The premium charged for an insurance policy should be

The premium charged for an insurance policy should be

• A. set as a flat amount regardless of exposure.
• B. Commensurate with the exposure.
• C. determined by the insurer's desired profit margin.
• D. based solely on the policyholder's age.

Answer: (B)

Pricing insurance is about matching the price to the risk being transferred. The premium should be commensurate with the exposure, meaning it reflects how likely and how costly a loss could be for that policy. Higher exposure—such as greater coverage, riskier health or driving factors, or higher hazard—means a higher expected loss and thus a higher premium. The premium is meant to cover expected claims, administrative costs, and a reasonable profit, all tied to the level of risk the policy poses. Setting a flat premium regardless of exposure would misprice risk, overcharging some and undercharging others, which undermines fairness and sustainability. Pricing purely on the insurer’s desired profit margin ignores the actual risk and can lead to inappropriate pricing. Basing the premium only on age ignores many other factors that influence risk, such as health, policy type, limits, deductibles, and underwriting details, making pricing inaccurate. So the premium being commensurate with the exposure best captures the idea that price should rise with greater risk and loss potential.

Pricing insurance is about matching the price to the risk being transferred. The premium should be commensurate with the exposure, meaning it reflects how likely and how costly a loss could be for that policy. Higher exposure—such as greater coverage, riskier health or driving factors, or higher hazard—means a higher expected loss and thus a higher premium. The premium is meant to cover expected claims, administrative costs, and a reasonable profit, all tied to the level of risk the policy poses.

Setting a flat premium regardless of exposure would misprice risk, overcharging some and undercharging others, which undermines fairness and sustainability. Pricing purely on the insurer’s desired profit margin ignores the actual risk and can lead to inappropriate pricing. Basing the premium only on age ignores many other factors that influence risk, such as health, policy type, limits, deductibles, and underwriting details, making pricing inaccurate.

So the premium being commensurate with the exposure best captures the idea that price should rise with greater risk and loss potential.