RMI final exam review
Insurer ABC has a 9-line surplus share treaty with Reinsurer XYZ and retains a line of $30,000. Insurer ABC issues a policy to insure Building A for $27,000 in exchange for a premium of $1,000, and experiences one loss of $10,000. How much coverage is ceded to Reinsurer XYZ? $0 No other answer is correct $24,300 $27,000
$0
Reported Losses (in $1000) accident yr v. mon. development 12. 24. 36. 1. 5000. 6000. 7000 2. 6000. 6500. 3. 8000 Based on the above loss development triangle, what is the estimate for the developed losses (as of 36 months) of accident year 3 based on the loss reserve development factor method?
$10,655.56
Insurer ABC has a 9-line surplus share treaty with Reinsurer XYZ and retains a line of $30,000. Insurer ABC issues a policy to insure Building B for $200,000 in exchange for a premium of $5,500, and experiences one loss of $2,500. How much coverage is ceded to Reinsurer XYZ? $0 $200,000 $170,000 No other answer is correct $30,000
$170,000
Lyman Insurance Co enters into a treaty agreement with Whitford Re. Under the terms of this agreement, Whitford will pay claims that are in excess of $500,000. How much will Whitford Re pay on a $750,000 claim? $0 No other answer is correct -$250,000 $250,000 $750,000
$250,000
Insurer ABC has a 9-line surplus share treaty with Reinsurer XYZ and retains a line of $30,000. The maximum cession permitted by the contract is ____________, and the retention and reinsurance allow Insurer ABC to issue policies with amounts of insurance as high as _______________. No other answer is correct $270,000; $270,000 $300,000; $270,000 $270,000; $300,000 $300,000; $300,000
$270,000; $300,000
Assume you are trying to buy insurance for your home. Your agent tells you that the pure premium is $300. He also tells you that the insurance company charges a loading of 5%. How much is your gross premium? $315.79 $15.00 $285.00 $300.00 $315.00
$315.00
Insurer ABC has a 9-line surplus share treaty with Reinsurer XYZ and retains a line of $30,000. Insurer ABC issues a policy to insure Building B for $200,000 in exchange for a premium of $5,500, and experiences one loss of $2,500. How much of the premium is allocated to Reinsurer XYZ (ignore any ceding commissions)? $5,500 $0 $825 $4,675
$4,675
The expected loss ratio for a class of business is 65%. What change would be indicated in the level of rates under the loss ratio method if the actual loss ratio turned out to be 70%? (0.70 - 0.65)/(1 - 0.70) or 16.67 percent (0.70 - 0.65)/(1- 0.65) or 14.29 percent (0.70 - 0.65)/0.65 or 7.69 percent (0.70 - 0.65)/0.70 or 7.14 percent
(0.70 - 0.65)/0.65 or 7.69 percent
A U.S. insurance company issued a guarantee against default to a German bank. The German bank invested in U.S. mortgaged-backed securities. The U.S. insurer promised that if the issuer of the mortgaged-backed securities defaulted, the insurer would pay the German bank for the loss. The guarantee the U.S. insurer provided is called a(n) Insurance option Credit default swap Put option Catastrophe bond
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Adverse selection is a term used to describe An underwriting error on the part of an insurance company A loss situation in which the chance of loss cannot be determined None of the other answers are correct The tendency of the poorer than average risks to seek insurance to a greater extent than better than average risks The choice of the wrong insurance to fit a specific need
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Adverse selection is a term used to describe The tendency of the poorer than average risks to seek insurance to a greater extent than do the better than average risks No other answer is correct A loss situation in which the chance of loss cannot be determined An underwriting error on the part of an insurance company The choice of the wrong insurance to fit a specific need
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All of the following statements about the handling of claims are true except A fair and prompt payment of claims is necessary to avoid actions from insurance commissioners enforcing unfair claims settlement practices regulation A fair and prompt payment of claims is essential for achieving customer satisfaction A fair and prompt payment of claims helps to avoid litigation All of the other statements are true
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All of the following statements about the independent agency system are true EXCEPT Agents are often authorized to adjust small claims Agents are compensated on the basis of commissions The agent is an independent business person who represents several companies The insurance company owns the renewal rights to the policies if the agency relationship terminates
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An agreement that covers an entire class or portfolio of loss exposures is Treaty reinsurance No other answer is correct Facultative reinsurance Loss portfolio transfer
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Reinsurance may provide surplus relief due to the fact that No other answer is correct Revenue is recognized when a policy is sold and expenses are recognized as they are incurred over the life of the policy Primary insurers must pay a ceding commission to reinsurers Expenses are recognized when a policy is sold and premiums are recognized as revenue is earned over the life of the policy
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The underwriting process begins with The desk underwriter The agent The inspection report The acceptance of the application
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Underwriters in personal lines base their decisions on a number of factors. Which of these would NOT ordinarily be one of the things that those underwriting decision are based on? A personal interview with the applicant Past loss experience The producer report A search of DMV records or other databases The application
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Which of the following statements about mutual insurers is true? They have a board of directors which is selected by state insurance departments They are legally organized as partnerships They are owned by their stockholders They may pay dividends to their policyholders
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Reported Losses (in $1000) accident yr v. mon. development 12. 24. 36. 1. 5000. 6000. 7000 2. 6000. 6500. 3. 8000 Based on the above loss development triangle, what is the 24 to 36 month (one-year) loss development factor?
1.1667
Reported Losses (in $1000) accident yr v. mon. development 12. 24. 36. 1. 5000. 6000. 7000 2. 6000. 6500. 3. 8000 Based on the above loss development triangle, what is the two-year loss development factor?
1.3319
Given the following data: written premiums = $100, loss reserves = 45, underwriting expenses incurred = 30, unearned premium reserves = 25, losses + LAE incurred = 60, surplus = 50, what is the insurer's Kenney ratio? 50/100=0.5 (45+30)/100=0.75 100/50=2 100/60=1.67
100/50 = 2
Given the following data: written premiums = $100, loss reserves = 45, underwriting expenses incurred = 30, unearned premium reserves = 25, losses + loss adjustment expenses incurred = 60, earned premiums = 90, surplus = 50, what is the value of the expense ratio? 30/50=0.60 (30+60)/100=0.90 30/90=0.33 30/100=0.30
30/100 = 0.30
Indiana has a 2% premium tax and Florida has a 4% premium tax. If an insurer domiciled in Florida acquires a license and writes business in Indiana, what tax rate will Indiana charge on premiums? 2% 3% 4% 6% No other answer is correct
4%
Given the following data: written premiums = $100, loss reserves = 45, underwriting expenses incurred = 30, unearned premium reserves = 25, losses + loss adjustment expenses incurred = 60, earned premiums = 90, surplus = 50, what is the value of the loss ratio? 45/100=0.45 60/90=0.67 60/100=0.60 45/90=0.50
60/90= 0.67
The unearned premium reserve of an insurance company is The portion of the insurance company's net worth that belongs to policyowners A liability of the insurance company that represents the unearned portion of gross premiums on outstanding policies An asset of the insurance company that represents the investments made with premium income A liability of the insurance company that represents claims that have been incurred but not paid
A liability of the insurance company that represents the unearned portion of gross premiums on outstanding policies
All of the following statements about claims adjustors are true except A statutory adjustor represents several insurers Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors Company adjustors are salaried employees who work for one insurer Agents may have the authority to settle claims
A statutory adjustor represents several insurers
Gene has a need for insurance that is unavailable in the state where he lives. To obtain insurance in the nonadmitted market, Gene should see A nonadmitted agent A general agency broker A direct writer A surplus lines broker
A surplus lines broker
The traditional disadvantages of the mutual insurance structure that have become more apparent in recent years include the fact that All answers are correct Mutuals cannot reward management through the use of publicly-traded stock options Mutuals cannot use stock to acquire other companies Mutual insurers have limited mechanisms for accessing capital The structure of mutual insurers is not particularly flexible
All answers are correct
Which of the following entities would commonly issue a bond? Corporations All listed entities commonly issue bonds State Government Federal Government
All listed entities commonly issue bonds
All of the following are major operations of an insurer except: Claims Marketing All options are major operations Actuarial Underwriting
All options are major operations
All of the following are factors that can affect ratemaking EXCEPT Estimation of losses All other answers are correct Projected changes in cost of claims Delays in data collection/use Target level of profit/contingencies
All other answers are correct
All of the following are potential reasons for a P/C insurer to use reinsurance except Stabilize profits Increase underwriting capacity Protect against catastrophic loss Provide surplus relief All other answers are reasons for a P/C insurer to use reinsurance
All other answers are reasons for a P/C insurer to use reinsurance
Upon receipt of a premium payment, an insurer records An increase in cash and a decrease in underwriting income An increase in cash and an increase in the unearned premium reserve A decrease in premiums written and an increase in the unearned premium reserve A decrease in the unearned premium reserve and an increase in premiums written A decrease in cash and an increase in premiums written
An increase in cash and an increase in the unearned premium reserve
An admitted insurer is best described as which of the following? An insurer that holds a license in a state An insurer that is domiciled in a state An insurer that was domiciled and holds a license in the state
An insurer that holds a license in a state
A property-casualty insurer would be insolvent if: Net underwriting income plus investment income were less than zero Assets were less than liabilities Nonadmitted assets were greater than admitted assets Policyholders' surplus was equal to assets less liabilities
Assets were less than liabilities
What fundamental concept provides the motivation for regulation of the insurance industry? Agency conflict between insurance consumers and insurance companies Adverse selection between regulators and consumers Asymmetric information between insurance consumers and insurance companies Moral hazard of insurance regulators
Asymmetric information between insurance consumers and insurance companies
The basic function of underwriting is to To make certain that only very good risks are insured Avoid insuring people who are likely to have losses Generate as high a premium volume as possible Limit premiums written to an acceptable level Avoid adverse selection
Avoid adverse selection
Which of the following items is usually the largest asset position on a property-casualty insurer's balance sheet? Mortgages and Real Estate Stocks Bonds Short-term investments/Cash Agents balances
Bonds
Which of the following is a principle method of ensuring the solvency of insurers? None of the other answers are correct Calculation of risk-based capital standards for insurers Disciplining agents of the insurer for illegal sales practices Regulating the forms (applications and policies) employed by the insurer Tracking and investigating market conduct complaints against insurers
Calculation of risk-based capital standards for insurers
Which type of investment gives the holder the right (but not the obligation) to buy an asset for a given price? Swap Put option Call option Forward
Call option
A property and liability insurer's loss reserve includes estimates for all of the following EXCEPT Claims reported and filed but not yet adjusted Claims anticipated but not yet incurred Claims incurred but not yet reported to the company Claims reported and adjusted but not yet paid
Claims anticipated but not yet incurred
Which component of the insurer claim loss reserve involves the highest degree of uncertainty? Claims paid Claims anticipated, but not yet incurred Claims incurred, but not yet reported Reported and adjusted, but not paid losses None of the other answers are part of the loss reserve
Claims incurred, but not yet reported
The valuation process applied under statutory accounting principles Tends to understate an insurer's liabilities Tends to overstate an insurer's assets Conservatively states policyholders' surplus Does not emphasize liquidity, as does GAAP Credits (adds to) policyholders' surplus the value of nonadmitted assets
Conservatively states policyholders' surplus
Regulators monitor and review insurance policy forms within their respective states. This action best promotes which of the following reasons for insurance regulation? Enhancement of market competition Consumer protection Insurer solvency Prevention of destructive competition
Consumer protection
Which of the following types of compensation structures awarded to agents and brokers accounts for not only the amount of business sold, but also the profitability (e.g., by accounting for the loss ratio on placed business)? Rate-adjusted commission Profit-margin bonuses Salary Contingent commission
Contingent commission
When considering a bond's riskiness, what type of risk reflects the possibility that the issuer will not make coupon payments and is typically evaluated by a rating from an agency? Liquidity Credit Interest rate Time to maturity
Credit
If you were a consultant hired to recommend a marketing system for a newly formed insurer that will write commercial liability insurance, which of the following systems would you be LEAST likely to recommend? Direct writer Exclusive agency Independent agency Broker
Direct writer
Bradford Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n) Reinsurance pool Surplus-share reinsurance treaty Excess-of-loss reinsurance treaty Quota-share reinsurance treaty
Excess-of-loss reinsurance treaty
A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called A reinsurance pool Automatic treaty reinsurance Retrocession Facultative reinsurance
Facultative reinsurance
The Gramm-Leach-Bliley Act made it illegal for insurers and banks to operate under the same "umbrella" (i.e., to be affiliated).
False
Under what type of rate regulation are insurer required to obtain regulatory approval of ratings before using them if the rate change exceeds a specified predetermined range? File-and-use-law Use-and-file law Flex-rating law Prior-approval law
Flex-rating law
An insurance company incorporated in another state has been licensed to operate in your state. In your state, this insurer would be considered a(n) Alien insurer Foreign insurer Nonadmitted insurer Reciprocal insurer
Foreign insurer
DLE Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If DLE becomes insolvent, which of the following will help pay the unpaid claims of the insurer? Admitted assets Premium rebates Risk-based capital Guaranty fund
Guaranty fund
Which of the following is true regarding policyholders of a mutual insurance company? The policyholders of a mutual are also the managers of the company If total losses are less than premiums collected, the policyholders will automatically receive a refund Policyholders have no ownership interest in the company If total losses exceed premiums collected, the policyholders can be required to pay additional premium
If total losses exceed premiums collected, the policyholders can be required to pay additional premium
All of the following are characteristics of a good rating factor EXCEPT Separate classes Admissibility Increase adverse selection Incentive value Build homogeneity
Increase adverse selection
All of the following statements about the methods of regulating insurance are true except: Insurance companies are totally exempt from regulation by federal agencies and laws State insurance commissioners, through administrative rulings, have considerable power over insurance companies doing business in their states The courts regulate insurance in many ways, including the interpretation of policy clauses and provisions
Insurance companies are totally exempt from regulation by federal agencies and laws
All of the following statements about judgment rating are true EXCEPT It involves the individual rating of exposures It is a form of retrospective rating It is used when credible loss statistics are not available It is used when the loss exposures are so diverse that a class rate cannot be calculated
It is a form of retrospective rating
For a new type of insurance, which of the following would be most appropriate to use for ratemaking? None of the listed methods can be used Judgement method Pure premium method Loss ratio method
Judgement method
With which of the following ownership structures did the owners traditionally have unlimited liability? Reciprocal Exchange Stock Mutual Lloyd's of London
Lloyd's of London
Laurier Insurance Ltd. wants to exit from writing business in Florida due to unprofitable underwriting experience. They can facilitate this exit by fully shifting the underwriting risk to a reinsurer in a transaction known as which of the following? Loss portfolio transfer Layering Surplus relief Retrocession
Loss portfolio transfer
Which of the following would not appear in the asset section of an insurance company's balance sheet? Loss reserves Real estate Bonds owned by the insurance company Common stock owned by the insurance company Policyholders surplus
Loss reserves
The principal (i.e., largest) liabilities of a property-liability insurer are Dividend reserves Reserves for contingencies Reserves for commissions and taxes Reinsurance reserves Loss reserves and unearned premium reserves
Loss reserves and unearned premium reserves
What is the name of a subset of artificial intelligence (AI) technology that allows for quick and efficient data processing? Cryptocurrency Insurance Analytics Machine learning Telematics Stochastic Algorithms
Machine learning
The basis for current state regulation of insurance is: The National Association of Insurance Commissioners McCarran-Ferguson Act Paul vs. Virginia The South-Eastern Underwriters Association Case
McCarran-Ferguson Act
The right of the states to regulate the business of insurance was first established by: Paul v. Virginia The South-Eastern Underwriters Association case The Sherman Act McCarran-Ferguson Act
McCarran-Ferguson Act
Which of the following rating factors would NOT usually be used for auto insurance underwriting? Medical condition Marital status Driving record Age of driver Type of vehicle
Medical condition
A major difference between stock and mutual insurers is Mutual insurers are not taxed, while stock insurers pay tax Stock insurers pay dividends to policyholders and mutual insurers do not None of the other answers are correct Stock insurers are owned by their stockholders, while mutual insurers are owned by their policyholders Stock insurers are incorporated, while mutual insurers are not
None of the other answers are correct
Which of the following is considered a nonadmitted asset for an insurer? Cash Preferred stocks Real estate Office furniture
Office furniture
A property insurer increasing its premium volume at a rapid rate Often appears to have a decreasing surplus account No other answer is correct Should have a decreasing claim reserve Is certain to be a secure insurer Should have a decreasing unearned premium reserve
Often appears to have a decreasing surplus account
Assume a policyholder files a claim for $3,000 and the insurance company put money aside for this claim. In addition to the loss reserve being increased by $3,000, which of the following is true? Policyholders surplus decreases by $3,000 Investments increase by $3,000 Unearned premium reserve decreases by $3,000 Cash decreases by $3,000
Policyholders surplus decreases by $3,000
The NAIC Insurance Regulatory Information System (IRIS) is designed to detect Potential Insolvencies Excessive litigation Declining premium volume Service Deficiencies Excessive rates
Potential Insolvencies
The statutory underwriting loss that is indicated when a property and liability insurer is increasing its premium volume results from the fact that A part of the premiums are never collected Commissions increase with sales Premiums are counted as income only as they become earned, but expenses are incurred at the inception of the policy Incremental fixed costs are required with increasing volume Premium taxes increase with volume
Premiums are counted as income only as they become earned, but expenses are incurred at the inception of the policy
Anne is in charge of accounting at EME Insurance Company. EME is a publicly-traded stock insurer. In describing her job, Anne said, "there aren't too many businesses where you are required to keep two sets of books." Anne's comment most likely refers to her company Preparing one set of books using dishonest values and another set using current market values Preparing accounting statements using statutory accounting principles (SAP) and GAAP accounting Preparing one set of accounting statements considering the investment income and another set of accounting standards not considering investment income Preparing one set of records for the insurer's managers and another set for policyholders
Preparing accounting statements using statutory accounting principles (SAP) and GAAP accounting
The amount assessed to surviving insurers that they must pay into a guaranty fund is based on: Pro-rata share based on premiums written Pro-rata share based on number of policies sold Equal share for all insurers in the state Amount of risk, weighted by risk-based capital
Pro-rata share based on premiums written
When considering options (the financial derivative), while a call option gives the owner the right (but not the obligation) to buy an asset, what option gives the owner the right (but not the obligation) to sell an asset? Swap Forward Coupon Put
Put
All of the following statements about regulatory objectives of insurance rate making are true EXCEPT A purpose of rate adequacy is to maintain the solvency of insurers Rates are unfairly discriminatory if they are based on age, even though losses may vary by age Rates are excessive if the policy owners are paying substantially more than the actual value of their protection Rates are adequate if they are high enough to pay all losses and expenses
Rates are unfairly discriminatory if they are based on age, even though losses may vary by age
A mutual insurer "assessing" their policies would be doing which of the following? Cancel a class of policies No other answer is correct Transferring their policies to a reinsurer Paying policyholder dividends Requiring additional payments from policyholders due to unexpectedly high losses
Requiring additional payments from policyholders due to unexpectedly high losses
Pennsylvania's premium tax is 2 percent. Georgia's premium tax is 3 percent. Pennsylvania insurers are required to pay the 3 percent rate on business written in Georgia. Pennsylvania requires insurers from Georgia to pay a 3 percent premium tax on business written in Pennsylvania, even though the tax rate is only 2 percent in Pennsylvania. This practice is known as a Guaranty fund assessment Retaliatory tax law Risk-based capital requirement Tax tariff
Retaliatory tax law
Insurers operating in the state (regardless of which state that may be) are responsible for paying state premium taxes on the premiums written in the state. The majority of this tax money goes towards which of the following? State insurance departments Federal government Other state expenses State insurance departments and the federal government share in premiums taxes equally Fraud prevention
State insurance departments
Which of the following is true regarding stock insurance companies? Stock insurers usually pay dividends to all of their policyholders Stock insurers in the UK are often referred to as Lloyd's Associations Stock insurers can make assessments against their policyholders Stock insurers cannot raise additional capital by increasing the premiums charged Stock insurers can raise additional capital by selling shares of their company
Stock insurers can raise additional capital by selling shares of their company
Regarding SAP financial statements, which of the following is true? Stocks are always shown at market value Bonds are always shown at market value Real estate is usually shown at market value Loss reserves are the largest asset
Stocks are always shown at market value
What is the name of a financial derivative where two parties exchange either cash flows or the values of one asset for another? Forward Mortgage-backed security Call Swap
Swap
Which of the following is an advantage of the FAST system over the IRIS solvency screen system? The IRIS system relies on a point system instead of an "unusual range" for included ratios The FAST system has point values that are not publicly available to avoid gaming the system The FAST system subjects firms to fixed minimum capital requirements All other answers are advantages of the FAST system
The FAST system has point values that are not publicly available to avoid gaming the system
All of the following statements about insurance regulation are true except Insurers are primarily regulated at the state level An insurance commissioner can revoke or suspend an insurer's license to do business in his or her state Insurance commissioners are appointed in some states and elected in some states The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts
The National Association of Insurance Commissioners (NAIC) can force states to adopt the model laws that it drafts
Who is responsible for creating the rates charged by the insurance company? The independent agent The claims adjuster The actuary The underwriter The exclusive agent
The actuary
In insurance accounting (SAP), the term "policyholders surplus" refers to The excess of assets over liabilities Amounts paid in by stockholders in excess of the par value of stock Premiums paid by the insured that have not yet been earned Benefits paid out in excess of premiums received None of the other answers are correct
The excess of assets over liabilities
The unit of measurement used in insurance pricing is called The experience unit The exposure unit The premium The unit rate
The exposure unit
Which of the following statements about reinsurance is true? The amount of insurance transferred to a reinsurer is called the net retention The reinsurer may not purchase reinsurance The reinsurer is responsible for providing claims service to the insured after a loss occurs The insurer transferring business to a reinsurer is called the ceding company
The insurer transferring business to a reinsurer is called the ceding company
The portion of an insurance premium allocated to expenses, profits, and a margin for contingencies is called The pure premium The loading The gross premium The experience rate
The loading
All of the following statements about underwriting standards are true EXCEPT Equitable rates should be charged so that each group of policy owners pays its own way in terms of losses and expenses The underwriter should select a book of business so that there is a proper balance within each rate classification The basic purpose of underwriting standards is to reduce adverse selection against the insurer The underwriter should select only those insured that are expected to have no losses
The underwriter should select only those insured that are expected to have no losses
Most P/C insurers would be unprofitable if only their underwriting results were considered.
True
True or False: P/C insurers are required to discount loss reserves for federal income tax purposes.
True
True or False: Underpricing contracts is a historical cause of property-liability insurer insolvency.
True
Vicky is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Vicky assigns the applicant to a rating category based on the applicant's degree of risk. Vicky is a(n) Claims Adjuster Loss control engineer Underwriter Actuary
Underwriter
Redlining is an unfair method of Reinsurance Underwriting Taxation Claims adjusting State regulation
Underwriting
Insurance operations result in ____________, while investment operations result in _____________. Underwriting income; investment income Investment income; net income Net income; investment income Investment income; underwriting profit No other answer is correct
Underwriting income; investment income
Under one type of rating law, insurers are free to change rates and to use modified rates immediately. However, the new rate must be filed with regulators within a specified period, such as 60 days after the modified rate is employed. This type of rating law is called Prior Approval Use-and-file Flex Rating File-and-use
Use-and-file
All of the following insurance contracts would be considered short-term except? Auto Health Homeowner's Annuities
annunites
The combined ratio is the sum of which two other ratios? loss ratio and expense ratio loss ratio and Kenney ratio IRIS ratio and RBC Ratio Kenney ratio and return-on-assets Profit ratio and operating ratio
loss ratio and expense ratio
An agent represents ___________ and a broker represents _____________. the customer, the insurer the insurer, the customer the customer, the customer the insurer, the insurer
the insurer, the customer
