FINA 365 Chapter 6 Multiple Choice

An insurance policy that often is the least expensive to the insured because of the policy does not include a savings plan is called A. term life. B. universal life. C. whole life. D. endowment life. E. variable life.

A

As of 2012, the primary regulator of both the life and property-casualty insurance industry is/are the A. state insurance commissions. B. NAIC. C. Federal Reserve. D. IRIS. E. new federal oversight commission yet to be named.

A

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

A

For property-casualty insurers, loss rates are more predictable for A. low-severity high-frequency events. B. low-severity low-frequency events. C. high-severity high-frequency events. D. high severity low-frequency events. E. low severity medium-frequency events.

A

Higher uncertainty of losses forces property-casualty firms to A. invest in more short-term assets than life insurance firms. B. invest in more long-term assets than life insurance firms. C. hold a lower percentage of capital and reserves than life insurance firms. D. invest in riskier equity securities than life insurance firms. E. conduct more separate accounts business than life insurance firms.

A

If losses on a particular line of fire insurance were $430 million, premiums earned were $595 million, and loss adjustment expenses were $95 million, the combined ratio would be A. 0.88 implying that this line of insurance is profitable. B. 0.88 implying that this line of insurance is unprofitable. C. 1.13 implying that this line of insurance is profitable. D. 1.13 implying that this line of insurance is unprofitable. E. 0.22 implying that this line of insurance is profitable.

A

Insurance policy benefits are classified on an insurance company's balance sheet as A. liabilities, because the insurance company may have to pay out the benefits. B. assets, because policy benefits are valuable to the company. C. liabilities, because customers may fall behind on their premium payments. D. assets, because policy benefits are fully covered by premium payments. E. liabilities, because insurance companies must maintain a capital base to cover the payments of benefits.

A

Life insurance guaranty funds A. are sponsored by state insurance regulators. B. involve a permanent reserve fund similar to the FDIC's bank deposit reserve. C. require uniform contributions from each state when there is a failure of an insurance company. D. make policyholder payments immediately in the event of an insurance company failure. E. are regulated by the Federal Reserve Bank.

A

The largest liability category on the balance sheet of U.S. life insurance companies as of 2012 was A. net policy reserves. B. policy claims. C. premium and deposit funds. D. commission, taxes and expenses. E. capital surplus.

A

The largest liability on property-casualty insurers' balance sheet as of 2012 was A. loss reserve and loss adjustment expenses. B. unearned premiums. C. cash. D. policyholder surplus. E. conditional reserve funds.

A

The largest line of life insurance in terms of total contract value in the U.S. is A. ordinary life. B. group life. C. industrial life. D. credit life. E. noncontributory life.

A

The two policy categories offered by property-casualty insurers that are most likely to be subject to rate regulation are A. auto insurance and worker's compensation. B. homeowner multiple peril and commercial multiple peril. C. earthquake and flood. D. surety bonds and financial guaranty. E. product liability and farm owner multiple peril.

A

Underwriting risk faced by property-casualty insurance companies may result from unexpected A. increases in loss rates. B. decreases in loss adjustment expenses. C. increases in investment yields. D. cancellations of policies by customers. E. increases in policy premiums.

A

What does the loss ratio measure in any particular year? 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

Which account refers to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided. A. Unearned premiums. B. Prepaid premiums. C. Premium reserves. D. Policy reserves. E. Outstanding premiums.

A

Which of the following insurance products protects a lender against a borrower's death prior to repayment of the debt? A. Credit life. B. Universal life. C. Whole life. D. Endowment life. E. Variable life.

A

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

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

E

Factors that affect the predictability of claims loss exposure include A. unexpected increases in inflation. B. the frequency and severity of loss. C. the concept of long-tail risk. D. property versus liability coverage. E. All of the above.

E

The operating ratio for a PC insurer equals 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.

E

If the loss ratio on a line of insurance is 70 percent and loss adjustment expenses are 33 percent, then the line is profitable before dividends if the ratio of A. commissions and other expenses are 15 percent and investment yields are 10 percent. B. commissions and other expenses are 5 percent and investment yields are 6 percent. C. commissions and other expenses are 16 percent and investment yields are 20 percent D. commissions and other expenses are 15 percent and investment yields are 12 percent. E. commissions and other expenses are 6 percent and investment yields are 4 percent.

C

An insurance company collected $31.0 million in premiums and disbursed $28 million in losses. Loss adjustment expenses amounted to $5.0 million. The firm is profitable A. if dividends paid to policyholders is $4 million and income generated on investments is $4 million. B. if dividends paid to policyholders is $10 million and income generated on investments is $14 million. C. if dividends paid to policyholders is $6 million and income generated on investments is $2 million. D. if dividends paid to policyholders is $10 million and income generated on investments is $4 million. E. if dividends paid to policyholders is $4 million and income generated on investments is $2 million.

B

An insurance policy that allows both the premium amount and the maturity of the life contract to be changed by the insured is called A. term life. B. universal life. C. whole life. D. endowment life. E. variable life.

B

Annuities are an important product sold by life insurance companies. Which of the following statements is correct as of 2012? A. Life insurance contracts continue to dominate premiums written while annuities are of less importance. B. The value of annuity sales are more than double those of traditional life insurance lines. C. Retirement accounts and private pension plans are not allowed access to the annuities of life insurance companies. D. The funds in an annuity can only be invested in guaranteed investment contracts (GICs). E. All annuities are listed as separate accounts business on the life insurer's balance sheet.

B

As of 2012, assets of property-casualty insurers totaled approximately ________, which was ______ of the assets of the life insurance industry. A. $900 billion; 20 percent B. $1,600 billion; 30 percent C. $4,250 billion; 90 percent D. $5,750 billion; 105 percent E. $7,700 billion; 120 percent

B

For property-casualty insurers, losses are higher for lines that are exposed to A. long tails and low inflation. B. long tails and high inflation. C. short tails and low inflation. D. short tails and high inflation. E. short tails and no inflation.

B

Guaranteed investment contracts (GICs) offered by a life insurance company A. are endowment life policies marketed to group insurance policyholders. B. are short- and medium-term debt instruments sold to fund their pension plan business. C. can only be purchased by a group life insurance plan. D. earn a return based on the consumer price index (CPI). E. Short- and medium-term investments in venture capital firms.

B

If losses on a particular line of medical malpractice insurance were $650 million and premiums earned were $575 million, the loss ratio would be A. 1.13 implying that this line of insurance is profitable. B. 1.13 implying that this line of insurance is unprofitable. C. 0.88 implying that this line of insurance is profitable. D. 0.88 implying that this line of insurance is unprofitable. E. -$75 million implying that this line of insurance is unprofitable.

B

The largest asset category on the balance sheet of U.S. life insurance companies as of 2012 was A. government securities. B. corporate bonds. C. corporate stock. D. cash. E. mortgages.

B

The largest asset on property-casualty insurers' balance sheet as of 2012 was A. cash. B. bonds. C. common stock. D. short-term securities. E. mortgages and mortgage-backed investments.

B

Which of the following involves fixed premium payments and a benefit payout at the time of death that will depend on investment returns over the life of the policy? A. Term life. B. Variable life. C. Whole life. D. Endowment life. E. Universal life.

B

Which of the following is used as collateral when an insurance company issues policy loans? A. Expected premium payments. B. Existing policies. C. Unearned premiums. D. Guarantee funds. E. U.S. Treasury Bills.

B

You start an annuity with $1million and expect to receive 12 equal payments beginning at the end of the first year. The guaranteed annual interest rate is 6 percent. The annual payments that you expect to collect are A. $88,333.33. B. $119,277.03. C. $59,638.51. D. $56,262.75. E. $112,525.50.

B

An insurance policy that protects an individual over an entire lifetime as long as the premiums are paid is called A. term life. B. universal life. C. whole life. D. endowment life. E. variable life.

C

Annuities offered by life insurance companies are a financial contract that A. is used to build up a fund. B. pays only fixed returns to groups of employees. C. is used to liquidate a fund. D. pays only variable returns to individuals. E. None of the above are correct.

