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

Because insurers earn investment income on premiums held before losses are paid, this income can offset the need for higher rates, allowing rates to be set somewhat below the pure cost of expected losses.

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

Adverse selection occurs when those most likely to have losses are also most likely to buy insurance, driving up costs; underwriters counter this through careful risk selection, rating accuracy, and tiered pricing.

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

Unfair discrimination means charging different rates for risks with the same expected loss characteristics; justifiable actuarial differences in loss potential are the legal basis for rate variations.

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

In prior-approval states, insurers must file proposed rates with the state insurance department and receive explicit approval before implementing them.

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

As the number of similar exposure units grows, actual loss experience converges toward the expected (theoretical) average, making loss predictions more reliable and rates more accurate.

(CU) Certified Underwriter Practice Test

(CU) Certified Underwriter Practice Test

CU Underwriting Pricing and Ratemaking 3