Underwriting Pricing and Ratemaking Flashcards
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Which component of insurance ratemaking represents the expected cost of claims per unit of exposure?
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.
An underwriter calculates a loss ratio of 72% and an expense ratio of 30%. What is the combined ratio?
Answer: 102%
The combined ratio equals the loss ratio plus the expense ratio: 72% + 30% = 102%, indicating an underwriting loss.
Which ratemaking method calculates rates by dividing incurred losses by earned premiums?
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.
What does 'rate adequacy' mean in property and casualty insurance underwriting?
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.
An underwriter uses 'credibility weighting' when calculating a risk's rate. What does this primarily address?
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.
Which type of rating plan adjusts the final premium based on the insured's actual loss experience during the policy period?
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.
What is the primary purpose of a 'trend factor' in insurance ratemaking?
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.