C

Calculate the annual cash flows of a $2 million, 10-year fixed-payment annuity earning a guaranteed 8 percent annually if the payments are to start at the end of this year. A. $137,990.27. B. $275,980.53. C. $298,058.98. D. $149,029.49. E. $220,000.00.

C

An insurance policy in which fixed premium payments are invested in mutual funds of stocks, bonds, and money market instruments is called A. term life. B. universal life. C. whole life. D. endowment life. E. variable life.

E

Separate accounts business of a life insurance company represents A. policies written that cover individuals as a group. B. liabilities owed to other life insurance companies as a result of reinsurance. C. the cumulative cash value paid to policyholders if the policies are terminated before maturity. D. a fund established separately from the other funds of the insurance company and invested without regard to the usual diversification restrictions. E. the cumulative price that the company may repurchase policies from existing customers.

C

The McCarran-Ferguson Act of 1945 A. separated commercial banking from insurance activities. B. mandated federal insurance company charters. C. stipulated that insurance companies are to be regulated at the state level. D. initiated a national insurance guaranty fund. E. limited insurance company assets to low risk government securities.

C

The primary function of insurance companies is to A. generate fees for the banks that sell insurance products. B. sell a variety of consumer investment products. C. protect policyholders from adverse events. D. assist in the transfer of wealth into the future. E. provide contracts that encourage policyholders to save current income.

C

The problem of adverse selection A. implies that many people who do not need insurance coverage have it through group plans. B. means that those people who apply for insurance are the least likely to need insurance coverage. C. causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums. D. creates a savings element along with the insurance component of the premium and policy. E. does not exist in the insurance industry.

C

The surrender value of an insurance policy is A. the expected payment commitment on existing policy contracts. B. a fund established and held separately from the company's other assets. C. the cash value paid to the policyholder if the policy is terminated before it matures. D. the same as the endowment payout. E. the price at which the company may repurchase the policy.

C

What explains the recent increase in many large insurance companies conversion to stockholder controlled companies? A. Pressure from policyholders. B. Additional premiums. C. Access to equity markets. D. Tax concerns. E. Regulatory requirement.

C

What is essentially understood to be insurance for property-casualty insurance companies? A. Policy reserves. B. Conditional reserve funds. C. Reinsurance. D. Unearned premiums. E. Surplus notes.

C

Which of the following is pure life insurance with a savings element built in A. term life. B. universal life. C. endowment life. D. variable universal life. E. variable life.

C

Which of the following observations concerning reinsurance is FALSE? 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.

C

Calculate the annual cash flows of a $500,000, 12-year fixed-payment deferred annuity earning a guaranteed 5 percent per year if annual payments are to begin at the end of year 4. A. $32,652.38. B. $79,018.76. C. $62,195.01. D. $65,304.76. E. $31,097.50.

D

Property-casualty insurance involves A. insurance coverage related to the loss of real and personal property. B. insurance protection against legal liability exposure. C. insurance protection against injuries in employment related work. D. Answers A and B only. E. Answers A and C only.

D

The insurance company that was the largest beneficiary of federal bailout funds during the most recent financial crisis was A. Globe Life. B. UBS. C. State Farm. D. AIG. E. New York Life.

D

Variable universal life insurance policies A. have fixed premiums and a fixed benefit payout. B. have fixed premiums, but allow the benefit payout to vary with investment returns. C. have a fixed benefit payout, but allow the premium to vary with investment returns. D. allow both the premium and benefit payout to vary with investment returns. E. allow both the premium and benefit payout to vary with investment returns, but have a fixed maturity date.

D

Which of the following arises in policies in which the insured event occurs during a coverage period but a claim is not filed or reported until many years later? A. Short-tail losses. B. Adverse selection. C. Moral hazard. D. Long-tail losses. E. Social inflation.

D

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

D

Which of the following did NOT occur in the life insurance industry during the most recent financial crisis? A. Low equity values reduced asset-based fees on separate account assets. B. Losses were incurred on holdings of commercial mortgage-backed securities and commercial loans. C. Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns. D. Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies. E. Historically low interest rates caused increased demand for whole life policies.

E