Insurance Premium Rating & Mathematics

Question 1

Which principle allows insurers to predict future losses more accurately as the number of exposure units increases?

Accepted Answer

Law of large numbers

Answer

The law of large numbers says that actual results move closer to expected results as the number of similar exposures grows. This is the basis of insurance pricing.

Question 2

A loss ratio is calculated as:

Accepted Answer

Incurred losses divided by earned premiums

Answer

The loss ratio compares incurred losses (and often loss adjustment expenses) to earned premiums. For example, $60,000 in losses on $100,000 of earned premium is a 60% loss ratio.

Question 3

Which rating method sets premiums using the insured group's own past claims experience?

Accepted Answer

Experience rating

Answer

Experience rating adjusts the premium based on the actual loss history of the insured or group. Manual rating applies published rates to broad classes.

Question 4

A gross premium is made up of:

Accepted Answer

Pure premium plus loading for expenses, profit and contingencies

Answer

The pure premium covers expected losses. The loading covers the insurer's expenses, profit and contingencies. Together they make the gross premium the policyholder pays.

Question 5

A building worth $500,000 is insured for $300,000 under a policy with an 80% coinsurance clause. A covered loss of $100,000 occurs (ignore the deductible). How much will the insurer pay?

Accepted Answer

$75,000

Answer

Required coverage is 80% × $500,000 = $400,000. The insured carried $300,000, so the insurer pays 300,000 / 400,000 × $100,000 = $75,000.

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Insurance Premium Rating & Mathematics