CAS Exam 5 Questions & Answers
(Grade A+)
What are the 4 common classifications of underwriting expense? -
correct 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? -
correct 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? -
correct answer ✅Price = Cost + Profit<br><b>Premium = Losses +
LAE + UW Expenses + UW Profit<b>
What is the primary goal of ratemaking? -
correct answer ✅The primary goal is to have a balanced
fundamental insurance equation.
What is the first CAS ratemaking principle? -
correct 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
,CAS Exam 5 Questions & Answers
(Grade A+)
the components of the fundamental insurance equation must be
estimated.
What is the second CAS ratemaking principle? -
correct 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? -
correct 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 -
correct 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
Severity -
correct answer ✅Total Losses/# of claims<br>Provides information
,CAS Exam 5 Questions & Answers
(Grade A+)
on loss trends and the impact of changes in claims handling
procedures<br>Can be paid, reported, or ultimate severity
Pure Premium (Loss Cost) -
correct 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 -
correct 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 -
correct answer ✅Total LAE/Total Losses<br>Used to monitor
stability of costs assocaited with claims settlement procedures
Underwriting Expense Ratio -
correct 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
, CAS Exam 5 Questions & Answers
(Grade A+)
Operating Expense Ratio (OER) -
correct answer ✅U/W Exp Ratio + LAE/Earned Premium
Combined Ratio -
correct answer ✅Loss Ratio + OER<br> This is the primary
measure of profitability of a book of business
Retention -
correct 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) -
correct 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? -
correct 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 as
(Grade A+)
What are the 4 common classifications of underwriting expense? -
correct 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? -
correct 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? -
correct answer ✅Price = Cost + Profit<br><b>Premium = Losses +
LAE + UW Expenses + UW Profit<b>
What is the primary goal of ratemaking? -
correct answer ✅The primary goal is to have a balanced
fundamental insurance equation.
What is the first CAS ratemaking principle? -
correct 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
,CAS Exam 5 Questions & Answers
(Grade A+)
the components of the fundamental insurance equation must be
estimated.
What is the second CAS ratemaking principle? -
correct 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? -
correct 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 -
correct 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
Severity -
correct answer ✅Total Losses/# of claims<br>Provides information
,CAS Exam 5 Questions & Answers
(Grade A+)
on loss trends and the impact of changes in claims handling
procedures<br>Can be paid, reported, or ultimate severity
Pure Premium (Loss Cost) -
correct 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 -
correct 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 -
correct answer ✅Total LAE/Total Losses<br>Used to monitor
stability of costs assocaited with claims settlement procedures
Underwriting Expense Ratio -
correct 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
, CAS Exam 5 Questions & Answers
(Grade A+)
Operating Expense Ratio (OER) -
correct answer ✅U/W Exp Ratio + LAE/Earned Premium
Combined Ratio -
correct answer ✅Loss Ratio + OER<br> This is the primary
measure of profitability of a book of business
Retention -
correct 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) -
correct 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? -
correct 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 as
