Question 1

The unit of measurement used in property and casualty insurance pricing is called the

Accepted Answer

The unit of measurement used in property and casualty insurance pricing is called the exposure unit. This is the unit used to measure the amount of risk being insured, such as a vehicle or a property. The premium is the amount the insured pays for the insurance policy, and the expense loading is the additional amount added to the premium to cover administrative costs and profit. The experience unit is not a commonly used term in insurance pricing.

Question 2

Nathan was hired as an actuary with ABC Insurance.Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking.Nathan calculated the pure premium and presented this value as the final premium.After Nathan's presentation,the director of ratemaking said,"You left out something very important.If we sell coverage at the pure premium rate,we'll be out of business soon." What did Nathan overlook in his calculations?

Accepted Answer

Nathan did not consider loading for expenses, which includes items such as commissions, sales and advertising expenses, overhead expenses, and taxes. Without adding these expenses to the pure premium, the company will not be able to cover its costs and will eventually go out of business.

Question 3

XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses for each 1,000 properties that it insures in a certain category of business insurance.What pure premium should XYZ charge for each property insured?

Accepted Answer

The answer of XYZ Insurance Company expects $500,000 in claims...

Question 4

Which of the following statements about experience rating is (are)true?
I.The insured's past loss experience is used to determine the premium for the next policy period.
II.Its use is generally limited to small firms whose actual experience lacks credibility.

Accepted Answer

Experience rating involves adjusting premiums based on an insured's past loss experience, making it more reflective of the risk they pose. It is more commonly applied to larger firms with credible loss data, not limited to small firms.

Question 5

Which of the following statements about the combined ratio is true?

Accepted Answer

The combined ratio is the sum of the loss ratio (claims paid divided by premiums earned) and the expense ratio (underwriting expenses divided by premiums written). A combined ratio greater than 1 (or 100 percent) indicates that the company paid out more in claims and expenses than it earned in premiums, resulting in an underwriting loss. Therefore, option B is the correct statement. Option A is incorrect because the loss ratio is part of the combined ratio, not a component that can be subtracted. Option C is incorrect because the combined ratio only looks at underwriting and expense metrics, not investment income. Option D is incorrect for the same reason as option A.

Question 6

Which of the following statements about retrospective rating is true?

Accepted Answer

Retrospective rating is an insurance pricing strategy where the premium for the current period is adjusted based on the actual loss experience during that period. This allows for a more accurate reflection of the insured's risk profile.

Question 7

Small Town used to be just that-a small town 6 miles from Large City.Over the years,the area between Small Town and Large City has developed,and now Small Town is part of the suburbs surrounding Large City.An auto insurer that operated in the area had a large increase in auto claims from Small Town insureds.The insurer did not adjust its rates,and this year will lose money because of claims attributable to higher population density.Which business rating objective did this insurer fail to meet?

Accepted Answer

The insurer failed to meet the business rating objective of responsiveness, which involves adjusting rates and policies to changing circumstances such as the increasing population density in Small Town. By not adjusting its rates, the insurer did not respond to the changing risk in the area, leading to a large increase in auto claims and ultimately losing money.

Question 8

Which of the following statements concerning regulatory objectives of rate making is (are)true?
I.Rates must not be unfairly discriminatory.
II.Rates must be adequate.

Accepted Answer

Both statements are true. One of the primary objectives of rate making is to ensure that rates are non-discriminatory and applied equally to all customers. Additionally, rates must be set at a level that is adequate to cover the costs of providing the service.

Question 9

Under one type of merit rating,the class or manual rate is adjusted upward or downward based on past loss history.This type of merit rating is called

Accepted Answer

Experience rating adjusts the manual rate based on the insured's past loss history.

Question 10

Which of the following statements is (are)true about the loss ratio method of class rating?
I.The pure premium is calculated,and it is loaded to cover expenses,profit,and contingencies.
II.The actual loss ratio is compared to the expected loss ratio,and the rate is adjusted accordingly.

