Technically a given category of insurance policy is under priced if

Argument –
Profits to policy = Revenues – Cost
In this case revenue = income from premiums
Cost = Expenses + claims against the policy
The argument says that if revenues > cost  policy is in loss = policy is under-priced
However the premiums (=revenue) are reinvested further the reinvested premiums will yield returns that will compensate for the costs and provide the required profits. Thus under priced policy does not always represent net loss.
Here we are assuming that the premiums can be returned and there are no other obligations / the reinvested premiums can yield sufficient returns to compensate for the costs

(A) No insurance policies are deliberately under priced in order to attract customers to the insurance company offering such policies.
- Negate = few policies are under priced to attract customers. However, we cannot justify the reinvestment of premiums to generate profits.
- Wrong
(B) A policy that represents a net loss to the insurance company is not an under priced policy in every case.
- Policy that presents loss = under priced policy every time. This is exactly what the conclusion is saying. This does not contradict the conclusion. In some cases, the policy can represent the net loss and in some cases it cannot.
- Wrong
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.
- We can make an argument that if claims can be predicted then we can predict the reinvestment of premiums required to generate a profit. But do we really require to predict the premiums with “great accuracy”? A simple prediction of positive or negative returns can also work.
- However even if there aren’t any policies that can predict claims, the condition does not constradict the conclusion that premiums can be reinvested to generate profits
-Wrong
(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits.
- There can be many determinants. It does not matter.
- Wrong

(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.
-Negate: Every policy required paying out premium income.
- If premiums do require to be paid immediately, they cannot be invested. If they cannot be invested profit cannot be generated using investment of profits. In such a case, a under priced policy always represents a net loss

There are several posts here already that analyze the argument. Could we trouble you to elaborate on what you don't understand after reading through the rest of the thread?
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GMATNinja After some rereading, I understood the question. It was more a vocabulary than an assessment issue of the argument. Tks anyway!

I may/may not be right regarding the option B.

Notice what conclusion says. It says —“an underpriced policy does not represent a net loss in every case”. Notice that the author has taken into account that a policy can be underpriced and not leading to a loss. What I am saying is that the author knows that if a policy is underpriced, it can either lead to/represent a loss or doesn’t lead to/represent a loss.

Now look at option B. If we negate option B, we get — “a policy that represents a loss to the insurance company is an underpriced policy in every case”. Does the negated statement really destroy the conclusion? No right? As explained above, author already has taken into account, in other words, negated statement is basically what is already there in the conclusion. Had the negated statement been something like this—“ only the policies that represent a net loss to the insurance company in every case are considered underpriced”. This statement would certainly have weakened the argument— if only the policies that represent loss in every case are considered underpriced, then such policies must represent a net loss in every case, so then how can the author say that underpriced policy does not represent a net loss in every case?

PS: above mentioned analysis is just my take on option B. I may be wrong/ I may not be wrong, so if any expert feels that my analysis is incomplete or incorrect, please feel free to correct me

Regards,

Posted from my mobile device

Hi,

One question, here the question says that underpriced policy does not represent a loss in every case, which means that in some cases it might and choice E says that at least some underpriced policies do not require paying out all of the premium at once. How do you deal with at least here? It will be really helpful if you can help me.

Thanks in advance!

Bumping this response ......down, I guess?

Perfect analysis.

D is one of those answers that might become troublesome if you don’t understand the purpose behind the “negation test” and why it is used.

Although it is a stretch, you could say that D slightly strengthens the claim that there are at least a few underpriced policies that do not represent a net loss. These types of answers that seem to strengthen the argument, but are not absolutely essential assumptions, can be the hardest to eliminate.

When you negate any answer that might strengthen the conclusion or that is at least in line with the conclusion, the conclusion will appear to weaken. You always need to step back and think the following in any find the assumption type questions: if I throw this answer out, can the author still use the supporting facts to make a conclusion that makes sense?

Stepping back and thinking about D: does the author absolutely have to assume that the investment income earned is the MOST important determinant of the company’s profits?

The author still has the supporting fact that there is this income coming in to offset and overcome the expenses associated with the policy. Even if the investment income is NOT the most important aspect, it is still income that can be used to offset the underpriced policy’s expenses. Even as a small determinant of the company’s profits, the investment income earned could be enough to conclude that not every underpriced policy is a net loss.

The author isn’t required to assume that it is the most important determinant of the company’s profits for the facts to support his conclusion.

Just having the investment income be enough to overcome the expenses in some of the underpriced policy cases is enough to conclude that not all these policies represent net loses.

D is wrong.


E is essentially telling us that there are at least a few policies in which the investment earnings do not have to be given to the policy holder.

If the author does not assume answer E, then it is the case that all of the investment income earned is not kept by the insurance company.

In such a case, anytime a policy is undervalued, the company does not have any investment income to offset these kinds of undervalued policies. The conclusion could never be true! There wouldn’t even even be a single case in which an undervalued policy makes the company money or breaks even.

E is essential to the argument. Without E being true, the facts do not support what the author claims.




Posted from my mobile device

The question asks for an assumption but we can think of this question as a must be true problem. A quick glance at the answer choices shows that many use strong language (in bold):

The argument above is based on which of the following assumptions?



Do we know that none of the insurance polices are deliberately underpriced in order to attract customers to the insurance company offering such policies? We don't. A is out.



Do we know that a policy that represents a net loss to the insurance company is not an underpriced policy in every case It's certainly possible that all policies that represent a net loss are underpriced policies. B is out.



This doesn't have to be true -- perhaps we can't predict any claims with great accuracy.



Do we know the income earned by investing premium income is the most important determinant of an insurance company’s profits? Maybe there is another determinant that is more important! D is out.



CORRECT. If we're concluding an underpriced policy does not represent a net loss in every case, then we need to use the premium income in order to invest. To be able to do this, we can't pay out all the premium income immediately as soon as it is earned.

E is the answer.
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VeritasKarishma mikemcgarry egmat
Could you please help explain why option B is incorrect?
I was hesitating between B and E.
Thanks for your help.

Conclusion and Assumptions need different logical pre-thinking. (B) in this question can work logically as Conclusion but not as an assumption. An assumption asks us to find something which the author has formulated or based on before the writing up of the argument, conclusion is the logical result of the argument.

Thank you

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.

Analysis: Case when claim+expenses > premium then policy is underpriced. However, premium income accrues interest, therefore, an underpriced policy does not necessarily represent a net loss

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.
Negation: At least some insurance policies are deliberately underpriced to attract customers
Analysis: So what? The argument is speaking about the financial aspect of the underpriced policy, not in terms of secondary gains. Discard.

(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case.
The classic trap answer choice. If the argument says If X then Y, this trap answer type says if not X then not Y. This is not necessarily true. Discard.

(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.
Whether or not the level of claims can be predicted just suggests to us whether or not it could be predicted if the policy is underpriced or not. It does not relate underpriced policy with a net loss. Discard.

(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits.
Let's say it is not the most important determinant, but it is still a determinant. It can still help us draw the same conclusion from the argument. Discard.

(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.
Negation: The claim against at least some underpriced policies requires paying out all of the premium income from the policies as soon as it is earned
Analysis: If the negation is true, the insurance company can't invest the premium income and therefore can't earn the interest. Therefore, the conclusion falls apart.

Therefore, E is the correct answer.
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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 assumption is that we'll get time to invest in a policy to generate an additional return. What if the premium income can't be invested? Is there any case when a premium can not be invested - when whatever premium the insurance company earns, they have to return that in the form of a claim?
Another way of looking at it is
An underpriced policy doesn't represent a net loss in every case BECAUSE of additional yield on returns HOW by investing a premium income. Is there anything in this chain that can weaken the conclusion? Yes. What if we can't invest? So, we have to shield the conclusion against this information. How - that's what option E does. It rules out the case that can weaken the conclusion.

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. Whether they are deliberately underpriced or not, we don't care.

(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case. - Yes, there can be other cases as well. We don't have to assume that this is the only case. Distortion.

(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set. - We are not concerned about those policies. Here, we are concerned about policies in which we get to know whether they made a profit or not, later. Out of scope.

(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits. - Company's profits in general are out of scope.

(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 shields the argument against a possible weakener. Per our pre-thinking.