B5. Loss-Sensitive Rating Plan

Question 1

Advantage of loss-sensitive rating plan for insured

Answer 1

1. Financial incentive for loss control
2. opportunity to save money in the short term with good experience
3. possible cash flow benefit compared to traditional plan
4. Possible savings from reduced premium-based taxes

Question 2

Disadvantage of loss-sensitive rating plan for insured

Answer 2

1. uncertain costs compared to traditional plan
2. loss of immediate tax deductibility
3. possibility of high costs in the short term with bad experience
4. impact of future financial statements as losses develop
5. ongoing administrative costs as loss develo
6. the need to post security as collateral against credit risk
7. additional complexity compared to traditional plan

Question 3

Advantage of loss-sensitive rating plan for insurer