EXAMFX Insurance Premium Calculation and Rating 2 — Questions and Answers
Question 1: Which of the following is an example of a 'schedule rating' adjustment?
- Applying a flat rate to all businesses in the same industry class
- Adding a credit or debit to an insured's premium based on specific physical characteristics of the risk (Correct answer)
- Using past losses to predict future premiums
- Calculating premiums based on payroll amounts
Correct 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.
Question 2: An insurer that charges different premiums to insureds with the same expected loss costs is guilty of:
- Adverse selection
- Unfair discrimination (Correct answer)
- Redlining
- Churning
Correct 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.
Question 3: What does 'earned premium' mean in insurance accounting?
- The portion of the written premium that applies to the expired portion of the policy period (Correct answer)
- The total premium collected from all policyholders in a given year
- The profit the insurer has earned after paying all claims
- The premium amount deposited into the state guaranty fund
Correct 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.
Question 4: Which pricing component covers an insurer's operating costs such as agent commissions, salaries, and overhead?
- Loss cost
- Expense loading (Correct answer)
- Investment income
- Profit margin
Correct 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.
Question 5: A 'retrospective rating plan' adjusts the insured's final premium based on:
- The insurer's investment returns during the policy period
- The insured's actual loss experience during the policy period (Correct answer)
- The state's benchmark loss ratio
- The insured's credit score at renewal
Correct 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.
Question 6: What is 'reinsurance' and what is its primary purpose?
- A second insurance policy purchased by the insured for additional coverage
- Insurance purchased by an insurer from another insurer to spread risk and protect against large losses (Correct answer)
- A government program that insures failed insurance companies
- A policy that covers claims denied by the primary insurer
Correct 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.
EXAMFX Insurance Premium Calculation and Rating 2
Which of the following is an example of a 'schedule rating' adjustment?