CIA CIA Insurance Market Analysis & Pricing 1 — Questions and Answers
Question 1: In insurance pricing, the 'pure premium' represents:
- The total premium charged to the policyholder
- The portion of premium needed to cover expected losses only, excluding expenses and profit (Correct answer)
- The premium after applying all discounts
- The reinsurance cost per policy
Correct answer: The portion of premium needed to cover expected losses only, excluding expenses and profit
The pure premium is the actuarially calculated portion of the premium needed solely to cover expected losses, before adding expense loadings and profit margin.
Question 2: A CIA appraiser analyzing insurance market conditions notes a 'hard market.' This is characterized by:
- Low premiums, broad coverage, and easy availability
- High premiums, restrictive coverage, and limited insurer capacity (Correct answer)
- Stable premiums with increasing competition
- Declining claim frequency across all lines
Correct answer: High premiums, restrictive coverage, and limited insurer capacity
A hard market is characterized by rising premiums, tighter underwriting standards, reduced coverage availability, and limited insurer capacity due to prior losses or capital constraints.
Question 3: Which rating factor most directly influences the premium for a homeowner's property insurance policy in the US?
- Credit score where permitted, construction type, and geographic location (Correct answer)
- The insured's annual income
- The number of family members in the household
- The age of the oldest household member
Correct answer: Credit score where permitted, construction type, and geographic location
Homeowner's property premiums are primarily driven by credit-based insurance scores where allowed, construction type, age of home, and geographic location including proximity to hazards.
Question 4: The combined ratio in insurance is calculated as:
- Net premiums written divided by surplus
- Loss ratio plus expense ratio (Correct answer)
- Investment income divided by earned premiums
- Ceded losses divided by assumed losses
Correct answer: Loss ratio plus expense ratio
The combined ratio equals the loss ratio plus the expense ratio; a combined ratio below 100% indicates an underwriting profit, while above 100% indicates an underwriting loss.
Question 5: In insurance market analysis, 'adverse selection' refers to:
- Insurers selecting only the best risks
- Higher-risk individuals disproportionately seeking insurance, skewing the insured pool toward poorer risks (Correct answer)
- Reinsurers avoiding catastrophic coverage
- State regulators rejecting rate filings
Correct answer: Higher-risk individuals disproportionately seeking insurance, skewing the insured pool toward poorer risks
Adverse selection occurs when higher-risk individuals are more likely to purchase insurance than lower-risk individuals, causing the insured pool to skew toward worse risks than the insurer anticipated.
Question 6: Which federal program provides flood insurance to property owners in the US because private insurers largely avoid this risk?
- FAIR Plan
- National Flood Insurance Program (NFIP) (Correct answer)
- Federal Crop Insurance Corporation
- Terrorism Risk Insurance Program (TRIP)
Correct answer: National Flood Insurance Program (NFIP)
The National Flood Insurance Program (NFIP), administered by FEMA, provides flood insurance because the concentration and severity of flood losses make it largely uninsurable in the private market.
CIA CIA Insurance Market Analysis & Pricing 1
In insurance pricing, the 'pure premium' represents: