Question 1

State-sponsored insurance guarantee funds are run and administered by private insurance companies operating in the state.

Accepted Answer

A) True 
 B)False

Question 2

An insurance policy that allows both the premium amount and the maturity of the life contract to be changed by the insured is called

Accepted Answer

A) term life. 
B) universal life. 
C) whole life. 
D) endowment life. 
E) variable life. 
A) term life. 
B) universal life. 
C) whole life. 
D) endowment life. 
E) variable life.

Question 3

One reason for the recent decline in the expense ratio for PC insurers is an increase dependence on independent brokers to sell and distribute insurance policies.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following observations concerning reinsurance is FALSE?

Accepted Answer

A) It is an alternative to managing risk on a PC insurer's balance sheet. 
B) Non-U.S.reinsurers are majority players in U.S.reinsurance business. 
C) It does not enable the insurer to improve its capital position. 
D) It can be used to limit losses and stabilize cash flows. 
E) It represented 2.6 percent of total PC industry assets in 2012. 
A) It is an alternative to managing risk on a PC insurer's balance sheet. 
B) Non-U.S.reinsurers are majority players in U.S.reinsurance business. 
C) It does not enable the insurer to improve its capital position. 
D) It can be used to limit losses and stabilize cash flows. 
E) It represented 2.6 percent of total PC industry assets in 2012.

Question 5

In group life insurance, lower rates on policies can be offered because of cost economies as a result of mass administration of plans and reduced selling and commission costs.

Accepted Answer

A) True 
 B)False

Question 6

Insurance guaranty funds involve a permanent fund similar to the FDIC for the purpose of compensating the policyholders of failed insurers.

Accepted Answer

A) True 
 B)False

Question 7

The process of life insurance uses risk pooling to transfer income-related uncertainties from a group of individuals to an insured individual.

Accepted Answer

A) True 
 B)False

Question 8

The operating ratio for a PC insurer equals

Accepted Answer

A) loss ratio plus the ratios of loss adjustment expenses to premiums earned. 
B) loss ratio plus expense ratio plus dividend ratio. 
C) combined ratio minus dividends paid to policyholders. 
D) acquisition costs plus dividends paid as a proportion of premiums earned. 
E) combined ratio after dividends minus the investment yield. 
A) loss ratio plus the ratios of loss adjustment expenses to premiums earned. 
B) loss ratio plus expense ratio plus dividend ratio. 
C) combined ratio minus dividends paid to policyholders. 
D) acquisition costs plus dividends paid as a proportion of premiums earned. 
E) combined ratio after dividends minus the investment yield.

Question 9

The Insurance Regulatory Information System (IRIS) is a standardized examination system used to measure the profitability of insurance companies.

Accepted Answer

A) True 
 B)False

Question 10

Calculate the annual cash flows of a $2 million, 10-year fixed-payment deferred annuity earning a guaranteed 8 percent per year if annual payments are to begin at the end of the sixth (6th) year.

Accepted Answer

A) $218,973.21. 
B) $202,752.97. 
C) $343,321.86. 
D) $405,505.95. 
E) $437,946.42. 
A) $218,973.21. 
B) $202,752.97. 
C) $343,321.86. 
D) $405,505.95. 
E) $437,946.42.

Question 11

The growth of HMOs has increased the amount of health insurance premiums collected by life insurance companies.

Accepted Answer

A) True 
 B)False

Question 12

Calculate the annual cash flows of a $500,000, 12-year fixed-payment annuity earning a guaranteed 6 percent per year if annual payments are to begin at the end of the current year.

Accepted Answer

A) $59,638.51. 
B) $56,262.75. 
C) $29,819.26. 
D) $83,841.52. 
E) $28,131.37. 
A) $59,638.51. 
B) $56,262.75. 
C) $29,819.26. 
D) $83,841.52. 
E) $28,131.37.

Question 13

What does the loss ratio measure in any particular year?

Accepted Answer

A) Payouts on policies to premiums earned. 
B) Amount of premiums earned relative to the payout on policies. 
C) Overall underwriting profitability of a line. 
D) Loss adjustment expenses to premiums earned. 
E) Commission and other acquisition costs to premiums written. 
A) Payouts on policies to premiums earned. 
B) Amount of premiums earned relative to the payout on policies. 
C) Overall underwriting profitability of a line. 
D) Loss adjustment expenses to premiums earned. 
E) Commission and other acquisition costs to premiums written.

