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Technically a given category of insurance policy is

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Manager
Joined: 13 Aug 2009
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Technically a given category of insurance policy is [#permalink]

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10 Apr 2010, 00:02
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Difficulty:

55% (hard)

Question Stats:

71% (01:18) correct 29% (02:06) wrong based on 10 sessions

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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.
[Reveal] Spoiler: OA

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Intern
Joined: 18 Feb 2010
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10 Apr 2010, 12:55
E
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. (Out of scope)
(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case. (No. This is simply repeating the conclusion)
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set. (No. may be the associated expenses may cause it to be underpriced every time.)
(D) The income earned by investing premium income is the most important determinant of an insurance company's profits. (No. It may be but cant see how it effects the conclusion)
(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. (YES. and this premium income can generate return which may in total (premium + return) exceed the claims + expenses. Thus in those cases the policy may not be actually underpriced.)
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Director
Joined: 25 Aug 2007
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WE 1: 3.5 yrs IT
WE 2: 2.5 yrs Retail chain

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28 Apr 2010, 06:12
IMO E.

This is a case of Defender Assumption. To defend the conclusion that underpriced policies are not a net loss, we have to show that premiums+return > claims+expenses. For this we need premiums to invest till the time returns comes. This is our assumtion criteria. Just check the options.

raghavs wrote:
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. [This is supporting one but it does not bring the relationship we are looking for. Incorrect]
(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case. [This is just a repition of the main conclusion. Incorrect]
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set. [We need to find info on underpriced policy. This is super set of policy which may or may not bring relevent relationship. Incorrect]
(D) The income earned by investing premium income is the most important determinant of an insurance company's profits. [This is Shell Game fallacy. Incorrect Remember, answer choices, which have MOST/PRIMARY REASON words are usually suspect of misleading incorrect answer choices.]
(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. [This is exactly what we are looking for. Correct]

[Reveal] Spoiler:
OA--E

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Manager
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29 Apr 2010, 06:57
yup....even i think its E
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Kudos [?]: 30 [0], given: 12

Re: Assumption cr   [#permalink] 29 Apr 2010, 06:57
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Technically a given category of insurance policy is

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