Faculty of Actuaries Institute of Actuaries

2010 Examinations

SPECIMEN EXAMINATION

Subject ST8 — General Insurance: Pricing

Specialist Technical

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

1. Enter all the candidate and examination details as requested on the front of your answer
booklet.

2. You have 15 minutes before the start of the examination in which to read the
questions. You are strongly encouraged to use this time for reading only, but notes
may be made. You then have three hours to complete the paper.

3. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

4. Mark allocations are shown in brackets.

5. Attempt all eight questions, beginning your answer to each question on a separate
sheet.

6. Candidates should show calculations where this is appropriate.

AT THE END OF THE EXAMINATION

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

Faculty of Actuaries
ST8 Specimen 2010 Institute of Actuaries
1 (i) Explain briefly the two types of variable which GLMs require in order to be
defined. [3]

(ii) Define the term categorical factor in the context of GLMs, giving an example.
[3]

(iii) Explain the expression ―interaction term‖ in the context of GLMs. [2]
[Total 8]

2 You are an actuary working for a newly established general insurance company. It
commences writing household contents insurance on 1 September 2009 writing
annual policies only. The company sells the following number of policies per month
in 2009:

Month Policies sold

September 1,000
October 1,500
November 2,000
December 2,500

(i) Describe the claims characteristics of household contents insurance. [4]

(ii) Calculate the average accident date for accidents occurring during 2009 by
considering the company’s exposure profile. Assume that policies incept on
the first day of the month in which they are sold. State any other assumptions
that you use. [4]
[Total 8]

3 Explain the five key modules of a catastrophe model. [10]

4 Discuss the key reasons for monitoring general insurance business written. [10]

5 For a number of years a reinsurer has written a working layer per event risk XL treaty
with unlimited reinstatements. The cedant places this treaty to protect the liability
element of a large book of private motor vehicle insurance. The reinsurer has recently
introduced a stability clause and an aggregate deductible to the layer.

(i) Define each of these new features and explain the impact of their introduction
on the expected cost of claims to the layer. [5]

(ii) State the advantages and disadvantages to both the reinsurer and the cedant of
the addition of each of these new features to the layer. [6]
[Total 11]

ST8 Specimen 2010—2

6 You are the actuary of a large general insurance company. You have been asked to
price a ―cross-class‖ deal for a customer. The policy will cover the customer’s motor
fleet and public liability requirements. Another general insurance company has
written the public liability cover in the past.

The proposed structure for the policy is as follows:

Motor: the general insurance company will provide unlimited cover for any
individual loss.

Public liability: the limit of indemnity on any one individual loss is £250m.

The customer retains a deductible of £0.5m on each and every loss for the
complete programme subject to an annual aggregate deductible of £15m.

(i) Outline the concerns you would have with this proposed structure. [3]

The customer has provided you with a large database of their individual claims data,
as well as relevant exposure measures, for the past 10 years.

(ii) Explain how you would calculate a risk premium for this product using the
information on this database. [10]
[Total 13]

ST8 Specimen 2010—3 PLEASE TURN OVER

7 A motor underwriter has approached you for assistance with a new business premium
quote on a fleet of 100 heavy goods vehicles commencing 1 January 2010. She has
supplied you with the following unprojected historical claims data from the existing
insurer as at 31 October 2009.

Incurred Claim amounts in £000’s

Accident Own Third Party Third Party Earned

Year Damage Damage Personal Vehicle
Incurred Incurred Injury Years
Costs Costs Incurred Costs

2005 44 30 55 80
2006 56 32 61 88
2007 42 35 51 90
2008 70 50 35 92
2009 40 30 20 98

The following additional information is available:

The prospective insured has always renewed the policy on 1 January each year.

Damage inflation has been 4% p.a. for many years.

Personal Injury inflation has been 7% p.a. in each of the calendar years 2005 to 2007,
then 9% p.a. from calendar year 2008.

Incurred Claims as a percentage of Annual Ultimate Projected Claims are estimated

from internal data to be:

As at development month
10 22 34 46 58

Own Damage 70% 95% 105% 102% 100%

Third Party 45% 80% 95% 100% 100%
Damage
Third Party 30% 55% 75% 85% 95%
Injury

Commission is 15%. Expenses are £100 per policy, £10 per vehicle and 7% of claims
costs. Insurance Premium Tax can be ignored.

Profit and contingency loading is 5% of the overall gross written premium.

(i) Estimate the annual premium to charge the prospective client, using the data
provided, stating any assumptions you make. [11]

You have predicted that the average annual premium charged per vehicle during
January 2010 on your company’s existing account of 25,000 heavy goods vehicles
will be £3,750. You decide to recalculate the premium using a credibility approach.

ST8 Specimen 2010—4

 (ii) Recalculate the annual premium assuming you use a credibility factor for the
fleet’s own experience as:

Z = minimum (1, 1 – / )

where

= the standard deviation of the yearly projected burning cost per vehicle
observed from the five year data

= the average of the yearly projected burning cost per vehicle observed from
the five year data [4]

(iii) Explain why the premium charged in practice may not equal the premiums
calculated in parts (i) or (ii). [5]
[Total 20]

8 You are the actuary of a large general insurance company that only sells insurance to
large international companies. The underwriters are considering entering the smaller
end of the commercial market through the creation of a new product that covers the
insurance needs of construction and engineering tradesmen who are either sole
traders, partnerships or limited companies with up to five employees.

(i) Describe the distribution channels through which this new product could be
sold. [8]

(ii) Compare the marketing methods in part (i) to those which would be used for
the insurer’s existing business. [2]

(iii) Describe the types of commercial insurance that these tradesmen may wish to
purchase. [10]
[Total 20]

END OF PAPER

ST8 Specimen 2010—5