Insurance Premium Calculation and Rating Flashcards
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Read the first 6 Insurance Premium Calculation and Rating flashcards as text
Which of the following is an example of a 'schedule rating' adjustment?
Answer: Adding a credit or debit to an insured's premium based on specific physical characteristics of the risk
Schedule rating modifies a class rate by applying credits or debits based on specific characteristics of the individual risk, such as the condition of the premises, management quality, or safety programs.
An insurer that charges different premiums to insureds with the same expected loss costs is guilty of:
Answer: Unfair discrimination
Unfair discrimination occurs when an insurer charges different premiums to insureds who present the same risk without actuarial justification, which is prohibited by state insurance regulations.
What does 'earned premium' mean in insurance accounting?
Answer: The portion of the written premium that applies to the expired portion of the policy period
Earned premium is the share of the written premium that corresponds to the portion of the policy period that has already elapsed, representing coverage already provided by the insurer.
Which pricing component covers an insurer's operating costs such as agent commissions, salaries, and overhead?
Answer: Expense loading
Expense loading is the portion of the insurance premium that covers the insurer's administrative and operational costs, including agent commissions, underwriting, and overhead.
A 'retrospective rating plan' adjusts the insured's final premium based on:
Answer: The insured's actual loss experience during the policy period
Under a retrospective rating plan, the final premium is determined after the policy period ends based on the insured's actual losses, subject to minimum and maximum premium limits.
What is 'reinsurance' and what is its primary purpose?
Answer: Insurance purchased by an insurer from another insurer to spread risk and protect against large losses
Reinsurance allows a primary insurer (the ceding company) to transfer a portion of its risk to another insurer (the reinsurer), protecting the primary insurer from catastrophic losses and stabilizing capacity.