For a level premium with rating factors such as age and risk class, how is the premium adjusted?

• A. Base level premium times trend^number of years times current rating factors
• B. Base level premium times trend^number of years divided by current rating factors
• C. Base level premium times current rating factors
• D. Base level premium times trend^number of years times current rating factors

Answer: (D)

The main idea is that a level premium is set to cover increasing costs over time while also reflecting the insured’s current risk. To compute the premium at a given point, you start with the base level premium and adjust it for two things: time and risk class.

First, multiply by a trend factor raised to the number of years since issue. This trend captures expected growth in costs, expenses, and the amount needed to fund future benefits as time passes. Second, multiply by the current rating factors that represent age and risk class. As the insured ages or their health and risk profile change, these factors change the premium to reflect the updated risk.

So the premium becomes base level premium times trend^years times current rating factors. This structure would not work if you divided by the rating factors (that would reduce premium when risk rises), or if you omitted the trend (ignoring cost growth), or if you omitted the rating factors (ignoring changes in risk).