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Technically a given category of insurance policy is

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Technically a given category of insurance policy is [#permalink] New post 26 Oct 2006, 11:52
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A
B
C
D
E

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Technically a given category of insurance policy is underpriced 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 underpriced 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 underpriced 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 underpriced 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 underpriced policies do not require paying out all of the premium income from those policies as soon as it is earned.
PLease explain
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 [#permalink] New post 26 Oct 2006, 12:13
My Choice is B

Here is my explaination:

Technically a given category of insurance policy is underpriced 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 underpriced 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 underpriced in order to attract customers to the insurance company offering such policies.
Too strong word
(B) A policy that represents a net loss to the insurance company is not an underpriced 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.
Out of Scope
(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits.
Too Strong word
(E) The claims against at least some underpriced policies do not require paying out all of the premium income from those policies as soon as it is earned.

I picked up B between B and E.

What is OA??
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 [#permalink] New post 26 Oct 2006, 16:27
Should be E.
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 [#permalink] New post 26 Oct 2006, 17:40
I think its C

The premium money can be invested only if the insurance company is able to invest rather than pay out the premium as claims. So , the insurance companies can only have a stable revenue if it can accurately predict the actual money it has to pay out as claims. If it can't guarantee a stable revenue it will have to increase the premium to cover the associated risk of increasing claims.

C clearly states that assumption , negate it the argument falls apart.
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 [#permalink] New post 26 Oct 2006, 18:49
one more C.
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 [#permalink] New post 26 Oct 2006, 18:50
I'm for E.
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 [#permalink] New post 26 Oct 2006, 19:34
I am in for E too.

(A) Motive for under pricing does not figure in to the statement
(B) This talks about an overpriced policy that still has a loss associated - Not in scope
(C) If level of claims can be predicted before premiums are set, then no premium need to be underpriced. The argument however states that a policy is underpriced IF, OVER TIME...Therefore, this cannot be an assumption
(D) Not necessarily true
(E) The fact that an underpriced policy does not represent a net loss in every case means that there are atleast some cases of underpriced policies for which premium income is invested to earn additional income as oppossed to paying out as soon as it is earned. So E is the right choice
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 [#permalink] New post 26 Oct 2006, 20:12
Say a policy received a preminum of $1 million and at the sametime had to settle claims of $1 million. Where is the money to invest ?

Answer is without doubt (E)
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 [#permalink] New post 27 Oct 2006, 07:58
I'll go out on a limb here and choose (A).

What if the insurance company purposely took a loss on some not so lucrative policies so as to snag larger ones? This seems like the only logical gap between the evidence and conclusion.
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 [#permalink] New post 27 Oct 2006, 13:00
OA is E
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 [#permalink] New post 27 Oct 2006, 17:23
Swagatalakshmi wrote:
Say a policy received a preminum of $1 million and at the sametime had to settle claims of $1 million. Where is the money to invest ?

Answer is without doubt (E)


Yes you are right this should be E . I went overboard with my reasoning. :hammer
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 [#permalink] New post 29 Oct 2006, 11:24
E sounds right
  [#permalink] 29 Oct 2006, 11:24
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