With this column, we’re bringing back a Future Fellows series with a fresh perspective. In June 2021, “Exams In Real Life,” or “Exams IRL,” began as a way to examine how content from CAS exams are used on the job in real life. The Future Fellows issues this year have already addressed MAS I and II (see links below). This column will explore Exam 5-Basic Techniques for Ratemaking and Estimating Claim Liabilities. In essence, we would like to supply a little motivation by answering “Why am I learning this stuff?” and “When am I ever going to use any of it?” 

Exam 5 in many ways provides the foundational concepts for P&C actuarial work. All of us have likely been asked what we do for work, only to receive a blank stare of confusion when we respond, “I’m an actuary!” If the unknown of our profession piques the interest of our questioner, then the explanation we provide likely includes some idea from Exam 5. Statements like “I price insurance,” “I handle risk,” “I make sure insurance companies can pay their claims,” and “I predict the future” all point to Exam 5. 

“I price insurance.” 

This exam has two overarching sections in its syllabus, the first being ratemaking: the “rate” being the price, or premium, an insured will pay and the “making” being the process of finding said price. Exam 5 covers ratemaking ideas such as trending, on-leveling, development, and expense or profit loads. Many entry-level actuarial analysts utilize these concepts early in their careers during rate reviews. It all leads to an “indication,” a target amount the aggregate premium for a book of business needs to change. Studying for Exam 5 will provide the opportunity to dive deep into the math behind the indications process and better understand assumptions and alternative methods along the way. 

“I handle risk.” 

Another critical component of the ratemaking section on Exam 5 is risk classification. In pricing insurance, actuaries can successfully select a percentage by which the aggregate premium should change, but if attention isn’t paid to the resulting impact on individual policyholders, rates can quickly become inaccurate. Learning about the pitfall of adverse selection and how to avoid it is critical to an actuary’s success, and Exam 5 provides the first look at how to practice favorable selection. CAS candidates will learn how to analyze whether risk characteristics are useful and appropriate. For example, a vehicle’s model year may be very useful at differentiating insureds, but using a variable like household income is likely to be considered an invasion of privacy and therefore shouldn’t be used. After the right combo of characteristics is found, Exam 5 teaches how they can be used to accurately make a rate, or price, at an individual level. 

“I make sure insurance companies can pay their claims.” 

The other section of the Exam 5 syllabus is reserving. Again, reserving concepts are sometimes used by actuaries on day one of their careers. But in taking this exam, candidates get to expand their knowledge about the goals of reserving, how each of the reserving methods work, and how to recognize situations where each method can be used. The reserve amounts selected can significantly impact the operations of an insurance company. Pick reserves that are too high and profit could appear low, leading to weary investors or skeptical regulators. Pick too low and a deteriorating loss experience could lead to an inability to indemnify insureds. 

“I predict the future.” 

The saying goes, “history repeats itself.” Actuaries may rely on this truth more so than any other profession. At its core, Exam 5 is all about using the past, with strict assumptions and proven practices, to predict the future (with some uncertainty of course). This involves everything already discussed as well as important topics such as credibility, statistical modeling and adjusting for anomalies in loss experience. The final boss of Exam 5 is cohesively putting it all together to craft our best guess of what the future will hold and the response best suited to the possibilities. 

Every actuarial exam we take is challenging, stressful and ultimately rewarding. The first few exams lay a mathematical foundation actuaries need. Exam 5 is the first where real-world application is paramount in everything you learn. The methods and concepts acquired will guide you for the rest of your actuarial career!

Exams IRL 2024 Archive 

MAS I 

MAS II