Insurance Premium Calculation and Rating Flashcards

In insurance rating, what is the purpose of the 'loss ratio'?

Answer: To compare losses incurred to premiums earned, indicating underwriting profitability

The loss ratio is calculated by dividing incurred losses by earned premiums; a ratio below 100% indicates the insurer is collecting more in premiums than it pays in claims.

What is the 'combined ratio' in insurance?

Answer: The sum of the loss ratio and expense ratio, used to measure overall underwriting profitability

The combined ratio adds the loss ratio and expense ratio; a combined ratio under 100% signals an underwriting profit, while over 100% signals an underwriting loss.

Which rating method bases an insured's premium primarily on the historical loss experience of the specific insured?

Answer: Experience rating

Experience rating adjusts premiums based on the insured's own past claims history relative to expected losses for their class, rewarding good loss records with lower premiums.

What is a 'rate' in insurance terminology?

Answer: The price per unit of insurance exposure used to calculate the premium

A rate is the cost per unit of insurance coverage (e.g., per $100 of property value or per $1,000 of life insurance), which is multiplied by the number of exposure units to determine the premium.

Which of the following best describes 'adverse selection' in insurance?

Answer: The tendency of higher-risk individuals to seek insurance more than lower-risk individuals

Adverse selection occurs when people with higher-than-average risk are more likely to purchase insurance, which can distort the risk pool and increase costs for the insurer.

What is a 'deductible' in an insurance policy?

Answer: The amount the insured must pay out-of-pocket before the insurer begins paying a claim

A deductible is the portion of each covered loss that the insured is responsible for paying before the insurance company's obligation begins.