AU 60 - Assignment 7 - Pricing The Insurance Product
Class Rate
A ____ rate for a particular classification reflects the aggregate loss experience of similar accounts included within that classification.
Catastrophe Model
A ____, which incorporates past experience with scientific theory, is often used to calculate an appropriate charge for potential losses.
Increased limit factor
A factor applied to the rates for basic limits to arrive at an appropriate rate for higher limits.
Exposure unit
A fundamental measure of the loss exposure assumed by an insurer.
Pure premium method
A method for calculating insurance rates using estimates of future losses and expenses, including a profit and contingencies factor.
Loss ratio method
A method for determining insurance rates based on a comparison of actual and expected loss ratios.
Judgment ratemaking method
A method for determining insurance rates that relies heavily on the experience and knowledge of an actuary or an underwriter who makes little or no use of loss experience data.
B. Investment operations.
A property-casualty insurer performs the two distinct operations of insurance operations and A. Regulatory operations. B. Investment operations. C. Marketing operations. D. Safety operations.
Blanket highest rate
A rate that can be used for blanket coverage at multiple locations that uses the highest rate applicable to any one location.
C. Expense modification.
A rating plan that adjusts the insured premium for savings in insurance company commissions is called A. Experience. B. Rebating. C. Expense modification. D. Participating.
Retrospective rating plan
A rating plan that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
True
(T/F) Participating plans can usually also be applied to accounts that are schedule rated and experience rated.
Retrospective premium
= (Basic premium + Converted losses) × Tax Multiplier
C. Midterm pricing is performed.
All of the following apply to composite-rating plans, EXCEPT: A. Some insurers develop proprietary composite rating plans. B. They are used on larger accounts. C. Midterm pricing is performed. D. One premium base is used for the entire account.
Risk charge
An amount over and above the expected loss component of the premium to compensate the insurer for taking the risk that losses may be higher than expected.
B. $40.
Auto Insurer B is calculating the pure premium based on insured losses of $8 million and earned-car years of 200,000. The pure premium is A. $20. B. $40. C. $200. D. $400.
Underwriting expenses
Costs incurred by an insurer for operations, taxes, fees, and the acquisition of new policies.
A. Terrorism coverage
For which one of the following types of insurance would the judgment method of ratemaking most likely be used? A. Terrorism coverage B. Professional liability coverage C. Workers compensation coverage D. Crime coverage
D. By purchasing reinsurance
How do most insurers decrease their catastrophe exposure? A. Through the use of warranty funds B. Through self-retention of risk C. By establishing reserves D. By purchasing reinsurance
Underwriting profit
Income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses.
C. Competitive
Insurance rate regulatory objectives include all of the following, EXCEPT: A. Adequate B. Not unfairly discriminatory C. Competitive D. Not excessive
Incurred
Insurance rates are based partly on ____ losses. These losses include both paid losses and outstanding loss reserves.
B. The appropriate number of exposure units.
Once an insurance rate is calculated, it is multiplied by which one of the following to produce a premium? A. The expense factor. B. The appropriate number of exposure units. C. The pure premium. D. The desired policy limits.
Pure Premium
The ____ (the amount needed to pay losses and, depending on the line of business, allocated loss adjustment expenses) is calculated by dividing the dollar amount of incurred losses by the number of earned exposure units.
Allocated loss adjustment expense (ALAE)
The expense an insurer incurs to investigate, defend, and settle claims that are associated with a specific claim.
Experience period
The period for which all pertinent statistics are collected and analyzed in the ratemaking process.
Loss costs
The portion of the rate that covers projected claim payments and loss adjusting expenses.
Amount subject
The total value exposed to loss at any one location from any one event.
Premium base
The unit in which the exposure is measured, such as gross sales or payroll.
Blanket Highest Rate
With the ____, the highest rate applicable to any one type of covered property is used on all covered property at all locations when more than one rate applies to property covered by a blanket insurance policy.
Blanket insuranceI
nsurance that covers either of the following with one limit of insurance: (1) one type of property in one or more separately rated buildings or (2) two or more types of property in one or more separately rated buildings.
D. 5 years
How many years of loss experience do most states require insurers to use for fire insurance ratemaking purposes? A. 1 year B. 1 - 3 years C. 3 - 5 years D. 5 years
A. Only basic limit losses.
Unusual rate fluctuations could result from occasional large losses, whether from large individual losses or from an accumulation of smaller losses from a single event. In liability insurance, these fluctuations are controlled by using A. Only basic limit losses. B. A minimum of five years of loss data. C. Credibility factors. D. A risk charge.
Catastrophe model
A type of computer program that estimates losses from future potential catastrophic events.
Judgment rate
A type of individual rate that is used to develop a premium for a unique exposure for which there is no established rate.
Class rate
A type of insurance rate that applies to all insureds in the same rating category or rating class.
C. Specific fire rate.
An insurance rate developed by an ISO field representative through a physical visit to a particular property and development of an individual advisory loss cost is known as a A. Judgment rate. B. Class rate. C. Specific fire rate. D. Experience rate.
Specific fire rate
An insurance rate that is developed by ISO field representatives through a physical visit to a property and development of an individual advisory loss cost.
Expense modification
An insurance rating plan that modifies the expense portion of an insured's rate to reflect the actual cost of providing coverage to that insured.
Composite rating
An optional insurance pricing approach that uses a premium base other than the one specified in the rating manual to price an entire account.
B. $100
Auto Insurer T insured 100,000 cars each year during a three year experience period, and its incurred losses were $30 million. What is the pure premium per car year? A. $30 B. $100 C. $300 D. $1,000
C. $78
Given the following data and using the pure premium ratemaking method, calculate the insurance rate (rounded). Incurred losses $750,000 Earned exposure units 12,500 Fixed expenses per exposure unit $15 Profit and contingencies factor 4% A. $58 B. $63 C. $78 D. $187
A. $ 40.
Insurer X has $8 million in incurred losses. Its earned exposure units are 200,000. The pure premium is A. $ 40. B. $ 80. C. $400. D. $800.
Availability
Some accounts have experienced ____ problems related to obtaining insurance coverage or purchasing insurance at an affordable price—effectively making insurance unavailable. For example, large losses resulting from hurricanes in coastal areas of the southeastern United States have led to availability problems as many insurers withdraw from providing coverage in those areas.
Schedule Rating Plan; Individual Risk Premium Modification Plans (IRPM)
The ____ in liability insurance allows underwriters to modify the final premium to reflect factors not included in the class rate. The ____ plan achieves the same result in property insurance.
C. Pure premium.
The amount included in the rate per exposure unit that is required to pay losses is the A. Claims premium. B. Base rate. C. Pure premium. D. Flat rate.