Question 14

Property-casualty underwriting risk only exists when the premiums generated on a given insurance line are less than the claims (losses) on the line.

Accepted Answer

A) True 
 B)False

Question 15

The expected loss potential is more difficult to determine with low-severity, high-frequency events.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is NOT a possible result when a property-liability company purchases reinsurance?

Accepted Answer

A) improved capital position. 
B) limits on losses on reinsured policies. 
C) stabilized cash flows. 
D) dilution of earnings per share. 
E) All of the above are possible results of purchasing reinsurance. 
A) improved capital position. 
B) limits on losses on reinsured policies. 
C) stabilized cash flows. 
D) dilution of earnings per share. 
E) All of the above are possible results of purchasing reinsurance.

Question 17

Which of the following is an advantage of converting from a mutual insurance company to a stockholder-controlled company?

Accepted Answer

A) Publicly held companies have access to equity markets for additional capital for future business expansion. 
B) Mutual organizations are subject to higher regulatory standards than public companies. 
C) Ability to offer more insurance products than those allowed under mutual ownership. 
D) Publicly held insurance companies can convert to federal charters but mutual organizations cannot. 
E) Mutual organizations can only underwrite policies in the state in which they are chartered while publicly held organizations can expand nationwide. 
A) Publicly held companies have access to equity markets for additional capital for future business expansion. 
B) Mutual organizations are subject to higher regulatory standards than public companies. 
C) Ability to offer more insurance products than those allowed under mutual ownership. 
D) Publicly held insurance companies can convert to federal charters but mutual organizations cannot. 
E) Mutual organizations can only underwrite policies in the state in which they are chartered while publicly held organizations can expand nationwide.

Question 18

Because of the large amounts of policy reserves that life insurance companies carry as liabilities, they are rarely surprised by unexpected fluctuations in expected future payouts.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is used as collateral when an insurance company issues policy loans?

Accepted Answer

A) Expected premium payments. 
B) Existing policies. 
C) Unearned premiums. 
D) Guarantee funds. 
E) U.S.Treasury Bills. 
A) Expected premium payments. 
B) Existing policies. 
C) Unearned premiums. 
D) Guarantee funds. 
E) U.S.Treasury Bills.

Question 20

Automobile liability insurance provides protection against theft or damage to the vehicle.

Accepted Answer

A) True 
 B)False

Exam 6: Financial Services: Insurance

State-sponsored insurance guarantee funds are run and administered by private insurance companies operating in the state.

An insurance policy that allows both the premium amount and the maturity of the life contract to be changed by the insured is called

One reason for the recent decline in the expense ratio for PC insurers is an increase dependence on independent brokers to sell and distribute insurance policies.

Which of the following observations concerning reinsurance is FALSE?

In group life insurance, lower rates on policies can be offered because of cost economies as a result of mass administration of plans and reduced selling and commission costs.

Insurance guaranty funds involve a permanent fund similar to the FDIC for the purpose of compensating the policyholders of failed insurers.

The process of life insurance uses risk pooling to transfer income-related uncertainties from a group of individuals to an insured individual.

The operating ratio for a PC insurer equals

The Insurance Regulatory Information System (IRIS) is a standardized examination system used to measure the profitability of insurance companies.

Calculate the annual cash flows of a $2 million, 10-year fixed-payment deferred annuity earning a guaranteed 8 percent per year if annual payments are to begin at the end of the sixth (6th) year.

The growth of HMOs has increased the amount of health insurance premiums collected by life insurance companies.

Calculate the annual cash flows of a $500,000, 12-year fixed-payment annuity earning a guaranteed 6 percent per year if annual payments are to begin at the end of the current year.

What does the loss ratio measure in any particular year?

Property-casualty underwriting risk only exists when the premiums generated on a given insurance line are less than the claims (losses) on the line.

The expected loss potential is more difficult to determine with low-severity, high-frequency events.

Which of the following is NOT a possible result when a property-liability company purchases reinsurance?

Which of the following is an advantage of converting from a mutual insurance company to a stockholder-controlled company?

Because of the large amounts of policy reserves that life insurance companies carry as liabilities, they are rarely surprised by unexpected fluctuations in expected future payouts.

Which of the following is used as collateral when an insurance company issues policy loans?

Automobile liability insurance provides protection against theft or damage to the vehicle.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

Calculate the annual cash flows of a $2 million, 10-year fixed-payment deferred annuity earning a guaranteed 8 percent per year if annual payments are to begin at the end of the sixth (6^th) year.