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# Technically a given category of insurance policy is

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Director
Joined: 01 Feb 2003
Posts: 842

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Technically a given category of insurance policy is [#permalink]

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28 May 2005, 17:32
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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 companyâ€™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.

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Director
Joined: 03 Nov 2004
Posts: 850

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28 May 2005, 17:45
I will go with E

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Director
Joined: 01 Feb 2003
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28 May 2005, 17:46
I will go with E

Any explanation?

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Director
Joined: 03 Nov 2004
Posts: 850

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28 May 2005, 17:50
Vithal wrote:
I will go with E

Any explanation?

Sure Vithal, why not.

The conclusion is that an underpriced policy does not represent a net loss in every case,
so we have to look for something that says underpriced policy do in fact are profitable in some cases, E fits this assumption.

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SVP
Joined: 05 Apr 2005
Posts: 1708

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28 May 2005, 18:43
D.
the passage is talking about the investment of premiums. so if the earning from the investment of premium is significant part of the profit then definitely the a given insurance policy is not said to be underpriced.

E cannot be correct.

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Senior Manager
Joined: 07 Nov 2004
Posts: 453

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28 May 2005, 21:35
agree with E.

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Senior Manager
Joined: 21 Mar 2004
Posts: 445

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Location: Cary,NC

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29 May 2005, 12:37
A. Too extreme
B. Again too extreme
C. level of prediction - out of scope
D. Not necessarily true. Other factors could be more important for profits
E. Use denial test. If all premium income were doled out to the underpriced policy, a net loss would be there for every case. Whereas the passage states that all cases do not represent a net loss.
_________________

ash
________________________
I'm crossing the bridge.........

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29 May 2005, 12:37
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