Rate Manual
A ____ contains not only the loss costs used for rating but also valuable additional information to support pricing decisions and provides important information concerning the use of endorsements that amend the policy.
Experience modification factor
A factor that tailors manual rates to an insured's experience based on the insured's payroll and loss record of certain prior years.
D. Investment operations.
A property-casualty insurer performs two distinct operations. They are insurance operations and A. Educational operations. B. Safety operations. C. Rating operations. D. Investment operations.
Not Unfairly Discriminatory
A rate is ____ if it equitably reflects the expected losses and expenses of the insured to whom it applies.
Not Excessive
A rate is considered ____ if it does not generate an unreasonable profit for the insurer.
Blanket average rate
A rate that can be used for blanket coverage at multiple locations instead of using the highest rate applicable to any one location.
Experience rating plan
A rating plan that increases or reduces the premium for a future period based on the insured's own loss experience for a period in the recent past.
Large deductible plan
A rating plan whereby the insured assumes a substantial per accident or per occurrence deductible, generally ranging from $100,000 up to $1 million.
Rate manual
A resource for classifying accounts and developing premiums for given types of insurance; includes necessary rules, factors, and guidelines to apply those rates.
Paid loss retrospective rating plan
A retrospective rating plan in which the insured pays a deposit premium at the beginning of the policy period and makes additional payments, usually monthly, to reimburse the insurer for the insured's losses as they are paid and in which the total amount paid is subject to the minimum and maximum premium.
Independence
A situation in which the occurrence of one event has no effect on the likelihood of the occurrence of any other event.
Simplicity
A social goal of insurance stating that a rate must be reasonably simple to develop and modify.
Stability
A social goal of insurance stating that rates should remain firm and change only when underlying costs have changed substantially.
Affordability
A social goal of insurance that states that a ceiling placed on rates keeps coverage available so people can purchase it, that rates are determined so that they transfer a portion of the costs of coverage from high-risk insureds to the remaining insureds, or that a subsidy from outside the insurance mechanism offsets premiums that are deemed unaffordable.
Availability
A social goal of insurance that states that insurance is accessible to those who want or need it.
C. $20,000
ABC Corp. is looking to insure two buildings under a blanket insurance policy. Each building has an insurable value of $1,000,000. The underwriter assigns the buildings a rating of $1.25 and $0.75 per $100 respectively. If the underwriter prices the insurance using blanket average rate, what should ABC Corp.'s premium be? A. $10,000 B. $12,500 C. $20,000 D. $25,000
D. $12,500
ABC Corp. is looking to insure two buildings under a blanket insurance policy. Each building has an insurable value of $500,000. The underwriter assigns the buildings a rating of $1.25 and $0.75 per $100 respectively. If the underwriter prices the insurance using blanket highest rate, what should ABC Corp.'s premium be? A. $5,000 B. $6,250 C. $10,000 D. $12,500
C. Ratemaking
Actuaries and underwriters both have roles in pricing insurance products. Which one of the following is actuaries' primary pricing role? A. Individual account pricing B. Account classification C. Ratemaking D. Application of premium modification plans
C. $60
Alpha Insurance Company (AIC) has incurred automobile insurance losses of $6 million and earned exposure units of 120,000 car-years. The company's expenses total $840,000. AIC's management wants to include a factor for profits and contingencies of five percent. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following represents the rate per exposure unit that AIC needs to charge for automobile insurance? A. $42 B. $55 C. $60 D. $77
Rate
An insurance ___ consists of three components: - An amount needed to pay future claims and loss adjustment expenses (prospective loss costs) - An amount needed to pay future expenses, such as acquisition expenses, overhead, and premium taxes (expense provision) - An amount for profit and contingencies (profit and contingencies factor)
B. $14,000 using a blanket average rate
Bob, an underwriter, has agreed to use blanket insurance to insure ABC Company's business personal property located in several buildings. The blanket rate has been determined to be 0.70 per $100 in value, and the total insurable value is $2 million. What is the total blanket premium Bob should charge ABC Company? A. $20,000 using a blanket highest rate B. $14,000 using a blanket average rate C. $1,400 using a blanket average rate
C. Past loss experience
In developing insurance rates, which one of the following is generally used as a starting point to estimate future losses? A. Current financial trends B. Exposure analysis based on physical inspections C. Past loss experience D. Current loss trends
D. Flat catastrophe charge.
In ratemaking, most losses from catastrophic events, such as hurricanes, are excluded from ratemaking data and replaced by a A. State wide severity trending factor. B. Risk charge. C. Increased limits factor. D. Flat catastrophe charge.
A. Underwriters need to be familiar with the rate applicable to each classification.
In underwriting an account, all of the following statements are true, EXCEPT: A. Underwriters need to be familiar with the rate applicable to each classification. B. Underwriters need to be familiar with the rating process for individual rating plans. C. Underwriters need to have a working knowledge of rates and rate levels for specified classes. D. Underwriters should ensure that each account is properly classified.
D. The insured receives no price advantage by being composite rated.
In which one of the following ways does composite rating differ from other pricing plans? A. All insureds are eligible for composite rating. B. No premium audit is necessary with composite rating. C. Composite rating modifies the expense portion of the insured's rate. D. The insured receives no price advantage by being composite rated.
C. Paid losses plus loss reserves.
Incurred losses consist of: A. Paid losses. B. Loss reserves. C. Paid losses plus loss reserves. D. Ultimate losses.
A. Blanket insurance.
Insurance coverage in which two or more types of property or locations are covered as a single location and subject to a single limit of insurance is known as A. Blanket insurance. B. Large deductible insurance. C. Schedule rating insurance D. Specific insurance.
Specific insurance
Insurance that covers each building for a specific limit of insurance and personal property at each building for a specific limit of insurance.
C. The insured can avoid being overinsured or underinsured for its various property exposures.
Insureds frequently request coverage of property on a blanket basis. Which one of the following is the primary benefit of blanket insurance to the insured? A. Blanket insurance covers a broader range of perils than specific insurance. B. Blanket insurance provides an extra layer of coverage once specific insurance limits are exceeded. C. The insured can avoid being overinsured or underinsured for its various property exposures. D. The blanket insurance premium is typically cheaper than several specific insurance premiums added together.
D. A 10 percent decrease in rates is indicated.
Insurer A has calculated its actual loss ratio to be 54 percent. The expected loss ratio was 60 percent. Using the loss ratio ratemaking method, which one of the following statements is true? A. A 6 percent rate increase is indicated. B. A 10 percent increase in rates is indicated. C. A 6 percent rate decrease is indicated. D. A 10 percent decrease in rates is indicated.
