Study 8 - Pricing Insurance Coverages

Question 1

What are the four (4) Components of Rates

Answer 1

1. ) Anticipated cost of settling claims
2. ) Acquisition costs of the business
   - - commissions
   - - marketing
   - - operations
3. ) Costs of administering the process
4. ) Target profit

Question 2

What are the two (2) Basic Approaches to Rating?

Answer 2

1. ) Class Rating

2. ) Schedule Rating

Question 3

Which rating is used when statistics can be gathered on a large number of risks that share common characteristics?

Answer 3

Class Rating

Question 4

Which rating is used when the body of statistical data is too fragmented?

Answer 4

Schedule Rating

Question 5

What are some factors to be used when using schedule rating and a commercial risk?

Answer 5

• Occupancy
• wall construction
• floor construction
• height of building
• wiring system
• heating system
• storage of flammables
• manufacturing process
• floor area
• presence of protective devices (sprinklers, extinguishers)
• exposure to nearby buildings

Question 6

What are two reasons that insurers may NOT charge premiums commensurate with the risk?

Answer 6

1. ) Effects of COMPETITION ON THE MARKETPLACE (think hard and soft markets)
2. ) Effects of GOVERNMENT PRESSURES

Question 7

Why would government intervene in the rates of insurance in a free market?

Answer 7

• Auto insurance, ensuring availability, pressure from consumers.
• Effects of catastrophes; perhaps after a catastrophic loss w/out adequate insurance governments pressure insurers o come up with a product

Question 8

How do governments intervene in the rating process?

Answer 8

• Insurers have to submit their premiums to a provincial government
• Insurer may be allowed to implement the rates but the rates must still be approved by the regulator
• Governments could impose a rate freeze on insurers.