Question

Provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and is based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time?

(Choose from the following options)
1. Profit rating
2. Components rating
3. Loss costs rating
4. Provision rating

Answer 1

The correct option is 'loss costs rating,' which is used by insurers to calculate a portion of a rate based on past loss data without accounting for expenses or profit. It plays a crucial role in ensuring that the insurance premiums are sufficient to cover claim payments, company expenses, and provide profits.

Step-by-step explanation:

The concept described in the student's question pertains to loss costs rating, which is a method used by insurers to set premiums. This method provides an insurer with that portion of a rate that does not include provisions for expenses (with the exception of adjusting expenses) or profit. Instead, it focuses on historical aggregate losses and loss adjustment expenses, projected to their ultimate value and trended to a future point in time.

The payments made by an individual towards an insurance policy need to collectively cover three major areas:

1. The individual's claims,
2. The operational costs of the insurance company,
3. A margin that allows for the profits of the firm.

Understanding this fundamental law of insurance is essential when considering how loss costs come into play. These costs are crucial to determining the rate at which premiums are set, ensuring that the firm has the appropriate funds to cover potential claims while also managing to generate a profit and covering administrative overheads.