CAS Exam With 100% Correct
Answers
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 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 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
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 base rates, rating factors and
fees needed to calculate premium<br>3. Rating Algorithm - provides detailed instructions on
how to calculate the policy premium<br>4. Underwriting Guidelines - not always included in
rating manual, but contains decisions to accept, decline, or refer risks, company placement and
tiering strategy
Base Risk - CORRECT ANSWER✔✔Specific risk characteristics selected by insurer that may be
the most common or selected based on marketing purposes - the base rate is applicable to the
base risk
Rating Variables - CORRECT ANSWER✔✔Used to adjust the base rate for different
characteristics, may be multiplicative or additive. Sometimes refered to as discounts/surcharges
or credits/debits
Rating Algorithm - CORRECT ANSWER✔✔Includes items such as:<br>Order to consider rating
variables<br>How rating variables are applied (multiplicative vs. additive)<br>Max and Min
Premiums<br>Rounding instructions<br><br>Algorithms often vary by coverage type
, Why would an insurance company write business under different companies? - CORRECT
ANSWER✔✔1. Way to sell similar products at different rates for risks with varying u/w
characteristics<br>2. Regulatory Issues - cannot get all rate options approved for a single
company<br>3. Different distribution systems of using agents vs. direct sales
What are three considerations to make when there is limited data available for a rate review? -
CORRECT ANSWER✔✔1. Must be aware of the impact on the analysis<br>2. Should examine
how sensitive the results are to various assumptions<br>3. Select data the minimizes distortions
in results
What are the two main types of internal data used in the ratemaking process? - CORRECT
ANSWER✔✔1. Risk information - exposures, premium, claim counts, losses, and explanatory
characteristics (data usually stored in two databases - a policy database and a claims
database)<br>2. Accounting information - underwriting expenses, ULAE (this data is not specific
to one policy or even a single line of business)
What three objectives apply when aggregating data for ratemaking? - CORRECT ANSWER✔✔1.
Accurately match losses and premium for the policy<br>2. Use the most recent data
available<br>3. Minimize data collection and retrieval costs
Advantages and Disadvantages of Calendar Year Aggregation for ratemaking - CORRECT
ANSWER✔✔<u><b>Advantages</u></b><br>No future development<br>Readily Available
(most financial reporting done on a CY basis)<br>Most responsive to ratemaking because there
is no delay due to developing losses<br><br><u><b>Disadvantages</u></b><br>Mismatch
between premium and losses
Advantages and Disadvantages of Accident Year Aggregation for ratemaking - CORRECT
ANSWER✔✔<u><b>Advantages</u></b><br>Better match of premium and losses than
CY<br>Most common grouping of claims data and easy to
explain<br><br><u><b>Disadvantages</u></b><br>Must estimate future development on
claims<br>Requires adjustment for audits and rates
Answers
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 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 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
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 base rates, rating factors and
fees needed to calculate premium<br>3. Rating Algorithm - provides detailed instructions on
how to calculate the policy premium<br>4. Underwriting Guidelines - not always included in
rating manual, but contains decisions to accept, decline, or refer risks, company placement and
tiering strategy
Base Risk - CORRECT ANSWER✔✔Specific risk characteristics selected by insurer that may be
the most common or selected based on marketing purposes - the base rate is applicable to the
base risk
Rating Variables - CORRECT ANSWER✔✔Used to adjust the base rate for different
characteristics, may be multiplicative or additive. Sometimes refered to as discounts/surcharges
or credits/debits
Rating Algorithm - CORRECT ANSWER✔✔Includes items such as:<br>Order to consider rating
variables<br>How rating variables are applied (multiplicative vs. additive)<br>Max and Min
Premiums<br>Rounding instructions<br><br>Algorithms often vary by coverage type
, Why would an insurance company write business under different companies? - CORRECT
ANSWER✔✔1. Way to sell similar products at different rates for risks with varying u/w
characteristics<br>2. Regulatory Issues - cannot get all rate options approved for a single
company<br>3. Different distribution systems of using agents vs. direct sales
What are three considerations to make when there is limited data available for a rate review? -
CORRECT ANSWER✔✔1. Must be aware of the impact on the analysis<br>2. Should examine
how sensitive the results are to various assumptions<br>3. Select data the minimizes distortions
in results
What are the two main types of internal data used in the ratemaking process? - CORRECT
ANSWER✔✔1. Risk information - exposures, premium, claim counts, losses, and explanatory
characteristics (data usually stored in two databases - a policy database and a claims
database)<br>2. Accounting information - underwriting expenses, ULAE (this data is not specific
to one policy or even a single line of business)
What three objectives apply when aggregating data for ratemaking? - CORRECT ANSWER✔✔1.
Accurately match losses and premium for the policy<br>2. Use the most recent data
available<br>3. Minimize data collection and retrieval costs
Advantages and Disadvantages of Calendar Year Aggregation for ratemaking - CORRECT
ANSWER✔✔<u><b>Advantages</u></b><br>No future development<br>Readily Available
(most financial reporting done on a CY basis)<br>Most responsive to ratemaking because there
is no delay due to developing losses<br><br><u><b>Disadvantages</u></b><br>Mismatch
between premium and losses
Advantages and Disadvantages of Accident Year Aggregation for ratemaking - CORRECT
ANSWER✔✔<u><b>Advantages</u></b><br>Better match of premium and losses than
CY<br>Most common grouping of claims data and easy to
explain<br><br><u><b>Disadvantages</u></b><br>Must estimate future development on
claims<br>Requires adjustment for audits and rates
