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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]

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05 Oct 2005, 17:51
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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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05 Oct 2005, 19:00
Between B and D, I'll take B. The conclusion says not all underpriced policies represent a net loss. B says that a policy that represents a net loss to the insurance company is not an underpriced policy in every case. So the conclusion holds.
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05 Oct 2005, 21:50
I don't know what to choose b/w B & D
B - It seems to just restate the conclusion
D - Says income earned from invested premium is the most important factor

OA & OE Please!
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06 Oct 2005, 01:19
go E go....
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06 Oct 2005, 20:44
Rahul, Can you post the OA & OE for this please.
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06 Oct 2005, 21:11
I take E cause it assumes that the insurance company holds onto the premium for atleast some time (long enuf for it to earn interest) before it has to shell it back out to some guy who just got shot in his ass?
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06 Oct 2005, 21:15
D goes way too far by making the extreme assumption that interest income is the most important determinant of insurance companies profits.

B is a safe choice because it conservatively assumes that such underpriced policies don`t always result in a net loss.
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07 Oct 2005, 16:25
I will pick D.

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07 Oct 2005, 21:03
Certainly E on this one!!!
The point of the argument is even if the claims and expense are much more than the premiums, the interest from the premiums would offset the losses. This is based on the assumption that the premiums will have time to accrue some interest.
But, if the claims start coming in as soon as the policies are issued, then there is no time, therefore no interest, therefore, net loss!!!
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23 Oct 2005, 05:30
anyone aware of OA...i go for D
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23 Oct 2005, 06:12
Dont take this for granted but I think OA is E, because I remember doing this question before...

it is exactly how anandsebastin explained it. An insurance policy can only offset the losses for the claims, and thus not represent a net loss, if the premiums paid by the insured can be invested to earn some income. If you directly have to pay out all premiuns for claims made by others, then you got no chance to earn interest...
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23 Oct 2005, 06:59
nero44 wrote:
Dont take this for granted but I think OA is E, because I remember doing this question before...

it is exactly how anandsebastin explained it. An insurance policy can only offset the losses for the claims, and thus not represent a net loss, if the premiums paid by the insured can be invested to earn some income. If you directly have to pay out all premiuns for claims made by others, then you got no chance to earn interest...

I've seen this before and the answer was (E).
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23 Oct 2005, 11:28
Clearly E for me. If the premium can not be invested (as it is stated in E), then the argument doesn't make any sense.
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23 Oct 2005, 19:11
E.

If whatever comes goes out immediately then what would you invest? No investment no earnings.
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Re: CR - Underpriced policy [#permalink]

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23 Oct 2005, 19:41
Principle: An insurance policy is underpriced if costs exceed total income from premiums.
Fact: Primiums can be invested and earn returns.
Conclusion: An underpriced policy may not be a net loss.

The conclusion that underpriced policy may not be a net loss is based on the fact that you could invest the premium, thus it assumes that you would have enough premiums to invest.

(A) No insurance policies are deliberately underpriced in order to attract customers to the insurance company offering such policies.
Irrelevant.

(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case.
We don't know. We know he said every A is not B. But he didn't say every B is not A.

(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.
That's not the point. You could do the balance sheet afterwards and find if a policy is underpriced or what. And you can also determine if it is a net loss after some time. You don't need to assume the accuracy of prediction ahead of time to determine both concepts.

(D) The income earned by investing premium income is the most important determinant of an insurance companyâ€™s profits.
It's not discussed at all. Irrelevant.

(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.
Correct.
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24 Oct 2005, 02:26
E for me
24 Oct 2005, 02:26
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# Technically a given category of insurance policy is

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