Exam 8 Practice Question 10
Study guide: Exam 8
A general liability insurer prices excess layers from a set of increased limit factors, with $1 million as the basic limit. The basic limit premium for a risk is $5,000.
| Limit ($ millions) | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Increased limit factor | 1.000 | 1.300 | 1.480 | 1.700 | 1.800 |
The resulting layer premiums are $1,500 for $1 million excess of $1 million, $900 for $1 million excess of $2 million, $1,100 for $1 million excess of $3 million and $500 for $1 million excess of $4 million.
Which layer premium fails a reasonableness check, and why?
- A) $1 million excess of $1 million, because it is higher than any of the layers above it
- B) $1 million excess of $2 million, because it is less than two-thirds of the layer below it
- C) $1 million excess of $3 million, because it is higher than the equal-width layer below it
- D) $1 million excess of $4 million, because it is less than a tenth of the basic limit premium
- E) None, because every factor is higher than the factor for the limit below it
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