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C11 Principles & Practice - CH03 - Ratemaking, Underwriting, and Rating
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C11 Principles & Practice - CH03 - Ratemaking, Underwriting, and Rating
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C11 Principles & Practice - CH03 -Ratemaking, Underwriting, and Rating
What is RATEMAKING? - CORRECT ANSWER-- Process of establishing rates
for each class of insurance.
- Determining the cost of a specified unit of insurance for a given period of time.
*(MNQ) What is RATE (unit cost)? - CORRECT ANSWER-- The price of a unit of
insurance for a period of one year.
- Expressed in dollars and cents or as a percentage.
*(MNQ) What is PREMIUM? - CORRECT ANSWER-- Total cost of an insurance
policy.
- Calculated by multiplying the rate times the amount or term of insurance
purchased.
What is difference between RATE & PREMIUM? - CORRECT ANSWER-- RATE
is the price of a unit of insurance for a period of one year.
- PREMIUM is the cost of an insurance policy determined by multiplying the rate
by the term of insurance purchased.
What are the TWO (2) FACTORS associated with the PROCESS OF
RATE-MAKING? - CORRECT ANSWER-1. The Law OF LARGE NUMBERS aka
law of averages.
2. The THEORY OF PROBABILITY.
*(MNQ) What is the THEORY OF PROBABILITY? - CORRECT ANSWER-- The
likelihood of an occurrence.
- Expressed by the ratio of the number of actual occurrences to that of possible
occurrences.
- This can be also referred to as chance.
*(MNQ) What is the LAW OF LARGE NUMBERS aka law of averages? -
CORRECT ANSWER-- The principle that the reliance to be placed on a given
probability is increased when the number of trials or cases is increased.
, - The larger the sample, the more reliable the result.
- Used in the process of rate making to determine rate and premiums.
*(MNQ) What is CHANCE and its relationship to insurance? (5 marks) -
CORRECT ANSWER-- The probability of a certain event happening, related to
the theory of probability
- If statistics are kept on the losses suffered by a large number of people, the
number of losses suffered by a similar group can be predicted.
*(MNQ) What are the 3 factors that affect the ACCURACY OF LOSS
PREDICTION in ratemaking? - CORRECT ANSWER-1. The size of the sample.
2. The time period over which the sample was taken.
3. Conditions in the past relative to the future.
*(MNQ) Describe how the size of the sample affect the accuracy of loss
predictions in ratemaking. - CORRECT ANSWER-The larger the size of the
sample used to base the predictions, the more reliable the predictions will be.
*(MNQ) Describe how the time period over which the sample was taken affect the
accuracy of loss predictions in ratemaking. - CORRECT ANSWER-The longer
the time period over which the sample has been taken, the more reliable the
predictions based upon the sample will be.
*(MNQ) Describe how the conditions in the past relative to future conditions affect
the accuracy of loss predictions in ratemaking. - CORRECT ANSWER-- If the
same conditions currently apply as those existed when the sample was taken,
the more reliable the predictions of future events will be.
- If conditions have been already changed, or are likely to change, this must be
considered when making predictions.
- Example: inflation, broadening of auto policy
What is the difference between the probability and uncertainty of an event
occurring in terms of the function of insurance? - CORRECT ANSWER-The
function of insurance is mainly to reduce uncertainty, and only incidentally the
reduction of probability
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