Study 8: Pricing Insurance Coverages Flashcards
Which of the following professionals performs ratemaking? A) Underwriter B) Actuary C) Claims adjuster D) Broker
B) Actuary
Actuaries perform ratemaking. The process involves statistical analysis, estimating, and reviewing previously analyzed information to estimate the cost of claims.
What are the two basic approaches to ratemaking?
A) Estimating and statistical analysis
B) trend watching and estimating
C) Class rating and schedule rating
D) The law or large numbers and statistical analysis
C) Class rating and schedule rating
Rating is the process by which underwriters apply the information developed by actuaries to the gathered risk information to establish a premium for specific risks. The two basic approaches are class rating and schedule rating.
What type of rating is used when the body of statistical data is too fragmented to permit class rating?
A) Schedule rating
B) Class rating
C) Estimating
D) Statistical analysis
A) Schedule rating
Schedule rating is used when the body of statistical data is too fragmented to permit class rating.
What type of rating is used when statistics can be gathered on a large number of risks that share common characteristics?
A) Schedule rating
B) Estimating
C) Statistical analysis
D) Class rating
D) Class rating
Class rating is used when statistics can be gathered on a large number of risks tat share common characteristics.
What affects ratemaking?
A) Business environment
B) Environmental changes
C) Consumer pressure
D) Fraud
A) Business environment
Ratemaking is affected by the business environment. Insurers may not charge premiums that are commensurate with the risks they insure because of competition in the marketplace and government pressure.
Which body approves insurance automobile premiums in the provinces and territories?
A) Municipal government
B) Federal government
C) Provincial or territorial government
D) Better business Bureau
C) Provincial or territorial government
Most provinces and territories require insurers to submit automobiles premiums to a provincial or territorial government body for approval. In some cases, procedures allow new rating programs to be used as soon as they are filed subject to certain caveats. In some jurisdictions, prior approval is required before any increase in rates is permitted.
What practice does regulatory action aim to remove?
A) Non-payment of premiums
B) Discriminatory practices
C) Denial of claim
D) Improper coding
B) Discriminatory practices
Regulatory action aims to remove discriminatory practices by prohibiting insurers from refusing to insure a person, cancelling, r refusing to renew car insurance policies based on grounds such as a person’s age, the age of a vehicle, or a missed payment.
What lead to consumer discontent regarding automobile insurance?
A) Lack of choice in insurers
B) Discriminatory practices
C) Economic environment
D) Rising automobile insurance costs
D) Rising automobile insurance costs
As consumer discontent with rising automobile insurance costs grew stronger, questions arose about the accuracy, objectivity, and fairness of the ratemaking process. Insurers’ efforts to explain and defend rating criteria and the ratemaking process were largely ineffective.
Why does ratemaking involve prospective analysis?
A) It produces figures that will be applied to claims in the future
B) It helps the organization plan for its investments.
C) It helps the organization figure out how many key employees re needed to replace retirees.
D) It helps the insurer figure out which consultants will be needed to plan for reorganizing the operation.
A) It produces figures that will be applied t claims in the future.
Ratemaking involves prospective analysis because it produces figures that will be applied to claims in the future. When premiums are increased, it is to pay for anticipates increases in the future cost of claims on policies written today.
What is the ultimate determinant of the price paid by the consumer for insurance?
A) How much money an insurer spends on marketing its product
B) Competition in the marketplace
C) The number of disasters in a given year
D) Demographic changes in key markets
B) Competition in the marketplace
While actuaries and underwrites go to great lengths to produce rating programs,the ultimate determinant of the price paid by the consumer is competition in the marketplace. Price is the major factor for consumers when they are shopping for insurance.
Narrative: Outline five reasons why statistical analysis of a risk might not yield useful conclusions for an underwriter.
Statistical analysis of a risk might not yield useful conclusions (any five of the following)
1) Insufficient statistical data
2) Sufficient data but difficult to compare risks
3) Statistical improbability of loss that does not rule its possibility
4) Underwriter’s familiarity with the industry
5) Underwriter should not dismiss a major claim just because it is large, happened once, and is likely to happen again
6) Underwriter looks beyond the loss record
Narrative: State the major components of rates. (5 marks)
Major components of rates:
1) Anticipated cost of settling claims
2) Acquisition costs of the business
2. 1) Commissions
2. 2) Marketing
2. 3) Operations
3) Costs of administering the process
4) Target profit
Narrative: Outline the effects that catastrophes have on ratemaking. (5 marks)
Effects of catastrophes:
1) Some court decisions in the US have ignored policy contractual conditions to provide relief for unfortunate consumers who have been devastated by catastrophe
2) Example of Hurricane Katrina - a judge’s decision against an insurer effectively found a homeowners policy exclusion for flooding inoperative
3) Such decisions result when the government applies pressure to try to provide as broadly as possible for everyone who suffers when a catastrophe occurs
4) So, insurers must consider such judicial interpretations when pricing is set
5) Contract terms should be clearly outline to demonstrate how policy reacts under given circumstances (otherwise insurer failures are certain to occur because of inadequate pricing)
