Provides
information on loss trends and the impact of changes in claims
handling procedures<br>Can be paid, reported, or ultimate
severity
Pure Premium (Loss Cost) - ANSWER Total Losses/# of
Exposures = Frequency x Severity<br> Highlights trends in
overall loss costs due to changes in both frequency and severity
Average Premium - ANSWER Total Premium/# of
Exposures<br>Highlights changes in the mix of
business<br>Premium and Exposure should be on the same
basis (earned, written, etc)
Loss Adjustment Expense Ratio - ANSWER Total LAE/Total
Losses<br>Used to monitor stability of costs assocaited with
claims settlement procedures
Underwriting Expense Ratio - ANSWER Total U/W Expense/Total
Premium<br>May be broken into two pieces to better match
expense to associated premium:<br>Expenses incurred at the
onset of the policy/Written Premium and Expenses incurred
throughout the policy/Earned Premium
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Operating Expense Ratio (OER) - ANSWER U/W Exp Ratio +
LAE/Earned Premium
Combined Ratio - ANSWER Loss Ratio + OER<br> This is the
primary measure of profitability of a book of business
Retention - ANSWER # of policies renewed/# of policies
available to renew<br>Helps determine competitiveness of
rates, Closely monitored following rate changes and major
changes in service, and a key parameter in projecting future
premium volume
Close Ratio (Hit Ratio or Conversion Rate) - ANSWER # of
accepted Quotes/# of Quotes<br> Measures the rate at which
prospective insureds accept a quote for new business, and is
useful for product management and marketing
What are the four common components of a rating manual? -
ANSWER 1. Rules - contains qualitative info to help user with
algorithms (such as definitions, available policy forms,
classification of risk, etc.)<br>2. Rate Pages - contains #'s such
CAS Exam 5 Questions with 100% Verified Answers
UPDATED!!!
What are the 4 common classifications of underwriting
expense? - ANSWER 1. Commissions and Brokerage<br>2.
Other acquisition<br>3. General<br>4. Taxes, Licenses, and Fees
(not including federal income tax)
What are the two main sources of underwriting profit? -
ANSWER 1. Operating Income (pure underwriting profit)
generated from individual insurance policies<br>2. Investment
income generating by investing funds held by company
What is the Product Pricing Fundamental Equation adapted for
insurance companies? - ANSWER Price = Cost +
Profit<br><b>Premium = Losses + LAE + UW Expenses + UW
Profit<b>
What is the primary goal of ratemaking? - ANSWER The primary
goal is to have a balanced fundamental insurance equation.
, Page |2
What is the first CAS ratemaking principle? - ANSWER <b>A rate
is an estimate of the expected value of future costs</b><br>
Since ratemaking is a prospective process, the cost of insurance
is unknown when the product is sold, therefore the
components of the fundamental insurance equation must be
estimated.
What is the second CAS ratemaking principle? - ANSWER <b>1.
A rate provides for all costs associated with the transfer of
risk.<br>2. Equilibrium should be achieved at the aggregate
level.</b><br> The goal of ratemaking is to have a balanced
fundamental insurance equation.
What is the third CAS ratemaking principle? - ANSWER <b>A
rate provides for the costs associated with an individual risk
transfer</b><br>A policy with more risk should cost more (E.g.
WC - steel worker on a high-rise vs. a clerical worker)
Frequency - ANSWER Frequency = # of claims/# of
exposures<br>Used to identify trends in claims occurrence or
ulitization and to measure the effectiveness of u/w actions<br>
Most commonly use reported claims to earned exposures
, Page |3
Severity - ANSWER Total Losses/# of claims<br>Provides
information on loss trends and the impact of changes in claims
handling procedures<br>Can be paid, reported, or ultimate
severity
Pure Premium (Loss Cost) - ANSWER Total Losses/# of
Exposures = Frequency x Severity<br> Highlights trends in
overall loss costs due to changes in both frequency and severity
Average Premium - ANSWER Total Premium/# of
Exposures<br>Highlights changes in the mix of
business<br>Premium and Exposure should be on the same
basis (earned, written, etc)
Loss Adjustment Expense Ratio - ANSWER Total LAE/Total
Losses<br>Used to monitor stability of costs assocaited with
claims settlement procedures
Underwriting Expense Ratio - ANSWER Total U/W Expense/Total
Premium<br>May be broken into two pieces to better match
expense to associated premium:<br>Expenses incurred at the
onset of the policy/Written Premium and Expenses incurred
throughout the policy/Earned Premium
, Page |4
Operating Expense Ratio (OER) - ANSWER U/W Exp Ratio +
LAE/Earned Premium
Combined Ratio - ANSWER Loss Ratio + OER<br> This is the
primary measure of profitability of a book of business
Retention - ANSWER # of policies renewed/# of policies
available to renew<br>Helps determine competitiveness of
rates, Closely monitored following rate changes and major
changes in service, and a key parameter in projecting future
premium volume
Close Ratio (Hit Ratio or Conversion Rate) - ANSWER # of
accepted Quotes/# of Quotes<br> Measures the rate at which
prospective insureds accept a quote for new business, and is
useful for product management and marketing
What are the four common components of a rating manual? -
ANSWER 1. Rules - contains qualitative info to help user with
algorithms (such as definitions, available policy forms,
classification of risk, etc.)<br>2. Rate Pages - contains #'s such
