Technically a given category of insurance policy is under priced if

Question

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.

dentobizz · Accepted Answer

Bumping for review and further discussion*.
New project from GMAT Club! Click here

Theory on Assumption Questions
E-gmat
inference-vs-assumption-146758.html?hilit=Inference
article-what-and-how-to-negate-6-exercise-questions-138510.html#p1119593
Souvik's article
gmatclub-verbal-attack-139074-40.html#p1125894
Kaplan
https://gmat.kaptest.com/2011/05/23/kapl ... C1289.dpbs
Veritasprep
https://www.gmatclub.com/forum/veritas-prep-resource-links-no-longer-available-399979.html#/2013/03 ... sumptions/
Knewton
https://gmatclub.com/blog/2011/08/the-de ... questions/
Mangoosh Gmat
https://magoosh.com/gmat/2013/assumption ... -the-gmat/
Manhattan Gmat
https://www.manhattangmat.com/blog/inde ... #more-6587
https://www.manhattangmat.com/articles/CR-assumption.cfm
Grockit
https://grockit.com/blog/gmat/2011/06/20 ... sumptions/
Gmatpill
https://www.gmatpill.com/practice-questi ... -question/
Gogmat
https://gogmat.com/blog/19-gmat-sample-q ... tion.html#.

nevergiveup · Answer

(A) No insurance policies  are deliberately  under priced in order to attract customers to the insurance company offering such policies.  This is extreme language and irrelevant to the argument. 
(B) A policy that represents a net loss to the insurance company is not an under priced policy in every case.  The argument is about policy does not represents a net loss not that represent a net loss. 
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.  Levels of claims is not the focus of the argument. 
(D) The income earned by investing premium income is the  most important  determinant of an insurance company’s profits.  This is again extreme language. Nowhere in the argument does the author mention about company's profit. 
(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.  If the claims request to pay out all of the premium income, then those income could not be used to invest and thus will sure post a net loss in every case. This is correct assumption.

patedhav · Answer

Why you have chosen E? I don't think it is E but it is D)?
- Insurance company is not going to expect claim for every policy? (E).

boeinz · Answer

I have difficulty dismissing 'A' even though 'E' is the clear-cut answer...

Economist · Answer

A is clearly out of scope. Just think, is the argument anyway concerned about the motivation of insurance companies to attract more customers ? The argument only talks about 'under-priced policies' , for that matter not even normal/over-priced policies:)

GyanOne · Answer

Clearly (E)

If the premium income is paid out as part of claims as soon as the premium is received, then the premium cannot be reinvested, which would undermine the conclusion.

Thoughtosphere · Answer

The statement says that a policy is under priced if the claims associated with it exceed the total income, then it states that the premium can be invested and it will yield returns of its own.

The first assumption that came to my mind is that every premium that is deposited is invested and that every deposited premium gives returns.

A - The statement doesn't talk about how the customers are attracted
B - The cases are not discussed
C - This answer could have been a better trap, had the word "accuracy" not used in it. 
D - This is another trap. The statement didn't talk about the profits of the insurance companies.
E - That's the answer. It matches the initial assumption I had. This is a finely worded answer. It has used "SOME", which means that the range of policies is from one to all.

E

earnit · Answer

Option E seems correct from various angles.

1. Process of Elimination leaves one with option D coming close but due to its mention of the "determinant" of company's "profits" gives it away. As the whole essence of an assumption that links the 'given' premise to the conclusion is defaulted.

2. Meaning: Option E clearly becomes the choice that MUST be true for the Conclusion ' under priced policy does not represent a net loss in  every case '  to be true.
 
3. Tone: Option E is the only option that uses Light tones unlike other choices that are very restrictive and uses strong tones like must/should/most.

P.S. Option 3 need not be the ONLY criteria for eliminating an option as there maybe some exceptions to the rule for certain CR questions. Ultimately, a coherent structure of the above 3 steps ensures that option E is a clear winner.

MBAisaMYTH · Answer

I feel we need to revisit option B :

According to GMAT, If the argument says A --> B, then the argument safely assumes that B -/-> A.
Using the same logic, wouldnt B be the correct choice.

Please help me understand this.

samusa · Answer

There is no causality in the argument.

Conclusion - an under priced policy does not represent a net loss in every case.

an Under priced Policy =either a Net loss policy  OR  a NO Net loss policy

Option B  -A policy that represents a net loss to the insurance company is not an under priced policy in every case

Net loss policy = either Under priced policy  OR   NOT an Under priced policy

Now do you think that option B is necessary for the conclusion!!!

I hope the above helps.

I DONOT MIND KUDOS

Nevernevergiveup · Answer

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.
 (This is new info as we have no info whether a policy is under-priced or not in the argument. It just defines a category.) 
(B) A policy that represents a net loss to the insurance company is not an under priced policy in every case. 
 (opposite of conclusion) 
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set. 
 (We don't need to assume regarding prediction of claims) 
(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits.  (importance is not given profits here as author spoke only of losses) 
(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. 
 (This indicates a possible assumption and indicates that claims do not require paying out all the incomes implying that it need not result in a loss.)

pinoygmat · Answer

D is basically a shell game. We are talking about policies. We are not talking about the company's profit.

I used Assumption Negation Technique (by MGMAT) here. Just negate the answer choice. If it weakens (actually destroys) the argument as a whole then you have the correct answer.

(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.

