AU 60 - ASSIGNMENT 7 - PRICING
THE INSURANCE PRODUCT
QUESTIONS & ANSWERS 100%
CORRECT
Pricing - ANSWERThe process of setting a price for a product or service and
establishing the terms and conditions for the insurance agreement.
Actuaries - ANSWER____ 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.
Amount subject - ANSWERThe total value exposed to loss at any one location from
any one event.
Reinsurance - ANSWERThe 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.
Law of Large Numbers - ANSWERAccording 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.
Law of Large Numbers - ANSWERThe 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.
C. The underlying costs of the product are unknown before the sale. -
ANSWERWhich 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.
Individual risk premium modification plan (IRPM) - ANSWERA rating plan that allows
underwriters to modify property premiums based upon specific risk characteristics
not reflected in the class rate.
,Expense modification - ANSWERAn insurance rating plan that modifies the expense
portion of an insured's rate to reflect the actual cost of providing coverage to that
insured.
Rebating - ANSWERThe 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.
Large deductible plan - ANSWERA rating plan whereby the insured assumes a
substantial per accident or per occurrence deductible, generally ranging from
$100,000 up to $1 million.
Individual Rating Plans - ANSWERUnderwriters 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.
Experience Rating Plans - ANSWER____ 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.
Actuaries; Underwriters - ANSWER____ 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.
A. Not known before the sale. - ANSWERPricing 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.
C. Marine insurance - ANSWERIn 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
,C. Marine insurance - ANSWERUnderwriters 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
C. Charging a sufficient premium for the risk assumed - ANSWERActuaries 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. Ratemaking - ANSWERActuaries 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
A. Forecasting - ANSWERUnderwriting pricing activities usually include all of the
following, EXCEPT:
A. Forecasting
B. Application of premium modification plans
C. Rating
D. Account classification
B. The insurer's book of business. - ANSWERWhen 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.
Exposure unit - ANSWERA fundamental measure of the loss exposure assumed by
an insurer.
Premium base - ANSWERThe unit in which the exposure is measured, such as
gross sales or payroll.
Homogeneous - ANSWERUnits of exposure that face approximately the same
expected frequency and severity of loss.
, Independence - ANSWERA situation in which the occurrence of one event has no
effect on the likelihood of the occurrence of any other event.
Homogeneous - ANSWERThe 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.
Credibility - ANSWERThe 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 ____.
Credibility - ANSWER____ 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).
Reinsurance Agreement; Reinsurer - ANSWERUnder 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.
B. The loss exposure is subject to a loss that would simultaneously affect other
similar loss exposures. - ANSWERAll 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.
Law of Large Numbers - ANSWERThe ____ 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.
B. Premium base. - ANSWERRating 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.
C. Independent and homogenous. - ANSWERIn 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.
THE INSURANCE PRODUCT
QUESTIONS & ANSWERS 100%
CORRECT
Pricing - ANSWERThe process of setting a price for a product or service and
establishing the terms and conditions for the insurance agreement.
Actuaries - ANSWER____ 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.
Amount subject - ANSWERThe total value exposed to loss at any one location from
any one event.
Reinsurance - ANSWERThe 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.
Law of Large Numbers - ANSWERAccording 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.
Law of Large Numbers - ANSWERThe 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.
C. The underlying costs of the product are unknown before the sale. -
ANSWERWhich 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.
Individual risk premium modification plan (IRPM) - ANSWERA rating plan that allows
underwriters to modify property premiums based upon specific risk characteristics
not reflected in the class rate.
,Expense modification - ANSWERAn insurance rating plan that modifies the expense
portion of an insured's rate to reflect the actual cost of providing coverage to that
insured.
Rebating - ANSWERThe 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.
Large deductible plan - ANSWERA rating plan whereby the insured assumes a
substantial per accident or per occurrence deductible, generally ranging from
$100,000 up to $1 million.
Individual Rating Plans - ANSWERUnderwriters 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.
Experience Rating Plans - ANSWER____ 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.
Actuaries; Underwriters - ANSWER____ 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.
A. Not known before the sale. - ANSWERPricing 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.
C. Marine insurance - ANSWERIn 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
,C. Marine insurance - ANSWERUnderwriters 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
C. Charging a sufficient premium for the risk assumed - ANSWERActuaries 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. Ratemaking - ANSWERActuaries 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
A. Forecasting - ANSWERUnderwriting pricing activities usually include all of the
following, EXCEPT:
A. Forecasting
B. Application of premium modification plans
C. Rating
D. Account classification
B. The insurer's book of business. - ANSWERWhen 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.
Exposure unit - ANSWERA fundamental measure of the loss exposure assumed by
an insurer.
Premium base - ANSWERThe unit in which the exposure is measured, such as
gross sales or payroll.
Homogeneous - ANSWERUnits of exposure that face approximately the same
expected frequency and severity of loss.
, Independence - ANSWERA situation in which the occurrence of one event has no
effect on the likelihood of the occurrence of any other event.
Homogeneous - ANSWERThe 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.
Credibility - ANSWERThe 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 ____.
Credibility - ANSWER____ 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).
Reinsurance Agreement; Reinsurer - ANSWERUnder 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.
B. The loss exposure is subject to a loss that would simultaneously affect other
similar loss exposures. - ANSWERAll 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.
Law of Large Numbers - ANSWERThe ____ 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.
B. Premium base. - ANSWERRating 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.
C. Independent and homogenous. - ANSWERIn 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.