B. $15.
Insurer Y is using the pure premium ratemaking method in estimating expenses per exposure unit based on the insurer's past expenses. Insurer Y knows that incurred losses are $4 million including loss adjustment expenses of $500,000. All other expenses are $1.5 million. The earned-car years used in the calculations are 100,000. The expenses per exposure unit are A. $10. B. $15. C. $17. D. $20.
Investment income
Interest, dividends, and net capital gains received by an insurer from the insurer's financial assets, minus its investment expenses.
D. Judgment rates are developed by reviewing individual account characteristics.
One of the types of rates used by underwriters to price insurance is judgment rates. Which one of the following is true regarding judgment rates? A. Judgment rates are typically used by property underwriters. B. Judgment rates are used to support exposures with substantial loss experience. C. Judgment rates are usually developed by ISO field representatives. D. Judgment rates are developed by reviewing individual account characteristics.
C. Will result in rates that do not accurately reflect the future loss potential of the classes.
Properly classifying accounts is an important task for underwriters. The use of incorrect or random rate classifications A. Is common because underwriters have very few guidelines to follow when classifying accounts. B. Typically occur when underwriters do not consult underwriting technicians. C. Will result in rates that do not accurately reflect the future loss potential of the classes. D. Is an illegal method that insurer's often use to manipulate underwriting statistics.
Blanket Average Rate
The ____ is an alternative to using the blanket highest rate. It is employed when the insurer and the insured agree to use an average rate. The rate is a weighted average based on values at each location and the rate at each location.
A. The total value at risk
The analyst determining the appropriate experience period to be applied will consider all of these factors, EXCEPT: A. The total value at risk B. Legal requirements C. The credibility of the data D. The variability of losses over time
Ultimate loss
The final paid amount for all losses in an accident year.
Experience Rating
The important difference between experience rating and retrospective rating is that ____ uses loss experience from prior policy periods in determining the premium for the current policy period.
A. Estimating the amount of losses for those claims.
The key to developing insurance rates that are adequate to pay future claims is A. Estimating the amount of losses for those claims. B. Capitalizing on underwriting profits. C. Effectively managing investment income. D. Estimating loss adjustment expenses.
Credibility
The level of confidence an actuary has in projected losses; increases as the number of exposure units increases.
Basic limit
The minimum amount of coverage for which a policy can be written; usually found in liability lines.
Blanket Insurance
The policy declarations of an insurer and insured agreeing to use a ____ approach would show that two or more types of property or locations are covered as a single item, subject to a single limit of insurance often referred to as a blanket limit.
D. Rate manuals provide information concerning the use of endorsements that amend the policy.
To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which one of the following is true regarding rate manuals? A. Underwriters can typically rely solely on rate manuals to determine premiums for individual accounts. B. Rate manuals always contain an appropriate class or rate for each account. C. Underwriters typically use rate manuals to develop premiums for unique exposures for which there is no established rate. D. Rate manuals provide information concerning the use of endorsements that amend the policy.
Expense Modification Plans
Under ____, an underwriter uses his or her judgment to determine whether an account is expected to have fewer expenses than the average account with similar loss exposures. Account expense savings are usually derived from reduced commissions to producers and reduced risk control costs.
C. Permit loss data to mature.
When basing new rates on an experience period, a primary reason for an insurer to wait longer to start the ratemaking process is to A. Absorb economic market fluctuations. B. Properly allocate expenses. C. Permit loss data to mature. D. Allow for regulatory changes.
C. Rate manuals do not always contain the appropriate classification for an account.
Which one of the following is a limitation of rate manuals: A. Rate manuals do not include information regarding endorsements. B. Rate manuals are not frequently updated. C. Rate manuals do not always contain the appropriate classification for an account.
D. Loss severity is higher in upper layers.
Which one of the following is a reason why increased limits factors in general liability insurance are large? A. Data credibility is higher in upper layers. B. Large liability losses settle quickly. C. Reinsurance is not used to provide high limits. D. Loss severity is higher in upper layers.
A. Any delay between when data are collected and when they are used tends to reduce rate accuracy.
Which one of the following statements is correct with regard to insurance ratemaking? A. Any delay between when data are collected and when they are used tends to reduce rate accuracy. B. The period for which all pertinent ratemaking statistics are collected and analyzed is called the exposure unit. C. A typical schedule for developing, approving, and implementing new insurance rates spans six months. D. Insurers generally wait for all claims to be paid before using the loss experience in ratemaking.
C. Insurers are legally required to show loss reserves on their balance sheets.
Which one of the following statements is correct with regard to loss estimates? A. Past loss experience rarely is used to estimate future losses. B. The value of incurred losses for a given period can be easily determined. C. Insurers are legally required to show loss reserves on their balance sheets. D. If loss reserves are too low, rates will probably be too high.
A. A five-year experience period is used almost universally for fire insurance because it is required by law in many states.
Which one of the following statements is correct with respect to ratemaking for different types of insurance? A. A five-year experience period is used almost universally for fire insurance because it is required by law in many states. B. Loss development factors are generally used for fire, inland marine, and auto physical damage insurance. C. In fire insurance, trending of claim severity is done based on the average value of all fire insurance claims. D. Losses from catastrophic events are included in ratemaking data because of the possibility that catastrophes will occur in the future.
D. The judgment ratemaking method is used when limited data are available.
Which one of the following statements is correct? A. Insurers entering a new line of business use the loss ratio method to set their initial rates. B. The pure premium ratemaking method is the oldest ratemaking method. C. The loss ratio ratemaking method does not factor in profits and contingencies. D. The judgment ratemaking method is used when limited data are available.
A. The loss ratio ratemaking method cannot be used to determine rates for a new type of insurance.
Which one of the following statements is true regarding insurance ratemaking methods? A. The loss ratio ratemaking method cannot be used to determine rates for a new type of insurance. B. All ratemaking methods use an insurer's current rates in the calculation of new rates. C. Insurers commonly use only the pure premium method or the loss ratio method. D. There are many methods for adjusting an existing rate or for developing a new rate.
B. Trending of losses in fire insurance is generally restricted to claim severity.
Which one of the following statements is true regarding ratemaking in different types of insurance? A. Most losses from catastrophic events, such as hurricanes, are included in ratemaking data in the affected states. B. Trending of losses in fire insurance is generally restricted to claim severity. C. The experience period used for property causes of loss other than fire is usually five years or less. D. Applying loss development factors to data is critical when claims settle quickly and loss reserves are relatively small.
D. Composite rating
Which one of the following types of rating plans combines all of the base premiums calculated using manual rates and rating plans to arrive at a policy premium and average rate? A. Experience rating B. Retrospective rating C. Scheduled rating D. Composite rating
C. Participating plan
Which one of the following types of rating plans is used most commonly for workers compensation insurance? A. Rebate plan B. Individual risk premium modification plan C. Participating plan D. Composite rating plans
C. Generally, those insureds that are eligible to use experience rating are also eligible to use schedule rating.
Which one the following statements is true regarding schedule rating and individual risk premium modification plans? A. As with class rating, schedule rating must be used on every account that qualifies. B. Both rating plans are used to modify final premium for liability insurance coverages. C. Generally, those insureds that are eligible to use experience rating are also eligible to use schedule rating. D. Schedule rating plans have been filed for optional use primarily for personal auto liability insurance.