Accepted Answer

The loss ratio method involves comparing the actual loss ratio to the expected loss ratio and adjusting rates based on this comparison. The pure premium method, not the loss ratio method, involves calculating the pure premium and loading it for expenses, profit, and contingencies.

Question 11

An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman.This value is called the

Accepted Answer

The net single premium is the present value of the expected death claim that an insurance company will pay for a policy. It represents the amount that needs to be paid in a lump sum to cover the cost of the insurance benefit over the life of the policy, without considering administrative costs or profit margins.

Question 12

Which of the following statements about schedule rating is (are)true?
I.It involves the determination of a basis rate for each exposure,which is then modified by credits or debits.
II.It is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's future loss experience.

Accepted Answer

Schedule rating is a method of adjusting an insurance premium by assigning a credit or debit based on specific characteristics of the risk being insured. This process involves the determination of a basis rate for each exposure, which is then modified by credits or debits. Additionally, it is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's future loss experience. Therefore, both statements I and II are true.

Question 13

A manufacturing company just hired a new risk manager,and she has instituted several employee safety programs.She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experience during the current coverage period rather than on the company's historical performance.This type of plan is called a(n)

Accepted Answer

A retrospectively rated plan adjusts the premium based on the actual loss experience during the coverage period, rather than historical data.

Question 14

Which of the following statements about judgment rating is true?

Accepted Answer

Judgment rating is used when the loss exposures are so diverse that a class rate cannot be calculated, making option B the correct statement. Option A is incorrect because judgment rating is typically done through a computer program, rather than manual rating. Option C is incorrect because while judgment rating is a type of rating plan, it is not considered a form of experience rating. Option D is incorrect because credible loss statistics are not a requirement for using judgment rating.

Question 15

Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they were considering insuring.What is the gross rate for this risk,assuming a 30 percent expense ratio?

Accepted Answer

The formula for gross rate is (pure premium / (1 - expense ratio)). Plugging in the given values, we get: 
gross rate = (280 / (1 - 0.30)) = 400. Therefore, the answer is B.

Question 16

Monopoly Insurance is the only company marketing a certain line of insurance in a state.After complaints from several consumers,the State Insurance Department investigated Monopoly's rates.The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage.Which regulatory rating objective was Monopoly violating?

Accepted Answer

Monopoly Insurance was violating the regulatory objective that rates must not be excessive. It was charging more than double the actuarial cost of the coverage, which is an excessive rate.

Question 17

XYZ Insurance Company uses class rating to determine the rate to charge for insurance.For one type of insurance,the pure premium XYZ actuaries calculated is $75 per unit.If XYZ's expense ratio is 25 percent,what is the gross rate for this coverage?

Accepted Answer

The gross rate is calculated by dividing the pure premium by one minus the expense ratio. Here, it's $75 / (1 - 0.25) = $75 / 0.75 = $100.

Question 18

The portion of an insurance premium allocated to expenses,profit,and a margin for contingencies is called the

Accepted Answer

Loading is the portion of an insurance premium allocated to expenses, profit, and a margin for contingencies. Pure premium is the portion of an insurance premium that covers only the expected cost of losses, without loading. Gross premium is the total amount of premium charged for an insurance policy, including pure premium and loading. Experience rate is a premium rate that reflects the actual loss experience of the insured.

Question 19

In schedule rating,each building is individually evaluated based on several rating factors.One factor refers to the possibility that the building will be damaged or destroyed by a fire that starts at an adjacent property and spreads to the building.This rating factor is known as

Accepted Answer

The rating factor referring to the possibility of a fire starting at an adjacent property and spreading to the building is known as exposure.

Question 20

All of the following statements about class rating are true EXCEPT

Accepted Answer

The other statements are true. Class rating is a common method used in commercial insurance underwriting to group similar risks based on their common characteristics such as historical loss experience, industry, location, etc. The rate for each class reflects the average loss experience for that particular class. Class rating is based on the assumption that future losses to insureds will be determined by the same classification factors currently in use. However, it may not be appropriate for personal lines coverages due to the high degree of diversity and individuality of those risks.

Quiz 7: Financial Operations of Insurers