prephase the argument!!

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raunekk: Legendary Member; Posts: 1159; Joined: Wed Apr 16, 2008 10:35 pm; Thanked: 56 times

by raunekk » Tue May 20, 2008 12:56 pm

hey folks.. can anyone explain or prephase the following argument for me please..

-Technically a given category of insurance policy is under priced if, over time,claims against it plus expenses associated with it exceed total income from premiums.But premium income can be invested and will then yield returns of its own.Therefore, an under priced policy does not represent a net loss in every case.

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Source: Beat The GMAT — Critical Reasoning | Tue May 20, 2008 12:56 pm

VP_Tatiana: GMAT Instructor; Posts: 189; Joined: Thu May 01, 2008 10:55 pmFollowed by: 1 member; Location: Seattle, WA; Thanked: 25 times; GMAT Score:750+

by VP_Tatiana » Tue May 20, 2008 2:15 pm

Here is how I would REPHRASE the argument:

Technically, for an insurance company to make money, the following must be true:

premiums > claims + associated expenses (1)

However, in actuality their income is not only made up of premiums, but investment income from those premiums.

So, they'll make money if:

premiums + interest > claims + associated expenses (2)

In short, statement (1) does not accurately reflect the situations in which the insurance company will make or lose money; statement (2) does.

Hope that helps,

Tatiana

Tatiana Becker | GMAT Instructor | Veritas Prep

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kino: Newbie | Next Rank: 10 Posts; Posts: 3; Joined: Tue Mar 04, 2008 8:07 pm

by kino » Tue May 20, 2008 9:23 pm

Okay..we are dealing with two different things. One is a UNDERPRICED POLICY another is LOSS.

and there are conditions for both to be true

1)a policy is UNDERPRICED if...

premiums <claims>does not necesssrily mean---->LOSS(2)

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raunekk: Legendary Member; Posts: 1159; Joined: Wed Apr 16, 2008 10:35 pm; Thanked: 56 times

hmmm....

by raunekk » Wed May 21, 2008 12:41 am

yet not clear...

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VP_Tatiana: GMAT Instructor; Posts: 189; Joined: Thu May 01, 2008 10:55 pmFollowed by: 1 member; Location: Seattle, WA; Thanked: 25 times; GMAT Score:750+

by VP_Tatiana » Thu May 22, 2008 5:14 am

Let me try to illustrate with an example. Suppose you want to sell me your car. You paid $500 for it (that's your expense), but you sell it to me for $400. Technically, I the car was UNDERPRICED.

However, let's say that you went and invested my $400 and made 25% interest. Now you've got $500 in your hand. So, even though the car was UNDERPRICED, you did not LOSE money.

A policy is UNDERPRICED if the insurance company sells it below the costs they incur insuring the person (claims and costs.) However, if investment income can make up for the amount by which the claim is UNDERPRICED, then there won't be a LOSS.

Hope that helped further,

Tatiana

Tatiana Becker | GMAT Instructor | Veritas Prep

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