CU Underwriting Pricing and Ratemaking 3

Question 1

In insurance pricing, what is the 'investment income offset' and how does it affect rate levels?

Accepted Answer

A reduction in required premium rates because investment income helps fund losses

Answer

A penalty assessed for poor investment performance

Answer

An additional loading to cover investment management expenses

Answer

A regulatory fee charged on investment portfolios

Question 2

What is 'adverse selection' in the context of insurance pricing and how do underwriters address it?

Accepted Answer

The tendency for higher-risk individuals to seek insurance more than lower-risk individuals, skewing the pool

Answer

Selecting only the best risks for the portfolio

Answer

Choosing between competing rate filings

Answer

Eliminating coverage for high-hazard occupations

Question 3

A rate filing must demonstrate that rates are not 'unfairly discriminatory.' What does this mean under U.S. insurance law?

Accepted Answer

Rate differences must be based on actuarially justified differences in expected losses, not arbitrary characteristics

Answer

Rates cannot vary by ZIP code under any circumstances

Answer

All insureds must be charged the same rate regardless of risk

Answer

Rates cannot exceed those of the largest competitor in the market

Question 4

Which of the following best describes a 'filed rate' in a prior-approval state?

Accepted Answer

A rate that has been submitted to and approved by the state insurance department before use

Answer

A rate that insurers file but can use immediately without waiting for approval

Answer

A rate negotiated individually between an insurer and a large commercial insured

Answer

A rate set by the state and mandatory for all insurers

Question 5

What role does the 'law of large numbers' play in insurance pricing?

Accepted Answer

It allows actuaries to predict average losses more accurately as the number of exposure units increases

Answer

It ensures large accounts always pay higher premiums

Answer

It limits the number of policies an insurer can write in any single state

Answer

It requires insurers with large portfolios to purchase reinsurance

Question 6

An underwriter is pricing a surplus lines risk. Which statement about surplus lines pricing is most accurate?

Accepted Answer

Surplus lines risks are generally exempt from rate and form filing requirements, allowing more pricing flexibility

Answer

Surplus lines rates are subject to the same state rate filing requirements as admitted markets

Answer

Surplus lines insurers must charge the highest rate approved in the standard market

Answer

Surplus lines pricing is set by Lloyd's of London for all U.S. risks

Question 7

What is the purpose of a 'catastrophe loading' in property insurance rates?

Accepted Answer

To build reserves for infrequent but severe loss events such as hurricanes or earthquakes

Answer

To increase profit margins in profitable years

Answer

To cover the cost of catastrophe-response staff

Answer

To fund policyholder dividend programs after a CAT event