D. Reduce its rates by approximately 6.7 percent.
Worthley Insurance Company's insurance rates are based on an expected loss ratio of 75 percent. Over the past three years, the actual loss ratio has been 70 percent. Application of the loss ratio method of ratemaking indicates that Worthley should A. Increase its rates by approximately 5 percent. B. Increase its rates by approximately 6.7 percent. C. Reduce its rates by approximately 5 percent. D. Reduce its rates by approximately 6.7 percent.
Loss Reserves
____ are estimates of future payments for covered claims that have already occurred, whether the claims are reported or not. Insurers are legally required to set aside funds for these future payments; these are shown as liabilities on their balance sheets.
A. The expense provision.
Ike, as an underwriter for IIA Insurance Company, knew his rates needed to include loss expenses, as well as profits and contingencies. Ike also had to pay premium taxes, general expenses and licenses and fees paid to government, regulatory, and advisory organizations. These expenses are generally included in ratemaking as A. The expense provision. B. The pure premium. C. The loss adjustment expenses. D. Allocated expenses.
C. Independent and homogenous.
In addition to having a large number of exposure units, viable risk transfer requires that exposure units be A. Dependent and homogenous. B. Independent and properly classified. C. Independent and homogenous. D. Dependent and properly classified.
Loss adjustment expense (LAE)
The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.
B. Loss adjustment expenses.
The expenses associated with adjusting claims are generally referred to as A. Claims costs. B. Loss adjustment expenses. C. Indemnity payments. D. Settlement, defense, and legal fees.
D. Loss adjustment expenses.
The expenses associated with adjusting claims are referred to as A. Claims costs. B. Prospective loss costs. C. Operating expenses. D. Loss adjustment expenses.
Credibility factor
The factor applied in ratemaking to adjust for the predictive value of loss data and used to minimize the variations in the rates that result from purely chance variations in losses.
Loss Costs; Expense Multiplier (Once the insurance rate is calculated, it is multiplied by the appropriate number of exposure units to produce a premium.)
The first component of an insurance rate is related to the prospective ____ developed by advisory organizations or by insurers with large pools of loss data. The second and third components are related to an ____.
Premium
The price of the insurance coverage provided for a specified period.
C. Prospective loss costs are supplied by advisory organizations or developed by insurers with large enough pools of loss data.
Which one of the following statements is correct? A. In ratemaking, the amount included to pay such things as future acquisition expenses, overhead, and premium taxes is referred to as the contingencies provision. B. The rate component intended to pay future claims and loss adjustment expenses is referred to as the expense provision. C. Prospective loss costs are supplied by advisory organizations or developed by insurers with large enough pools of loss data. D. The only components of an insurance rate are an amount to pay future claims and loss reserves plus a factor for profits and contingencies.
C. Property losses are usually paid relatively quickly, while liability losses often are not paid until years after the losses occur.
Which one of the following statements is correct? A. Investment returns are more likely to affect property insurance rates than liability insurance rates. B. An insurer's loss reserves for property insurance are usually much greater than its loss reserves for an equivalent amount of liability insurance. C. Property losses are usually paid relatively quickly, while liability losses often are not paid until years after the losses occur. D. The investment return earned by an insurer is independent of the types of insurance written, the loss reserves, or unearned premium reserves.
C. A property-casualty insurer performs two distinct operations: insurance operations and investment operations.
Which one of the following statements is correct? A. The assets that offset loss reserves constitute profits for an insurer. B. Today, insurers rarely consider investment results explicitly in their rate calculations. C. A property-casualty insurer performs two distinct operations: insurance operations and investment operations. D. An insurer's investment operations generate investment income through the sale of shares of the company.
Credibility
____ factors are used to minimize variations in rates that result from purely chance variations in losses. These factors range from zero (no credibility at all) to one (full confidence).
Simplicity
____ is a function of the insurance industry's data development and administrative capabilities as well as of the insurance industry's need to explain and defend its system to the public. Many states require that rate changes be accompanied by complete actuarial data before the changes can be implemented.
Pure Premium
____ is the amount included in the rate per exposure unit required to pay losses. This component is also sometimes called the loss cost.
Rate
A ____ is a charge for the exposure to risk. If an insurer uses a flat rate for a group of insureds with attributes that make some more susceptible to loss and others less susceptible to loss, some will be overcharged, and others will be undercharged.
Rate
A ____ is the basis for the premium charged by an insurer.
B. Time period during which rates are in effect, usually a full year
Responsiveness is a desirable ratemaking characteristic. Because conditions are constantly changing, any delay between when data are collected and when they are used tends to reduce the accuracy of rates. The delay in reflecting loss experience in rates stems from several sources, including which one of the following? A. Delays in the payment of losses by insurers B. Time period during which rates are in effect, usually a full year C. Delays in obtaining police reports and claim documentation D. Time required to receive investment income
False
(T/F) If rates are not responsive, underwriters are likely to develop overpriced books of business.
True
(T/F) The blanket average rate requires more calculations than the blanket highest rate, but the former rate is more cost effective for the insured.
Individual risk premium modification plan (IRPM)
A rating plan that allows underwriters to modify property premiums based upon specific risk characteristics not reflected in the class rate.
Schedule rating plan
A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
Trending
A statistical technique for analyzing environmental changes and projecting such changes into the future.
C. $51
ABC Insurance Company's actuary has calculated the pure premium for the company's homeowner's insurance line as $40. Fixed expenses for the line are $2.50 per exposure unit and variable expenses are 12 percent. The company's loading for profits and contingencies is 5 percent. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following is the rate per exposure unit that ABC needs to charge? A. $45 B. $47 C. $51 D. $58
Law of Large Numbers
According to the ____, adapted for insurance purposes, when the number of similar, independent exposure units increases, the relative accuracy of predictions about future losses based on these exposure units also increases.
C. Charging a sufficient premium for the risk assumed
Actuaries and underwriters both have roles in pricing insurance products. Which one of the following is underwriters' primary pricing role? A. Deciding which exclusions to include in insurance policies B. Determining which insurance products to offer to insureds C. Charging a sufficient premium for the risk assumed D. Establishing overall rates for insurance products
C. 2.5%
Actuary Joe Smith is projecting a rate increase of 10 percent in the upcoming year. If the credibility factor is .25, how much of a rate increase would be taken? A. .25% B. .75% C. 2.5% D. 7.5%
B. The loss exposure is subject to a loss that would simultaneously affect other similar loss exposures.
All of the following are characteristics of an ideally insurable loss exposure, EXCEPT: A. The loss exposure is subject to losses that are definite in time. B. The loss exposure is subject to a loss that would simultaneously affect other similar loss exposures. C. The loss exposure involves pure risk. D. The loss exposure is subject to losses that are measurable.
