nitya34 wrote:
Technically a given category of insurance policy is under priced if, over time, claims against it plus expenses associated with it exceed total income from premiums. But premium income can be invested and will then yield returns of its own. Therefore, an under priced policy does not represent a net loss in every case.
The argument above is based on which of the following assumptions?
(A) No insurance policies are deliberately under priced in order to attract customers to the insurance company offering such policies.
(B) A policy that represents a net loss to the insurance company is not an under priced policy in every case.
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.
(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits.
(E) The claims against at least some under priced policies do not require paying out all of the premium income from those policies as soon as it is earned.
The conclusion :- an under priced policy does not represent a net loss in every case.
Lets apply negation technique to get to the correct answer.
Option A if negated :- Some insurance policies are deliberately under priced in order to attract customers to the insurance company offering such policies.
But the premiums earned through those policies can be invested and that investment will generate return.
So we can say "an under priced policy does not represent a net loss in every case." The conclusion can be followed after negation.
Option A is out.
Option B if negated :- "A policy that represents a net loss to the insurance company is an under priced policy in every case. "
Lets say , "A policy that represents a net loss to the insurance company" = A
"an under priced policy" = B
So A is always inside B in the venn diagram.
So there could be some portion of B which is outside A. And it means, "an under priced policy ( B in our case) " is not always "A policy that represents a net loss to the insurance company (A in our case)". So we can say that
" an under priced policy" does not represent "a net loss" in every case."Conclusion follows even after negation . Option B is out.
Option C is clearly irrelevant.
Option D if negated :- The income earned by investing premium income is NOT the most important determinant of an insurance company’s profits.
So there are other ways too by which an insurance company can make profits. So an under priced policy does not represent a net loss in every case.
Conclusion follows even after negation. Option D is out.
Option E if negated :- "The claims against all under priced policies require paying out all of the premium income from those policies as soon as it is earned."
Then we can not say that "an under priced policy does not represent a net loss in every case." Then "the under priced policy does represent a net loss in every case."
Conclusion can not follow after negation.
Option E is the answer.
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