C11 Principles & Practice - CH03 - Ratemaking, Underwriting, and Rating Exam | Questions & 100% Correct Answers (Verified) | Latest Update | Grade A

What is RATEMAKING? : - 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)? : - 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? : - 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? : - 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. 2 | P a g e What are the TWO (2) FACTORS associated with the PROCESS OF RATE-MAKING? : 1. The Law OF LARGE NUMBERS aka law of averages. 2. The THEORY OF PROBABILITY. *(MNQ) What is the THEORY OF PROBABILITY? : - 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? : - 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