Property and Casualty Insurance Practice Exam

What describes reporting policies in insurance?

1. Flat premium policies with set annual rates

2. Policies that charge a deposit premium with periodic adjustments

3. Policies that only cover catastrophic events

4. Plans for high-risk individuals with fixed premiums

The correct answer is: Policies that charge a deposit premium with periodic adjustments

Reporting policies in insurance are characterized by the method in which premiums are calculated and adjusted based on actual exposure. These policies involve a deposit premium that is initially paid, which covers expected losses based on estimated exposure. However, the key feature is that they are subject to periodic adjustments as the actual exposure or risk is reported, allowing for recalibration of the premium based on the insured's actual usage or the amount of risk they presented during the policy period. This system enables more accurate pricing reflective of the insured's current situation rather than relying solely on fixed estimates, which can lead to either underinsurance or overcharging. The intention behind this structure is to ensure that premiums are more closely aligned with the risk involved in a particular coverage, which becomes especially relevant for businesses or entities whose risk profile can fluctuate throughout the policy term. The other options present characteristics that do not align with the unique structure and purpose of reporting policies. Flat premium policies with set annual rates do not adjust according to actual risk. Policies that only cover catastrophic events do not reflect the continuous nature of reporting adjustments. Plans for high-risk individuals with fixed premiums imply stability and predictability, which contrasts with the dynamic adjustments seen in reporting policies.