Negating (E):
(E) The claims against at least some under priced policies  require  paying out all of the premium income from those policies as soon as it is earned. --- Then there's no way the company could invest that premium to make an income, right?

Actually, when I was reading I was pre-thinking and I came up with another assumption --- that all investments are GUARANTEED to make an income. This is not the case. What if the investment turns south?

KUDOS PLS!

gmatexam439 · Answer

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. - We are concerned about the loss and not about consumer attraction. 
(B) A policy that represents a net loss to the insurance company is not an under priced policy in every case. - This reverses the causality. 
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set. - Okay? out of scope 
(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits. -  Most important? 
(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. - Correct. If we don't need to pay the claims we can invest that money and make some profit.

aragonn · Answer

This is really tough one. Under priced insurance policy = claims against it plus expenses associated with it exceed total income from premiums, think as company not consumer. I started thinking this question as consumer and could not make things. So for same period if company invest same base price, then it can get returns on it. and may be that is profitable for them. now these returns will come in time, some years. longer the duration, more profitable company will be.

Pre-thinking:  We need to find the assumption for which Conclusion holds true. let say that someone have an insurance and with in few days or in a month someone had claim for it. will company can have any kind of profit from it. What if all start doing this, company will not even survive. This should be the assumption.

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. ---- that is a bad move.
 
(B) A policy that represents a net loss to the insurance company is not an under priced policy in every case. --- might be true but negation will not hold true.

(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set. ---- So ? irrelevant

(D) The income earned by investing premium income is the most important determinant of an insurance company’s profits. ---- is that only one. What if no claim made ever? many loop holes in this choice.

(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. --- same on the line of pre-thinking.

BrentGMATPrepNow · Answer

I had a student ask me to explain why D is wrong.

Argument rewording: 
Policy is under priced if (claims + associated expenses) is  greater than  income from premiums. 
However, a company can make money by investing income from a particular premium, which means an under priced policy does not necessarily represent a net loss. 
  Conclusion: an under priced policy does not necessarily represent a net loss.

Let's apply the NEGATION technique to D and E.

(D) The income earned by investing premium income is the   NOT   most important determinant of an insurance company’s profits. 
Does this destroy the conclusion that   an under priced policy does not necessarily represent a net loss  ?
No. 
ELIMINATE D.

(E) The claims against   ALL   under priced policies   REQUIRE   paying out all of the premium income from those policies as soon as it is earned.
Does this destroy the conclusion that   an under priced policy does not necessarily represent a net loss  ?
Yes!
If you must pay out all of the premium income from those policies, then you can't offset the losses.

Answer: E

Cheers,
Brent

himanshurajawat · Answer

GMATNinja   gmat1393   GMATNinja Two  nightblade354   VeritasKarishma   Bunuel

Can you please help me in understanding the passage?

sayan640 · Answer

The conclusion :- an under priced policy does not represent a net loss in every case.
Lets apply negation technique to get to the correct answer.
Option A if negated :- Some insurance policies are deliberately under priced in order to attract customers to the insurance company offering such policies. 
But the premiums earned through those policies can be invested and that investment will generate return.
So we can say "an under priced policy does not represent a net loss in every case." The conclusion can be followed after negation.
Option A is out.

Option B if negated :- "A policy that represents a net loss to the insurance company is an under priced policy in every case. "
Lets say , "A policy that represents a net loss to the insurance company" = A 
 "an under priced policy" = B
So A is always inside B in the venn diagram.
So there could be some portion of B which is outside A. And it means, "an under priced policy ( B in our case) " is not always "A policy that represents a net loss to the insurance company (A in our case)". So we can say that  " an under priced policy" does not represent "a net loss" in every case." 
Conclusion follows even after negation . Option B is out.

Option C is clearly irrelevant.

Option D if negated :- The income earned by investing premium income is NOT the most important determinant of an insurance company’s profits. 
So there are other ways too by which an insurance company can make profits. So an under priced policy does not represent a net loss in every case. 
Conclusion follows even after negation. Option D is out.

Option E if negated :- "The claims against all under priced policies require paying out all of the premium income from those policies as soon as it is earned."
Then we can not say that "an under priced policy does not represent a net loss in every case." Then "the under priced policy does represent a net loss in every case."
Conclusion can not follow after negation.
Option E is the answer.

Please give me kudo s if you liked my explanation.
 generis   GMATNinja   VeritasKarishma

azhrhasan · Answer

Conclusion: Underpriced policy is not a net loss in every case. Therefore, assumption is that investment income need not be returned.

E fits the bill

dcummins · Answer

The argument is that an underpriced policy does not represent a net loss in every case.

This is based on the fact that a given category of insurance policy may be under priced, but the premiums can still be invested and earn investment income.

A - is incorrect because it has no effect on the argument. They may be deliberately underpriced, but it doesn't matter in the context here.
B - Negate: "A policy that represents a net loss to the insurance company is an under priced policy in every case." 
It just strengthens the argument (the opposite)
C - even if the claims can be predicted the policies may still be loss making. Incorrect
D - No. Worst answer here.
E - CORRECT. This MUST be true and it quite clearly links the gap in logic between insurance premiums and the fact that not "every" policy is a net loss. If premiums are paid (presumably because claims are made as soon as premiums are received) then insurance companies CANNOT invest the money and yield returns.

Technically a given category of insurance policy is under priced if

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

GMAT Critical Reasoning (CR) Questions

Technically a given category of insurance policy is under priced if

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia