CU Underwriting Pricing and Ratemaking 1 — Questions and Answers
Question 1: Which component of insurance ratemaking represents the expected cost of claims per unit of exposure?
- Expense loading
- Pure premium (Correct answer)
- Loss ratio
- Combined ratio
Correct answer: Pure premium
The pure premium (also called loss cost) is the expected claim cost divided by the number of exposure units, forming the foundation of the rate.
Question 2: An underwriter calculates a loss ratio of 72% and an expense ratio of 30%. What is the combined ratio?
- 42%
- 72%
- 102% (Correct answer)
- 58%
Correct answer: 102%
The combined ratio equals the loss ratio plus the expense ratio: 72% + 30% = 102%, indicating an underwriting loss.
Question 3: Which ratemaking method calculates rates by dividing incurred losses by earned premiums?
- Pure premium method
- Loss ratio method (Correct answer)
- Exposure rating method
- Judgment rating method
Correct answer: Loss ratio method
The loss ratio method compares actual incurred losses to earned premiums, then adjusts the existing rate to achieve the target loss ratio.
Question 4: What does 'rate adequacy' mean in property and casualty insurance underwriting?
- Rates are set higher than competitors
- Rates are sufficient to cover losses, expenses, and provide a reasonable profit (Correct answer)
- Rates are approved by state regulators
- Rates equal the industry average
Correct answer: Rates are sufficient to cover losses, expenses, and provide a reasonable profit
Rate adequacy means rates are neither excessive nor inadequate — they must cover anticipated losses, underwriting expenses, and yield a reasonable profit margin.
Question 5: An underwriter uses 'credibility weighting' when calculating a risk's rate. What does this primarily address?
- The financial stability of the insured
- How much weight to give the risk's own loss experience versus industry data (Correct answer)
- Whether the risk qualifies for a preferred rate tier
- The regulatory approval status of the rate filing
Correct answer: How much weight to give the risk's own loss experience versus industry data
Credibility weighting blends an individual risk's own experience with broader class or industry data based on statistical reliability of the risk's data.
Question 6: Which type of rating plan adjusts the final premium based on the insured's actual loss experience during the policy period?
- Schedule rating
- Experience rating
- Retrospective rating (Correct answer)
- Judgment rating
Correct answer: Retrospective rating
Retrospective rating adjusts the premium after the policy period ends based on actual losses incurred during that period, within minimum and maximum premium limits.
Question 7: What is the primary purpose of a 'trend factor' in insurance ratemaking?
- To adjust for geographic differences in loss frequency
- To account for changes in loss costs between historical data and the future policy period (Correct answer)
- To reflect the underwriter's individual judgment about a risk
- To reduce the rate for long-term policyholders
Correct answer: To account for changes in loss costs between historical data and the future policy period
Trend factors adjust historical loss data to reflect anticipated future conditions, accounting for inflation, social trends, and other factors that affect loss costs.
CU Underwriting Pricing and Ratemaking 1
Which component of insurance ratemaking represents the expected cost of claims per unit of exposure?