C. Rates promote availability and affordability of insurance.
All of the following are objectives of rate regulation, EXCEPT: A. Rates generate no more than a reasonable profit for the insurer. B. Rates are adequate to pay for incurred losses and expenses. C. Rates promote availability and affordability of insurance. D. Rates equitably reflect expected losses and expenses of the particular insured.
A. For which the insurer has provided a full year of coverage.
An earned exposure unit is an exposure unit A. For which the insurer has provided a full year of coverage. B. For which a claim has been paid. C. For which the insurer has earned a profit. D. For which premium has been paid.
C. Earned exposure units.
An insurance rate consists of all the following components EXCEPT: A. Prospective loss costs. B. Future expenses. C. Earned exposure units. D. Profit and contingencies.
D. 12.5% increase
Due to poor loss experience in its product liability line of insurance, an insurer wants to adjust its current insurance rates. The insurer's actual loss ratio is 45 percent and the expected loss ratio is 40 percent. Using the loss ratio ratemaking method, which one of the following represents the indicated rate change? A. 12.5% decrease B. 5.0% decrease C. 5.0% increase D. 12.5% increase
C. Experience rating plans encourage the insured to implement risk control measures.
Experience rating plans can be used to modify rates of individual accounts. Which one of the following is a benefit of experience rating plans? A. Experience rating plans do not use credibility factors like other individual rating plans. B. Changes in an insured's loss experience are immediately recognized in the insured's premium. C. Experience rating plans encourage the insured to implement risk control measures. D. State insurance departments do not regulate experience rating plans.
D. Experience rating plans use premium size at basic limits to determine a credibility factor.
Experience rating plans use a credibility factor. Which one of the following statements regarding the use of credibility factors is true? A. Data from the most recent policy term is included to reflect the insured's positive risk control efforts. B. The smaller the premium size, the more credibility the account's loss experience receives. C. The experience modification credibility factor is not used for accounts with deteriorating loss experience. D. Experience rating plans use premium size at basic limits to determine a credibility factor.
C. Classification.
Generally, the rate that is applied to individual accounts is determined primarily by the account's A. Size. B. Number of exposure units. C. Classification. D. Premium base.
D. -13%
Given the following data and using the loss ratio ratemaking method, calculate the insurance rate change (rounded). Expected loss ratio 63% Actual loss ratio55% Incurred losses $600,000 Earned premium $1,250,000 Expenses 45% A. 7% B. 15% C. -8% D. -13%
D. $65
Given the following data and using the pure premium ratemaking method, calculate the insurance rate (rounded). Incurred losses $600,000 Earned premium units 12,000 Fixed expenses $12 Profit 4% A. $13 B. $16 C. $52 D. $65
A. Statutory benefits can change unexpectedly.
Loss trending practices vary by type of insurance. A special trending problem unique to workers compensation insurance exists because A. Statutory benefits can change unexpectedly. B. Loss frequency is very low. C. Inspection and risk control services are a significant portion of the rate. D. Trending is needed for both premium and losses.
A. Blanket insurance
Home Center, Inc. operates a chain of home improvement stores and is looking to purchase property insurance. Home Center has three different warehouses that it uses to store inventory, and the value of the goods in each individual warehouse fluctuates based on the company's shipping schedule. Based on this information, which one of the following types of insurance should Home Center consider? A. Blanket insurance B. Schedule rating insurance plan C. Specific insurance D. Participating insurance plan
A. Catastrophic
In addition to the conditions included in the law of large numbers, commercially insurable loss exposures are considered by insurers to be those that have losses that are all of the following, EXCEPT: A. Catastrophic B. Accidental C. Definite and measurable D. Economically feasible to insure
D. The expense provision.
In ratemaking, the amount included to pay such things as future acquisition costs, overhead, and premium taxes is referred to as A. The operating costs factor. B. The cost multiplier. C. The contingencies provision. D. The expense provision.
C. Prospective loss costs.
In ratemaking, the component included to pay future claims and loss adjustment expenses is referred to as A. The expense provision. B. Projected settlement expense. C. Prospective loss costs. D. The claims and contingencies factor.
C. Marine insurance
In which one of the following types of lines of insurance do underwriters usually have extreme flexibility in account pricing and are able to develop rates without actuarial intervention? A. Life insurance B. Casualty insurance C. Marine insurance D. Property insurance
D. Schedule rating plan
Individual rating plans use different approaches to modify the rate for an account. Which one of the following types of individual rating plans is used to modify the premium of liability insurance policies based on risk characteristics such as condition of premises and equipment, and safety programs? A. Individual premium risk modification plan B. Experience rating plan C. Retrospective rating plan D. Schedule rating plan
C. $66
Insurance Company (IC) reports the information below for its automobile insurance line. Using the pure premium ratemaking method, which one of the following is the rate per exposure unit, rounded to the nearest dollar, for IC's automobile line of business? Incurred losses: $5 million Earned car-years: 100,000 Expenses: $1.3 million Profit and contingencies factor: 5% Earned premiums: $6.2 million A. $25 B. $49 C. $66 D. $81
B. $99
Insurance Company's actuary has calculated the pure premium for its automobile insurance line as $67. Fixed expenses for the line are $25 per exposure unit, and the loading for profit and contingencies is 7%. Using the pure premium ratemaking method and rounding to the nearest whole dollar, which one of the following is the rate per exposure unit? A. $86 B. $99 C. $106 D. $115
A. Have the same likelihood of loss.
Insurance classification systems group risks that share similar characteristics and that usually A. Have the same likelihood of loss. B. Have the same size exposure base. C. Generate similar rates and premiums. D. Are not subject to catastrophic loss.
A. Loss adjustment expenses.
Insurer B proudly pays 90 percent of its claims in 90 days. Besides the typical claim costs, Insurer B pays a substantial amount of salary dollars to in-house claims adjusters. These salary dollars are an example of A. Loss adjustment expenses. B. Pure premium expenses. C. Loss cost components. D. Contingency loading.
