Question 1

What additional flexibilities are provided by variable and universal life as compared to a standard whole life or endowment policy?

Accepted Answer

Variable life allows the policyholder to choose among various mutual fund investments where their cash value is invested. The choice allows policyholders to choose what level of risk they wish to bear. Universal life and variable universal life allow the policyholders to vary the amount of premiums paid and the maturity of the contract. Premiums can even be skipped. Traditional policies lack these flexibilities.

Question 2

The adverse selection problem arises in situations when the policyholders engage in risky activities that increase the probability of an insurance payoff.

Accepted Answer

A) True 
 B)False  False

Question 3

Which one of the following statements concerning annuities offered by insurers is not true?

Accepted Answer

A) Interest on annuities is not taxed until the investor receives the payments. 
B) Annuity payments may be fixed or variable. 
C) Annuity contributions are not capped by the IRS. 
D) Annuities can be deferred or immediate. 
E) Annuity payments must cease upon the policyholder's death. 
A) Interest on annuities is not taxed until the investor receives the payments. 
B) Annuity payments may be fixed or variable. 
C) Annuity contributions are not capped by the IRS. 
D) Annuities can be deferred or immediate. 
E) Annuity payments must cease upon the policyholder's death. E

Question 4

What are the main lines of P&C insurance?

Accepted Answer

Fire and allied lines,homeowne

Question 5

How do insurance guarantee funds differ from bank deposit insurance funds?

Accepted Answer

-The insurance funds are administered by

Question 6

The primary asset for P&C insurers is bonds.

Accepted Answer

A) True 
 B)False

Question 7

Premiums received before the coverage period are termed

Accepted Answer

A) unearned premiums. 
B) lagged premiums. 
C) loss-adjustment expenses. 
D) loss reserves. 
E) policyholder's surplus. 
A) unearned premiums. 
B) lagged premiums. 
C) loss-adjustment expenses. 
D) loss reserves. 
E) policyholder's surplus.

Question 8

Insurance companies face the problem of ________ when people with highest probability of getting the insurance payoffs are the ones who purchase insurance.

Accepted Answer

A) moral hazard 
B) adverse selection 
C) fraud 
D) over-insurance 
E) agency costs 
A) moral hazard 
B) adverse selection 
C) fraud 
D) over-insurance 
E) agency costs

Question 9

State Farm and other P&C insurers came into conflict with policyholders over claims filed as a result of Hurricane Katrina that resulted in lawsuits. The conflict resulted from

Accepted Answer

A) insurers' refusal to pay until reinsurance funds were collected. 
B) policyholders' fraudulent claims. 
C) insurers' insistence that the Katrina storm surge resulted in flood damage that was not covered. 
D) insurers overcharging for hurricane insurance. 
A) insurers' refusal to pay until reinsurance funds were collected. 
B) policyholders' fraudulent claims. 
C) insurers' insistence that the Katrina storm surge resulted in flood damage that was not covered. 
D) insurers overcharging for hurricane insurance.

Question 10

Liability lawsuits related to asbestos claims are an example of long tail losses.

Accepted Answer

A) True 
 B)False

Question 11

Most states maintain a permanent reserve fund to resolve insurance company failures.

Accepted Answer

A) True 
 B)False

Question 12

An insurance line has a loss ratio of 62 percent and an expense ratio of 35 percent; the firm pays 2 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 9 percent. The operating ratio for this line is

Accepted Answer

A) 86. 
B) 90. 
C) 95. 
D) 106. 
E) 109. 
A) 86. 
B) 90. 
C) 95. 
D) 106. 
E) 109.

Question 13

Policy reserves are the primary asset of the typical life insurer.

Accepted Answer

A) True 
 B)False

Question 14

An insurance line has a pure loss ratio of 65 percent,LAE of 16 percent and an expense ratio of 26 percent; the firm pays 3 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 6 percent. Which one of the following statements is true?

