EXAMFX Insurance Premium Calculation and Rating 1 — Questions and Answers
Question 1: In insurance rating, what is the purpose of the 'loss ratio'?
- To measure the ratio of premiums collected to agent commissions paid
- To compare losses incurred to premiums earned, indicating underwriting profitability (Correct answer)
- To determine how much of the premium goes to administrative expenses
- To calculate the insured's deductible as a percentage of coverage
Correct answer: To compare losses incurred to premiums earned, indicating underwriting profitability
The loss ratio is calculated by dividing incurred losses by earned premiums; a ratio below 100% indicates the insurer is collecting more in premiums than it pays in claims.
Question 2: What is the 'combined ratio' in insurance?
- The ratio of reinsurance costs to gross premiums
- The sum of the loss ratio and expense ratio, used to measure overall underwriting profitability (Correct answer)
- The ratio of investment income to total assets
- The combination of the policy limit and the deductible
Correct answer: The sum of the loss ratio and expense ratio, used to measure overall underwriting profitability
The combined ratio adds the loss ratio and expense ratio; a combined ratio under 100% signals an underwriting profit, while over 100% signals an underwriting loss.
Question 3: Which rating method bases an insured's premium primarily on the historical loss experience of the specific insured?
- Manual rating
- Class rating
- Experience rating (Correct answer)
- Judgment rating
Correct answer: Experience rating
Experience rating adjusts premiums based on the insured's own past claims history relative to expected losses for their class, rewarding good loss records with lower premiums.
Question 4: What is a 'rate' in insurance terminology?
- The total annual premium charged to the insured
- The price per unit of insurance exposure used to calculate the premium (Correct answer)
- The percentage of claims paid by the insurer
- The agent's commission as a percentage of the premium
Correct answer: The price per unit of insurance exposure used to calculate the premium
A rate is the cost per unit of insurance coverage (e.g., per $100 of property value or per $1,000 of life insurance), which is multiplied by the number of exposure units to determine the premium.
Question 5: Which of the following best describes 'adverse selection' in insurance?
- The tendency of lower-risk individuals to seek more coverage
- The tendency of higher-risk individuals to seek insurance more than lower-risk individuals (Correct answer)
- An insurer's decision to reject all high-risk applicants
- The process of selecting adverse claims for denial
Correct answer: The tendency of higher-risk individuals to seek insurance more than lower-risk individuals
Adverse selection occurs when people with higher-than-average risk are more likely to purchase insurance, which can distort the risk pool and increase costs for the insurer.
Question 6: What is a 'deductible' in an insurance policy?
- The maximum amount the insurer will pay per occurrence
- The amount the insured must pay out-of-pocket before the insurer begins paying a claim (Correct answer)
- The premium discount for bundling multiple policies
- The penalty for early policy cancellation
Correct answer: The amount the insured must pay out-of-pocket before the insurer begins paying a claim
A deductible is the portion of each covered loss that the insured is responsible for paying before the insurance company's obligation begins.
EXAMFX Insurance Premium Calculation and Rating 1
In insurance rating, what is the purpose of the 'loss ratio'?