Which statement best describes guaranteed cost insurance's impact on the cost of risk?

Which statement best describes guaranteed cost insurance's impact on the cost of risk?

• A. The premium covers not only expected losses, but also insurer administrative costs, adverse selection and moral hazard costs, premium taxes, and social loadings.
• B. Guaranteed cost insurance can minimize the cost of risk because much of the uncertainty about future losses is transferred to the insurer.
• C. It minimizes the cost of risk, but it is not ideal because premiums cover not only expected losses, but also insurer administrative costs, adverse selection and moral hazard costs, premium taxes, and any social loadings.
• D. It minimizes risk costs only for loss exposures that are legally required to be transferred.

Answer: (A)

Guaranteed cost pricing fixes the premium to cover not only the expected losses but also the insurer’s own costs and loadings. This includes administrative expenses, the potential costs from adverse selection and moral hazard, premium taxes, and any social loadings. In this arrangement, the insured pays a known, fixed amount that is designed to absorb these cost elements, transferring the uncertainty of actual losses to the insurer. That comprehensive, all-inclusive premium is what makes this description the best fit for guaranteed cost insurance. Other statements misstate the fixed-cost nature or how the costs are allocated, so they don’t capture the defining feature of guaranteed cost pricing.

Guaranteed cost pricing fixes the premium to cover not only the expected losses but also the insurer’s own costs and loadings. This includes administrative expenses, the potential costs from adverse selection and moral hazard, premium taxes, and any social loadings. In this arrangement, the insured pays a known, fixed amount that is designed to absorb these cost elements, transferring the uncertainty of actual losses to the insurer. That comprehensive, all-inclusive premium is what makes this description the best fit for guaranteed cost insurance. Other statements misstate the fixed-cost nature or how the costs are allocated, so they don’t capture the defining feature of guaranteed cost pricing.