Multiple choice

Identify the two factors that affect insurance ratemaking.

  1. Probability and severity of risk

  2. Source and nature of risk

  3. Source and timing of risk

  4. Nature and impact of risk
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A Correct answer
Explanation

Insurance is based on transfer of risk to the insurer. By purchasing an insurance policy, the insured is able to reduce the impact of financial losses arising from the peril, against which the property is insured. The whole mechanism of insurance involves pooling of a large number of statistically similar risks, so that the law of large numbers would operate and the probability of number of losses (frequency) as well as the extent of loss (severity) becomes predictable. Thus, probability and severity of risks are the two important factors.

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