Old Exam 5 2010#28

[Hiu]

It is related to Ch.14 of Werner & Modlin textbook.

As to queestion(c), my solution is

1. Proposed Avg Prem per Exposure=110*1.0625=116.875

2. Proposed Avg Varible Premium per Expo=116.875-14.61(new expense fee from question b)=102.265

3. Proposed Avg Differential=(100*0.855+200*0.95+300*0.9+400*1)/1000=0.9455

4. Proposed Base Rate=102.265/.9455=108.16


But the CAS answer is 90*1.0625/(Proposed Avg Diff/Current Avg Diff)=97.68.

Anyone found something wrong with the solution?

[Vorian Atreides]

There's a problem with the problem itself--the result of someone "making stuff up" for the problem and not checking every angle of the problem.

To start with, note that the current implied expense fee is $23.13, which equates to a 16% Fixed Expense ratio to premium. So, right off, it's expected that the Expense fee is to decrease; and given that an overall increase is indicated, this means that this difference in expense fee (23.13 - 14.61 = 8.52) ought to be included with the variable premium (on average) on top of the indicated change.

It is this oversight on the change in the expense fee that is the major difference between your solution and the Exam solution. Your method implicitly accounts for this change while the Exam's solution does not.

Put another way, your solution should still get full credit, IMO.

(However, the Exam's solution is still valid with the above noted exception.)

[SMMBB]

(However, the Exam's solution is still valid with the above noted exception.)

I disagree. The current base rate implies that the current expense fee must be $23.13 (110-90*.9653). Nowhere in the problem does it state that the indicated Fixed expense ratio is constant in both current and proposed rates. A base rate indication of $108.16 is the only answer that is consistent with the information given. The model solution is flawed in my opinion.

I'd love to hear anyone else's thoughts on this.

[SMMBB]

It's problems like this that really piss me off. I feel they penalize people with enough insight to see that the question could be handled in two different ways because you then have to decide which way to go. And then when the model solution comes out, it's done the opposite way so you don't even know if you've got full credit for it.

If I encounter the problem while preparing for the next sitting, I have to scratch my head at the model solution, check for alternatives to the model solution, then give my opinion on which one should really have been accepted. While fuming about it, I then think about the fact that if I don't score at least 78% on the exam I'm going to be writing again next year and if there are enough questions like this, there's no way I'm going to finish in time because I'll keep second-guessing myself.

So I wind up wasting valuable study time, burning through critical exam writing time and losing quality family time.