CAS CAS Loss Reserving and Ratemaking Fundamentals 1 — Questions and Answers
Question 1: What is the primary purpose of loss reserves in property-casualty insurance?
- To fund marketing expenses
- To represent the insurer's estimated obligation for unpaid claims (Correct answer)
- To pay policyholder dividends
- To fund reinsurance premiums
Correct answer: To represent the insurer's estimated obligation for unpaid claims
Loss reserves are a balance sheet liability representing the insurer's best estimate of future payments for claims that have already occurred.
Question 2: What does IBNR stand for in actuarial reserving?
- Insured But Not Renewed
- Incurred But Not Reported (Correct answer)
- Indemnity Based Net Reserve
- Internal Balance Net Ratio
Correct answer: Incurred But Not Reported
IBNR (Incurred But Not Reported) reserves cover losses that have occurred but have not yet been reported to the insurer.
Question 3: The chain-ladder loss development method organizes data using which structure?
- Scatter plots
- Loss development triangles (Correct answer)
- Bar charts
- Linear regression tables
Correct answer: Loss development triangles
The chain-ladder method arranges cumulative loss data in development triangles by accident year and development period to project losses to ultimate.
Question 4: What is a loss development factor (LDF)?
- A ratio used to project losses from one development period to the next (Correct answer)
- The insurer's overall loss ratio
- A measure of policyholder risk class
- The reinsurance retention level
Correct answer: A ratio used to project losses from one development period to the next
LDFs (age-to-age factors) are ratios derived from historical triangles that project cumulative losses from one evaluation period to a later period.
Question 5: The Bornhuetter-Ferguson reserving method blends which two approaches?
- The loss development method and the expected loss method (Correct answer)
- Chain-ladder and simulation
- Frequency and severity models
- Paid and incurred loss development separately
Correct answer: The loss development method and the expected loss method
The Bornhuetter-Ferguson method combines the chain-ladder development method with the expected loss (a priori) method using credibility weighting.
Question 6: What is the key difference between case reserves and IBNR reserves?
- Case reserves are set by actuaries only
- Case reserves are for known individual claims; IBNR covers unreported and development on reported claims (Correct answer)
- Case reserves apply only to property claims
- IBNR applies only to liability claims
Correct answer: Case reserves are for known individual claims; IBNR covers unreported and development on reported claims
Case reserves are established by claims adjusters for specific known claims, while IBNR covers claims not yet reported and additional development on known claims.
CAS CAS Loss Reserving and Ratemaking Fundamentals 1
What is the primary purpose of loss reserves in property-casualty insurance?