C. If the rates generate an unreasonable profit for People's Protection
Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining economic market, which created huge profits for People's Protection. The next year, hoping for additional profits, the insurer increased rates only two percent maintaining that a five percent increase over two years was reasonable, because country estate owners' insurance products were designed to protect a wealthier customer who could afford to pay higher premiums. In which one of the following ways would People's Protection's second set of rates at two percent be considered as excessive? A. If the rates are sufficient to pay for incurred losses and the expenses associated with those losses B. If the rates promote social injustice or are detrimental to most country estate owners C. If the rates generate an unreasonable profit for People's Protection D. If they do not equitably reflect the expected losses and expenses of the country estate insureds to whom they apply
A. Retrospective rating plan
Mega Steel Inc. is looking to purchase workers compensation coverage for its 10,000 employees. Despite having an inconsistent loss history, Mega Steel has recently implemented some risk control measures that it believes will lead to fewer losses in the upcoming policy period. Which one of the following individual rating plans would be best for Mega Steel? A. Retrospective rating plan B. Individual risk premium modification plan C. Expense modification plan D. Experience rating plan
A. If they do not equitably reflect the expected losses and expenses of the country estate insureds to whom they apply
Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining economic market, which created huge profits for People's Protection. The next year, hoping for additional profits, the insurer increased rates only two percent maintaining that a five percent increase over two years was reasonable, because country estate owners' insurance products were designed to protect a wealthier customer who could afford to pay higher premiums. In which one of the following ways would People's Protection's second set of rates be considered as unfairly discriminatory? A. If they do not equitably reflect the expected losses and expenses of the country estate insureds to whom they apply B. If the rates are sufficient to pay for incurred losses and the expenses associated with those losses C. If the rates generate an unreasonable profit for People's Protection D. If the rates promote social injustice or are detrimental to most country estate owners
A. To determine potential loss severity
Insurers differ in their approach to calculating each account's amount subject. Which one of the following is the objective in making this determination? A. To determine potential loss severity B. To determine potential loss frequency C. To rate the property according to location D. To accurately estimate claim reserves
A. Changes in exposure will be discovered by premium audit at the end of the policy term.
Insurers do not have to perform mid-term pricing on composite-rated accounts because A. Changes in exposure will be discovered by premium audit at the end of the policy term. B. Loss modification factors are applied to the initial premium. C. A premium base in the rating manual is used to price the entire account. D. Composite rating is a paid loss retrospective plan.
C. Converts several exposures to a single rate and a single rating basis.
Insurers sometimes use composite rating as an administrative convenience. Composite rating A. Requires insured's to retain more risk and pay for losses as they occur. B. Adjusts an insured's premium based on its past loss experience. C. Converts several exposures to a single rate and a single rating basis. D. Gives a portion on the producer's commission to the insured as incentive to purchase the account.
B. The insured receives no price advantage by being composite rated.
Insurers sometimes use composite rating to price accounts. How does composite rating differ from other pricing methods? A. The insurer uses a longer period of the insured's loss history when determining the composite rated premium. B. The insured receives no price advantage by being composite rated. C. Composite rating is only implemented on smaller accounts. D. The insured's "credibility factor" is given more weight when determining the composite rated premium.
A. Composite rating is primarily used for its administrative convenience.
Insurers will sometimes use composite rating when determining the premium on an account. Which one of the following is true regarding composite rating? A. Composite rating is primarily used for its administrative convenience. B. Insureds typically experience savings based on favorable loss experience when composite rated. C. Insurers must perform mid-term pricing on composite-rated accounts. D. Composite rating is typically used on smaller accounts.
A. Exposure base.
Joe is hoping to insure his home for $100,000. This will include the contents of his home as well as other property that is defined in his homeowners policy as covered property. This "value" being insured by Joe is the A. Exposure base. B. Rate base. C. Loss base. D. Expense base.
B. Higher limits can require a portion of the coverage to be reinsured, and the additional expense must be included in the rate.
Liability insurance coverage is provided at various limits of coverage. Which one of the following statements is true regarding charges to increase limits above the basic limit? A. There is less variability of losses in higher coverage layers than for the basic limit losses, allowing more credible pricing for higher limits. B. Higher limits can require a portion of the coverage to be reinsured, and the additional expense must be included in the rate. C. Loss severity increases uniformly with increased coverage limits, and must be priced accordingly. D. Charges to increase liability limits should not exceed 100 percent of the charge for basic coverage limits.
Unallocated loss adjustment expense (ULAE)
Loss adjustment expense that cannot be readily associated with a specific claim.
C. Insurers setting rates too low in order to win market share can lead to insolvency.
One of the objectives of insurance rate regulation is to ensure that rates are adequate. Which one of the following best describes why it is necessary for insurance rates to be "adequate?" A. Insurers should not take advantage of the insurance-buying public. B. Accounts that present the same likelihood of loss should be charged approximately the same rate. C. Insurers setting rates too low in order to win market share can lead to insolvency. D. Rates should not generate unreasonable profit for insurers.
D. Explain and defend its system to the public.
One social criterion for ratemaking is simplicity. The requirement for simplicity arises out of the insurance industry's need to A. Base rates on factors that insureds have control over. B. Make insurance accessible to those who want or need it. C. Establish a ceiling on rates in order to make them affordable. D. Explain and defend its system to the public.
A. Not known before the sale.
Pricing the insurance product is different from pricing most other products and services because the underlying costs of insurance products are A. Not known before the sale. B. Determined by actuaries. C. Variable. D. Dependent upon the exposure.
Adequate
Rates must be ____ in order for the premiums collected to be sufficient to pay for incurred losses and the expenses associated with those losses. Because rates are based on predictions of future losses, insurers are often willing to establish prices that win market share but could lead to their insolvency.
B. Premium base.
Rating manuals used by underwriters and underwriting technicians for individual account pricing often use the term exposure basis interchangeably with A. Rating units. B. Premium base. C. Risk base. D. Risk denomination.
A. Uncertainty of economic loss for the certainty of insurance premium payment.
Risk transfer through insurance allows members of a group or pool to exchange the A. Uncertainty of economic loss for the certainty of insurance premium payment. B. Certainty of loss for a specific premium. C. Uncertainty of loss for the promise of claim payments. D. Certainty of risk for the promise of indemnity.
Law of Large Numbers
The ____ is the mathematical principle that serves as the foundation for insurance pricing. This law states that the accuracy of loss predictions increases as the number of exposure units increases.
Credibility Factor
The ____ is used as the weight in the weighted average. It indicates the amount of weight to give to the actual loss experience for the territory or class as compared with an alternative source—in this case, the statewide average loss experience and is a number between 0 (no credibility) and 1 (full confidence).
Loss Ratio
The ____ method determines a new rate by modifying an old rate, using a comparison of actual and expected loss ratios.
Judgment
The ____ method is used when little or no loss experience data are available for ratemaking, and it relies heavily on the knowledge and experience of an actuary or underwriter.
A. The loading for profits and contingencies.
The amount included in the insurance rate to protect insurers against the possibility that actual claims or expenses will exceed projections is referred to as A. The loading for profits and contingencies. B. The prospective loss costs. C. The expense factor. D. The claims and eventualities factor.
D. Supplied by advisory organizations or developed by insurers with large enough pools of loss data.
The amount needed to pay future claims and loss adjustment expenses is A. Easily determined by any insurer based on that insurer's claims costs for the previous year. B. Determined collectively by all insurers within a market based on shared loss data. C. Specified by state insurance regulators based on accumulated data from all insurers operating in the state. D. Supplied by advisory organizations or developed by insurers with large enough pools of loss data.
Credibility
The amount of confidence an actuary has in projected losses (and the resulting rates) increases as the number of exposure units increases. Actuaries call this confidence level ____.
Expense provision
The amount that is included in an insurance rate to cover the insurer's expenses and that might include loss adjustment expenses but that excludes investment expenses.
Pure premium
The average amount of money an insurer must charge per exposure unit in order to be able to cover the total anticipated losses for that line of business.
A. As homogeneous as possible without sacrificing the predictive accuracy that large numbers create.
The goal of actuaries and underwriters in designing a rating system is to make each class A. As homogeneous as possible without sacrificing the predictive accuracy that large numbers create. B. As credible as possible. C. Independent and self-sustaining. D. Capable of earning enough premium to pay claims and expenses.
Homogeneous
The goal of actuaries and underwriters when designing a rating system is to make each class as ____ as possible without sacrificing the predictive accuracy that large numbers create.
C. The types of insurance written.
The investment return earned by an insurer depends largely on the loss reserves, the associated unearned premium reserves, and A. Available reinsurance. B. Market competition. C. The types of insurance written. D. Claims practices.
Blanket limit
The maximum dollar amount the insurer will pay for two or more items or classes of property at one or more locations.
Law of Large Numbers
The operation of the ____ is predicated on the exposure units' being similar or homogeneous but not necessarily identical. Homogeneity is ensured through classification systems and the refinement of those systems.
Rebating
The practice of giving a portion of the producer's commission or some other financial advantage to an individual as an inducement to purchase the policy.
Rate
The price per exposure unit for insurance coverage.
Ratemaking
The process insurers use to calculate insurance rates, which are a premium component.
Pricing
The process of setting a price for a product or service and establishing the terms and conditions for the insurance agreement.
A. The amount included in the rate per exposure unit required to pay losses.
The pure premium is A. The amount included in the rate per exposure unit required to pay losses. B. The amount included in the rate as a factor for profits and contingencies. C. The rate multiplied by the exposure units. D. The policy premium before discounts or surcharges are applied.
C. Loss cost.
The pure premium is the amount included in the rate per exposure unit required to pay losses. This component is also sometimes called the A. Earned exposure unit. B. Expense provision. C. Loss cost. D. Exposure base.
D. Premium.
The rate multiplied by the appropriate number of exposure units results in the A. Loss cost multiplier. B. Total earned exposure units. C. Pure premium. D. Premium.
B. Pure premium method.
The ratemaking method that factors in loss experience, fixed and variable costs, and profit to arrive at a rate is called the: A. Combined ratio method. B. Pure premium method. C. Loss ratio method. D. Judgment method.
Specific insurance
The standard approach to insuring buildings and personal property is to show a specific amount of insurance in the policy declarations for each building and a specific amount for personal property in each insured building. This approach is called ____.
Reinsurance
The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.
Pure Premium Ratemaking Method
This method uses loss per exposure based on past experience as the basis for the rate. While this method relies on past experience, it is independent of any current rates.
D. Class rate
To effectively price insurance accounts, underwriters must be familiar with different types of rates. Which one of the following types of rates reflects the aggregate loss experience of a similar group of accounts? A. Aggregate rate B. Specific fire rate C. Judgment rate D. Class rate
A. Rate adequacy
Which one of the following is the most important regulatory criterion? A. Rate adequacy B. Rate accuracy C. Rate reasonableness D. Rate equity
C. Prospective loss costs.
To understand why insurers charge a certain premium, the components must be understood. The amount needed to pay future claims and loss adjustment expenses is referred to as A. Claims provisions. B. The rate. C. Prospective loss costs. D. The expense provision.
D. For liability insurance, separate trending of claim severity and claim frequency is common.
Trending practices vary by type of insurance. Trending may be based on experience or external indices. Which one of the following statements regarding trending is accurate? A. Due to the statutory benefits, trending is not applied to workers compensation losses. B. For property insurance, trending usually is restricted to claim frequency. C. For most types of insurance, trending is applied to premium, losses, and risk control expenses. D. For liability insurance, separate trending of claim severity and claim frequency is common.
Composite rating
Under a ____ plan, the policy premium is determined at inception by combining all of the base premiums calculated using manual rates and rating plans to arrive at a policy premium. This policy premium is divided by a predetermined exposure basis to arrive at a composite rate.
Retrospective Rating Plans
Under a ____, a provisional (or deposit) premium is charged at the beginning of the policy period. After the end of the policy period, the actual loss experience for that period is determined, and a final premium for that policy period is charged. The insured's premium is adjusted after the end of the policy period to cover losses and loss adjustment expenses incurred by the insured during the policy period, subject to specified minimum and maximum premiums.
Reinsurance Agreement; Reinsurer
Under a this type of arrangement, an insurer pays a ____ a premium to reimburse the insurer for losses above a specified retention. Catastrophe protection is only one of several functions that reinsurance can serve for insurers.
Judgment Rates
Underwriters develop ____ rates by reviewing individual account characteristics rather than using a classification plan that is backed with substantial loss experience. This type of rating approach is usually required on loss exposures that are distinctive and therefore not numerous enough to establish a classification.
C. Marine insurance
Underwriters of which one of the following types of insurance typically have extreme flexibility in account pricing and can usually develop rates without actuarial intervention? A. Commercial property insurance B. Commercial automobile insurance C. Marine insurance D. General liability insurance
Individual Rating Plans
Underwriters use ____ to modify class rates to develop a policy premium that represents differences between an individual account's specific loss exposure and the loss exposures contemplated for all accounts included within the classification code.
A. Forecasting
Underwriting pricing activities usually include all of the following, EXCEPT: A. Forecasting B. Application of premium modification plans C. Rating D. Account classification
Homogeneous
Units of exposure that face approximately the same expected frequency and severity of loss.
B. The insurer's book of business.
When it comes to insurance pricing, actuaries use mathematical techniques to establish insurance rates for A. Marine insurance accounts. B. The insurer's book of business. C. All lines of insurance except marine insurance. D. Individual accounts.
