Critical Reasoning

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 underpriced policy does not represent a net loss in every case.

The argument above is based on which of the following assumptions?

(A) No insurance policies are deliberately underpriced in order to attract customers to the insurance company offering such policies.
(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case.
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.
(D) The income earned by investing premium income is the most important determinant of an insurance company's profits.
(E) The claims against at least some underpriced policies do not require paying out all of the premium income from those policies as soon as it is earned.

I selected B, but the OA based on what information I got from the forum is E.

My rationale behind B was I was guessing it on the basis as the Option B was establishing some sort of causality.

OA: E

Premise premiums can be invested.

Conclusion.an underpriced policy might not be at loss.

Now at the time of doing the question I was looking for options that connects investment of premium to the conclusion..

As an approach, if I don't get any option that links or connects or doesn't logically comes between the premise and conclusion then I go for options that directly links with the conclusion.

In this case,I was held back by B, D, and E...But E was just too direct for the premise and conclusion.. so didn't gave a second read to B and D..

Any comments on the approach is welcome ...

richachampion wrote: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 underpriced policy does not represent a net loss in every case.

The argument above is based on which of the following assumptions?

(A) No insurance policies are deliberately underpriced in order to attract customers to the insurance company offering such policies.
(B) A policy that represents a net loss to the insurance company is not an underpriced policy in every case.
(C) There are policies for which the level of claims per year can be predicted with great accuracy before premiums are set.
(D) The income earned by investing premium income is the most important determinant of an insurance company's profits.
(E) The claims against at least some underpriced policies do not require paying out all of the premium income from those policies as soon as it is earned.

Conclusion: An underprice policy does not represent a net loss in every case.
Premises: underpriced means claims + expenses > income from premiums; premiums can be invested to yield returns.

When choosing between B and E, try negation.

B negated: A policy that represents a net loss to the insurance company is an underpriced policy in every case. Remember that the net is determined after the premiums are invested. The fact that there was a net loss simply tells us that the returns earned from investing the premiums wasn't enough to offset the initial gap. Therefore, It's certainly possible that every time there was a net loss, it was the case that claims + expenses > income from premiums.

E negated:The claims against all underpriced policies require paying out all of the premium income from those policies as soon as it is earned. If the insurance company has to pay out all of the premium income, they can't invest it. If they can't invest the premium income, they can't offset the shortfall caused by the underpriced policy. In this case, the negation destroys the argument. (And the correct answer to an Assumption question, when negated, will undermine the argument. So E is the correct answer.