Underwriting Pricing and Ratemaking Flashcards
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In commercial lines underwriting, which rating factor typically has the MOST significant impact on workers' compensation premiums?
Answer: Industry classification (class code)
Workers' compensation class codes reflect the inherent hazard of the type of work performed and are the primary driver of the manual rate applied to payroll.
An underwriter applies a schedule rating credit of 15% to a commercial property risk. What is the basis for this type of modification?
Answer: Specific physical or managerial characteristics that differ from the average risk in the class
Schedule rating allows underwriters to adjust rates for specific characteristics of an individual risk — such as building construction, protection, or management quality — that differ from the class average.
What does the 'permissible loss ratio' represent in the loss ratio ratemaking method?
Answer: The target loss ratio that allows for recovery of expenses and a profit margin
The permissible loss ratio is 1 minus the expense ratio, representing the proportion of premium available to pay losses while still achieving profitability.
Which exposure base is most commonly used for general liability insurance rating?
Answer: Gross sales or payroll, depending on the operation
General liability premiums are most commonly based on gross sales for mercantile and service operations, or payroll for contracting risks, as these best correlate with liability exposure.
What is 'loss development' and why is it important in ratemaking?
Answer: The growth of reported losses over time as claims mature to their ultimate value
Loss development accounts for the fact that reported losses at any given point in time are not final; factors are applied to project incurred losses to their estimated ultimate values for accurate ratemaking.
An underwriter reviewing a large account uses 'experience rating modification.' A mod factor of 0.85 means the insured will:
Answer: Pay 85% of the manual premium
An experience modification factor of 0.85 is applied to the manual premium, resulting in a premium that is 15% below manual — a credit for better-than-average loss experience.
Which statement best describes 'minimum premium' in underwriting pricing?
Answer: The floor amount charged for a policy regardless of how low calculated premium would otherwise be
A minimum premium ensures the insurer recovers basic fixed administrative and acquisition costs even for very small or short-term policies, regardless of computed premium.