2008 #29 (a)

[Invicta]

Question reads: Explain the impact of this new characteristic on both companies assuming that Company ABC implements the new rating characteristic while maintaining the same average rate and that XYZ maintains its existing rating plan.

Is this a miswording? I would have read this as Company ABC implemented the new rating variable but used the same average rate from before (without the new r.v.)

[Vorian Atreides]

No . . . ABC implements the new rating characteristic, lowering the rate for some and increasing the rate for others (and not changing the rate on most). The "maintaining the same average rate" simply means that they're taking in the same amount of premium after the implementation as before--recall that average rate = total_prem / total_exposures.

Hopefully, you'll see that company ABC will now be skimming the cream while XYZ will begin to experience adverse selection.