D. Amounts to pay future claims, loss adjustment expenses, other expenses, and an amount for profits and contingencies
Which one of the following best describes the components included in an insurance rate? A. Factors to pay current claims, current operating expenses, and current investment expenses B. An amount to pay future claims and loss reserves plus a factor for profits and contingencies C. Factors to cover projected future losses, loss adjustment expenses, and acquisition expenses D. Amounts to pay future claims, loss adjustment expenses, other expenses, and an amount for profits and contingencies
A. Expense provision
Which one of the following components of insurance rates includes the amount needed for premium taxes and fees paid to regulatory organizations? A. Expense provision B. Pure premium C. Contingencies factor D. Loss adjustment expenses
C. The amount included in the rate per exposure unit required to pay losses
Which one of the following correctly describes the pure premium component of ratemaking? A. The amount for which the insurer has provided a full year of coverage B. The amount added to the rate for excessive losses or expenses C. The amount included in the rate per exposure unit required to pay losses D. The amount included in the rate per exposure unit required for loss adjustment expenses
C. The underlying costs of the product are unknown before the sale.
Which one of the following explains why pricing the insurance product is different from pricing other products: A. Customers do not understand insurance products. B. Competitive conditions are more difficult in insurance. C. The underlying costs of the product are unknown before the sale.
C. Not excessive
Which one of the following is a regulatory criterion for insurance rates: A. Stable B. Controllable C. Not excessive D. Responsive
C. Rates are based on incomplete loss experience.
Which one of the following statements is correct with respect to estimating losses for use in the ratemaking process? A. Insurers include data only on paid losses in the ratemaking process. B. Incurred but not reported (IBNR) losses are not included in ratemaking because their values are uncertain. C. Rates are based on incomplete loss experience. D. Consistent errors in estimating future losses cannot be corrected through actuarial methods.
A. Charges to increase commercial liability insurance limits frequently exceed 100 percent of the charge for basic coverage limits.
Which one of the following statements is correct with respect to increased limits above the basic coverage limits? A. Charges to increase commercial liability insurance limits frequently exceed 100 percent of the charge for basic coverage limits. B. Loss severity typically increases uniformly with increased coverage limits. C. Higher limits can require a portion of the coverage to be reinsured, which reduces the insurer's risk and hence the premium charged for the coverage. D. Because increased limits losses are typically well documented, they provide excellent data credibility.
A. Data used in developing insurance rates for basic coverage limits include only losses associated with the basic coverage limit.
Which one of the following statements is correct with respect to increased limits factors in liability insurance? A. Data used in developing insurance rates for basic coverage limits include only losses associated with the basic coverage limit. B. Increased limits factors are expressed as a dollar amount such as $100 for each additional $10,000 of coverage. C. Because large losses are relatively rare, increased limits factors are usually only nominal amounts. D. Increased limits factors are typically only used in commercial general liability and workers compensation ratemaking.
B. The loading for profits and contingencies protects the insurer against the possibility that actual losses and expenses will exceed the projected losses and expenses included in the rate.
Which one of the following statements is correct? A. The pure premium is equal to the prospective loss costs multiplied by one factor for expenses and another for profits and contingencies. B. The loading for profits and contingencies protects the insurer against the possibility that actual losses and expenses will exceed the projected losses and expenses included in the rate. C. The cost of legal fees incurred to defend claims are included in an insurer's expense provision rather than in the pure premium. D. Insurers rarely include premium taxes, and licenses and fees paid to government and regulatory organizations as expenses when calculating insurance rates.
D. Some states require that investment income be considered explicitly in rate calculations.
Which one of the following statements is correct? A. Traditionally, property-casualty insurers subtracted investment income from their expense loading when calculating insurance rates. B. Insurers are prohibited from investing premiums collected as these funds must be available to pay claims as they occur. C. Property-casualty insurers are prohibited from including investment returns when calculating insurance rates. D. Some states require that investment income be considered explicitly in rate calculations.
A. An insurer's loss reserves for liability insurance are usually much greater than its loss reserves for an equivalent amount of property insurance.
Which one of the following statements is true regarding an insurer's investment operations and use of investment income? A. An insurer's loss reserves for liability insurance are usually much greater than its loss reserves for an equivalent amount of property insurance. B. The result of the investment operations is called policyholder surplus. C. Historically, property-casualty insurers considered their investment returns directly when calculating insurance rates. D. Today, insurers generally do not consider investment results explicitly in their rate calculations.
A. Large deductible plan
Which one of the following types of individual rating plans can be used by medium to large insureds in combination with risk control and allows the insured to manage its cash flow by avoiding upfront payments? A. Large deductible plan B. Individual risk premium modification plan C. Expense modification plan D. Schedule rating plan
B. $1,200,000
XYZ Corp. purchased blanket insurance to cover two of its buildings. Building A is valued at $1,000,000, and Building B is valued at $2,000,000. XYZ decides to purchase a blanket limit of $2,500,000. However, the underwriter decides to implement a 20 percent margin limit. Based on this information, if a covered loss occurred at Building A, what is the maximum amount of coverage that policy will provide? A. $1,000,000 B. $1,200,000 C. $2,500,000 D. $3,250,000
Experience Rating Plans
____ adjust the class rate to reflect the insured's actual loss experience before the current policy period. The credit or debit calculated under the plan is applied to the applicable class rate. To be eligible, an account must have at least three years of loss experience, not including the year immediately before rating, and develop a specified minimum premium that varies by insurer.
Large Deductible Plans
____ can assist medium to large accounts with lowering insurance premiums. Such plans are used in general liability, auto liability, workers compensation, and other lines of business. In exchange for the insured's sharing the risk with the insurer and assuming a larger deductible amount, the insured may receive substantial premium savings.
Credibility
____ is a measure of the predictive ability of data and, in ratemaking, is important in projecting future losses.
Ratemaking
____ is based on estimating losses from past coverage periods and then adjusting those losses for future conditions. For example, adjustments could be made to past loss experience for anticipated future inflation or for changes in benefits mandated by legislation.
Expense Provision
____ is the amount added to the pure premium required to pay expenses. Such expenses include acquisition expenses; general expenses; premium taxes; and licenses and fees paid to government, regulatory, and advisory organizations.
Basic Limit
____ losses are losses capped at some predetermined amount, such as $100,000.
Actuaries; Underwriters
____ perform ratemaking, in which rates for each classification in the insurer's book of business are determined. ____ apply those rates by performing the mechanics of classification and rating. In many instances, these persons modify the rate to reflect the loss exposures presented by the account.
Actuaries
____ use mathematical techniques to establish insurance rates for the insurer's book of business, which underwriters apply to individual accounts, and is generally referred to as ratemaking.
Participating Plans
____, like retrospective rating plans, use the loss experience of an insured for the current policy period to adjust the premium at the end of the policy period. That adjustment is done, in most cases, either by using a flat dividend that applies regardless of loss experience or a graded or sliding scale dividend that varies with the size of the premium and loss ratio.
