Which statement is true about guaranteed cost premiums in general?

Which statement is true about guaranteed cost premiums in general?

• A. It minimizes cost by transferring most of the risk to the insurer.
• B. It is never used for legally mandated transfers.
• C. Premiums include taxes, admin costs, and loadings.
• D. It provides the highest liquidity risk.

Answer: (C)

Guaranteed cost premiums are priced to cover the insurer’s expected losses plus all ongoing costs of providing the coverage, including administrative expenses, loadings, taxes, and a profit margin. This means the premium includes those fixed elements as part of the price, giving the insured price certainty regardless of actual loss experience. That’s why the statement that premiums include taxes, admin costs, and loadings is true. The other ideas don’t describe the core nature of guaranteed cost pricing: it’s not simply about minimizing cost by shifting risk, nor is it correct to say it’s never used for legally mandated transfers, and liquidity risk isn’t inherently highest under this structure.

Guaranteed cost premiums are priced to cover the insurer’s expected losses plus all ongoing costs of providing the coverage, including administrative expenses, loadings, taxes, and a profit margin. This means the premium includes those fixed elements as part of the price, giving the insured price certainty regardless of actual loss experience. That’s why the statement that premiums include taxes, admin costs, and loadings is true. The other ideas don’t describe the core nature of guaranteed cost pricing: it’s not simply about minimizing cost by shifting risk, nor is it correct to say it’s never used for legally mandated transfers, and liquidity risk isn’t inherently highest under this structure.