Accepted Answer

A) The line is profitable because the operating ratio is greater than 100. 
B) The line is profitable because the operating ratio is less than 100. 
C) The line is not profitable because the operating ratio is greater than 100. 
D) The line is profitable because the combined ratio after dividends is greater than 100. 
E) The line is profitable because the combined ratio after dividends is less than 100. 
A) The line is profitable because the operating ratio is greater than 100. 
B) The line is profitable because the operating ratio is less than 100. 
C) The line is not profitable because the operating ratio is greater than 100. 
D) The line is profitable because the combined ratio after dividends is greater than 100. 
E) The line is profitable because the combined ratio after dividends is less than 100.

Question 15

For P&C insurers,if the combined ratio is more than 100 percent,that firm

Accepted Answer

A) could not have been profitable. 
B) must have been profitable. 
C) may have been profitable if investment returns were high enough. 
D) was profitable if the LAE was low enough. 
A) could not have been profitable. 
B) must have been profitable. 
C) may have been profitable if investment returns were high enough. 
D) was profitable if the LAE was low enough.

Question 16

Which one of the following would provide an example of social inflation?

Accepted Answer

A) Large malpractice awards beyond the level of damages incurred 
B) Increase in costs on auto physical damage claims 
C) Increase in prescription drug cost claims 
D) Losses to repair damages caused by hurricanes in Florida 
E) Rising cost of funeral expenses due to inflation 
A) Large malpractice awards beyond the level of damages incurred 
B) Increase in costs on auto physical damage claims 
C) Increase in prescription drug cost claims 
D) Losses to repair damages caused by hurricanes in Florida 
E) Rising cost of funeral expenses due to inflation

Question 17

The primary regulator of insurance firms is the

Accepted Answer

A) NAIC. 
B) McCarran-Ferguson Commission. 
C) FDIC. 
D) state insurance regulator. 
E) SEC. 
A) NAIC. 
B) McCarran-Ferguson Commission. 
C) FDIC. 
D) state insurance regulator. 
E) SEC.

Question 18

The most important federal legislation affecting the regulation of life insurance companies prior to 1999 was the

Accepted Answer

A) McCarran-Ferguson Act. 
B) McFadden Act. 
C) Investment Company Act. 
D) SEC Act. 
E) Insurance Freedom Act. 
A) McCarran-Ferguson Act. 
B) McFadden Act. 
C) Investment Company Act. 
D) SEC Act. 
E) Insurance Freedom Act.

Question 19

The cash surrender value of a life insurance policy is the present value of expected future payouts on the policy.

Accepted Answer

A) True 
 B)False

Question 20

Liability losses are more subject to social inflation than property losses.

Accepted Answer

A) True 
 B)False

Exam 15: Insurance Companies

What additional flexibilities are provided by variable and universal life as compared to a standard whole life or endowment policy?

The adverse selection problem arises in situations when the policyholders engage in risky activities that increase the probability of an insurance payoff.

Which one of the following statements concerning annuities offered by insurers is not true?

What are the main lines of P&C insurance?

How do insurance guarantee funds differ from bank deposit insurance funds?

The primary asset for P&C insurers is bonds.

Premiums received before the coverage period are termed

Insurance companies face the problem of ________ when people with highest probability of getting the insurance payoffs are the ones who purchase insurance.

State Farm and other P&C insurers came into conflict with policyholders over claims filed as a result of Hurricane Katrina that resulted in lawsuits. The conflict resulted from

Liability lawsuits related to asbestos claims are an example of long tail losses.

Most states maintain a permanent reserve fund to resolve insurance company failures.

An insurance line has a loss ratio of 62 percent and an expense ratio of 35 percent; the firm pays 2 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 9 percent. The operating ratio for this line is

Policy reserves are the primary asset of the typical life insurer.

An insurance line has a pure loss ratio of 65 percent,LAE of 16 percent and an expense ratio of 26 percent; the firm pays 3 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 6 percent. Which one of the following statements is true?

For P&C insurers,if the combined ratio is more than 100 percent,that firm

Which one of the following would provide an example of social inflation?

The primary regulator of insurance firms is the

The most important federal legislation affecting the regulation of life insurance companies prior to 1999 was the

The cash surrender value of a life insurance policy is the present value of expected future payouts on the policy.

Liability losses are more subject to social inflation than property losses.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

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