Nathan was hired as an actuary with ABC Insurance.Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking.Nathan calculated the pure premium and presented this value as the final premium.After Nathan's presentation,the director of ratemaking said,"You left out something very important.If we sell coverage at the pure premium rate,we'll be out of business soon." What did Nathan overlook in his calculations?
A)loadings
B)the underwriting cycle
C)seasonality of claims
D)investment income

Question

Quizplus · Accepted Answer

Loadings are additional amounts added to the pure premium to cover expenses such as administrative costs, commissions, and contingencies. By not including loadings in his calculations, Nathan did not fully account for the total cost of providing insurance coverage and the company may not be able to cover their expenses and make a profit if they sell coverage at the pure premium rate.

Nathan Was Hired as an Actuary with ABC Insurance