Actuarial Outpost > SoA Module 5 #17 (incorrect answer on test?)
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#1
08-21-2006, 01:54 AM
 A_person Join Date: Oct 2004 Posts: 18
Module 5 #17 (incorrect answer on test?)

A few people on the FAP discussion forum discussed whether the test reports the wrong answer. After two people commented on the question, no one responded either way. Can anyone match the answer on the module test? The question is:

You are the actuary for a small group health company and have the following information:

Rate levels are currently adequate under the following expense assumptions:

Claim costs: 70%
Commissions: 12%
Taxes: 3%
Profit & Risk: 5%

If administrative expenses remain at the same dollar level and the current gross premium is \$1,000, what would the gross premium be if commissions are reduced to 10%?

A) 972
B) 976 (answer I would expect)
C) 977 (indicated answer on test)
D) 978
E) 982

I would think that the solution would be:
(1000 * (.7 (claim costs) + .10 (administration expenses)) / (1 - .1 - .03 - .05) = 975.61
#2
08-21-2006, 07:26 AM
 IT Refugee Member Join Date: Jun 2004 Posts: 133

I think they want you to assume that the dollar amount of the profit does not change. If you make that assumption, that moves the 0.05 out of the denominator and into numerator. The second time I took the test I ended up with 850 / .87 which equals answer C.
#3
08-21-2006, 07:35 AM
 ReddEye Member SOA Join Date: Aug 2006 Location: Cubicle City, USA Favorite beer: real alcoholics don't drink beer Posts: 941

I believe the SOA has realized they fooked up (again).

On the FAP forum there is a thred in the "General Study Discussion" forum dated 8/13 (originally from Jeffrey Jardin). A response there indicates that B is correct and it wil be revised.

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