AU 60 Chapter 7 Practice UPDATED
ACTUAL Questions and CORRECT
Answers
Actuaries and underwriters both have roles in pricing insurance products. What would be the
underwriters' primary pricing role? - CORRECT ANSWER - Charging a sufficient
premium for the risk assumed.
In addition to the conditions included in the law of large numbers, commercially insurable loss
exposures are considered by insurers to be NOT ____________. - CORRECT ANSWER -
Catastrophic.
Insurance classification systems group risks that share similar characteristics and that usually: -
CORRECT ANSWER - Have the same likelihood of loss.
Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining
economic market, which created huge profits for People's Protection. The next year, hoping for
additional profits, the insurer increased rates only two percent maintaining that a five percent
increase over two years was reasonable, because country estate owners' insurance products were
designed to protect a wealthier customer who could afford to pay higher premiums.
In which ways would People's Protection's second set of rates at two percent be considered as
excessive? - CORRECT ANSWER - If the rates generate an unreasonable profit for
People's Protection.
In ratemaking, the amount included to pay such things as future acquisition costs, overhead, and
premium taxes is referred to as: - CORRECT ANSWER - The expense provision.
In ratemaking, the component included to pay future claims and loss adjustment expenses is
referred to as: - CORRECT ANSWER - Prospective loss costs.
, Auto Insurer T insured 100,000 cars each year during a three year experience period, and its
incurred losses were $30 million. What is the pure premium per car year? - CORRECT
ANSWER - $100.
Auto Insurer B is calculating the pure premium based on insured losses of $8 million and earned-
car years of 200,000. The pure premium is: - CORRECT ANSWER - $40.
Due to poor loss experience in its product liability line of insurance, an insurer wants to adjust its
current insurance rates. The insurer's actual loss ratio is 45 percent and the expected loss ratio is
40 percent. Using the loss ratio ratemaking method, which one of the following represents the
indicated rate change? - CORRECT ANSWER - 12.5% increase.
Unusual rate fluctuations could result from occasional large losses, whether from large individual
losses or from an accumulation of smaller losses from a single event. In liability insurance, these
fluctuations are controlled by using: - CORRECT ANSWER - Only basic limit losses.
In ratemaking, most losses from catastrophic events, such as hurricanes, are excluded from
ratemaking data and replaced by a: - CORRECT ANSWER - Flat catastrophe charge.
One of the types of rates used by underwriters to price insurance is judgment rates. Which one of
the following is true regarding judgment rates? - CORRECT ANSWER - Judgment rates
are developed by reviewing individual account characteristics.
To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which
one of the following is true regarding rate manuals? - CORRECT ANSWER - Rate
manuals provide information concerning the use of endorsements that amend the policy.
Mega Steel Inc. is looking to purchase workers compensation coverage for its 10,000 employees.
Despite having an inconsistent loss history, Mega Steel has recently implemented some risk
control measures that it believes will lead to fewer losses in the upcoming policy period. Which
one of the following individual rating plans would be best for Mega Steel? - CORRECT
ANSWER - Retrospective rating plan.
ACTUAL Questions and CORRECT
Answers
Actuaries and underwriters both have roles in pricing insurance products. What would be the
underwriters' primary pricing role? - CORRECT ANSWER - Charging a sufficient
premium for the risk assumed.
In addition to the conditions included in the law of large numbers, commercially insurable loss
exposures are considered by insurers to be NOT ____________. - CORRECT ANSWER -
Catastrophic.
Insurance classification systems group risks that share similar characteristics and that usually: -
CORRECT ANSWER - Have the same likelihood of loss.
Insurer People's Protection raised its Country Estate policies' rate by three percent in a declining
economic market, which created huge profits for People's Protection. The next year, hoping for
additional profits, the insurer increased rates only two percent maintaining that a five percent
increase over two years was reasonable, because country estate owners' insurance products were
designed to protect a wealthier customer who could afford to pay higher premiums.
In which ways would People's Protection's second set of rates at two percent be considered as
excessive? - CORRECT ANSWER - If the rates generate an unreasonable profit for
People's Protection.
In ratemaking, the amount included to pay such things as future acquisition costs, overhead, and
premium taxes is referred to as: - CORRECT ANSWER - The expense provision.
In ratemaking, the component included to pay future claims and loss adjustment expenses is
referred to as: - CORRECT ANSWER - Prospective loss costs.
, Auto Insurer T insured 100,000 cars each year during a three year experience period, and its
incurred losses were $30 million. What is the pure premium per car year? - CORRECT
ANSWER - $100.
Auto Insurer B is calculating the pure premium based on insured losses of $8 million and earned-
car years of 200,000. The pure premium is: - CORRECT ANSWER - $40.
Due to poor loss experience in its product liability line of insurance, an insurer wants to adjust its
current insurance rates. The insurer's actual loss ratio is 45 percent and the expected loss ratio is
40 percent. Using the loss ratio ratemaking method, which one of the following represents the
indicated rate change? - CORRECT ANSWER - 12.5% increase.
Unusual rate fluctuations could result from occasional large losses, whether from large individual
losses or from an accumulation of smaller losses from a single event. In liability insurance, these
fluctuations are controlled by using: - CORRECT ANSWER - Only basic limit losses.
In ratemaking, most losses from catastrophic events, such as hurricanes, are excluded from
ratemaking data and replaced by a: - CORRECT ANSWER - Flat catastrophe charge.
One of the types of rates used by underwriters to price insurance is judgment rates. Which one of
the following is true regarding judgment rates? - CORRECT ANSWER - Judgment rates
are developed by reviewing individual account characteristics.
To effectively price insurance accounts, underwriters must be familiar with rate manuals. Which
one of the following is true regarding rate manuals? - CORRECT ANSWER - Rate
manuals provide information concerning the use of endorsements that amend the policy.
Mega Steel Inc. is looking to purchase workers compensation coverage for its 10,000 employees.
Despite having an inconsistent loss history, Mega Steel has recently implemented some risk
control measures that it believes will lead to fewer losses in the upcoming policy period. Which
one of the following individual rating plans would be best for Mega Steel? - CORRECT
ANSWER - Retrospective rating plan.
