Which statement about guaranteed cost premiums is true?

Which statement about guaranteed cost premiums is true?

• A. Premiums lower than other methods
• B. Premiums cover not only expected losses but also insurer administrative costs, adverse selection and moral hazard costs, premium taxes, and social loadings.
• C. Premiums never include taxes
• D. Premiums are solely based on expected losses

Answer: (B)

Guaranteed cost premiums are set to be fully loaded, meaning the premium covers not just the expected losses but all the insurer’s costs and required margins. This includes administrative and overhead expenses, the additional costs associated with adverse selection and moral hazard, as well as premium taxes and social loadings. By including these loadings, the insurer can budget for claims and operating costs regardless of actual loss experience, which is the purpose of guaranteed cost pricing. That’s why this statement is the best: it accurately describes the comprehensive nature of guaranteed cost premiums. Premiums aren’t simply tied to expected losses; they incorporate taxes and other loadings. They aren’t typically lower than other methods due to these added costs. And they aren’t solely based on expected losses, since the loading components are essential to the pricing.

Guaranteed cost premiums are set to be fully loaded, meaning the premium covers not just the expected losses but all the insurer’s costs and required margins. This includes administrative and overhead expenses, the additional costs associated with adverse selection and moral hazard, as well as premium taxes and social loadings. By including these loadings, the insurer can budget for claims and operating costs regardless of actual loss experience, which is the purpose of guaranteed cost pricing.

That’s why this statement is the best: it accurately describes the comprehensive nature of guaranteed cost premiums. Premiums aren’t simply tied to expected losses; they incorporate taxes and other loadings. They aren’t typically lower than other methods due to these added costs. And they aren’t solely based on expected losses, since the loading components are essential to the pricing.