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# Technically a given category of insurance policy is under

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Manager
Joined: 24 Apr 2009
Posts: 91

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

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04 May 2009, 04:16
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Technically a given category of insurance policy is under priced 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 under priced 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 under priced 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 under priced 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.(Surely not the answer since no mention of Profits!!)
(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.

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Manager
Joined: 30 Mar 2009
Posts: 248

Kudos [?]: 207 [0], given: 1

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04 May 2009, 04:30
E

Technically a given category of insurance policy is under priced 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 under priced 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 under priced 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 under priced policy in every case --> if so, we still can't conclude a reverse result
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set --> irrelevant
(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits.(Surely not the answer since no mention of Profits!!) --> as you said
(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 --> Use the negating technique: no claims do not requires, or all claims require paying out all premium income. Then the insurance company can't invest in the premium in all insurance policy. So, all underpriced policy represent a net loss --> weaken, so this is the best
[/b]

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Director
Joined: 01 Aug 2008
Posts: 727

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04 May 2009, 05:45
agree with E.

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Director
Joined: 25 Oct 2006
Posts: 633

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04 May 2009, 10:08
IMO E.

Why "an under priced policy does not represent a net loss in every case." ??
because "premium income can be invested and will then yield returns of its own" - which is actually claim money.

So, assumption is "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 " - hence money is available for further investment.
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Kudos [?]: 656 [0], given: 6

Re: assumption   [#permalink] 04 May 2009, 10:08
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# Technically a given category of insurance policy is under

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