Chapter 1: Overview of Insurance Operations

Juan, sales and marketing manager for Millwright Insurance Company (Millwright), measures his sales department and customer satisfaction by the cancellation ratio and the retention ratio. Millwright renewed 5,000 auto policies which were due to expire at the beginning of 20X1 was 10,000. The number of policies lapsed during 20X1 was 1,000. Millwright's cancellation ratio is...

10%

At year-end, a property casualty insurer had a combines ration of 111.8, and an investment income ratio of 10.2. What is the insurer's overall operating ration for the year?

101.6

Insurer C (IC) has the following year-end results: Which one of the following is IC's combine ratio (trade basis)?

120%

Matrina, Cromley Insurance Company's (Cromley) underwriting manager, wants to know if her underwriting department has a gain or loss. Cromley has homeowner losses of $1,000,000 and written premium of $3,000,000. Cromley has earned premiums of $2,000,000. The taxes, salaries, and building expense for Matrina's underwriting department are $600,000. What is Cromley's combined ratio?

70%

ABC Insurance Company's written premiums are $2,000,00 and its earned premiums are $1,800,000. Losses total $1,000,000, and loss adjustment expenses are $350,000. Which one represents ABC's loss ratio?

75%

An insurer has the following the year-end financial results: Based on this information, which one of the following is the insurer's loss ratio?

80 %

ABC Insurance Company has written premiums of $3,000,000 and earned premiums of $2,750,000. The company's incurred losses are $1,700,000 and loss adjustment expenses are $225,000. ABC's incurred underwriting expense total $750,000. Which one of the following represents ABC's trade basis combined ratio?

95%

Which one of the following is an example of a cooperative insurer?

A mutual insurer

Pravalt Insurance Company, a proprietary insurer is concerned about meeting their insurer goal of earning a profit. CEO Emily has asked for suggestions from her management staff to meet this goal. Which one of the following suggestions from her staff will most effectively achieve this goal?

Actuarial Manager, Elin suggests their product be priced competitively in the market and appropriately for their risk.

Which one of the following is a proprietary insurer?

American Lloyds

Insurer A is a proprietary insurers that acts as an insurance marketplace. Its members underwrite any insurance or reinsurance purchased, and members are primarily partnerships or corporations with limited liability. Insurer A members belong to syndicates and delegate day-to-day operations to the syndicate manager. Insurer A is which one of the following? A cooperative insurer An insurance exchange An American Lloyd's insurer A mutual insurer

An insurance exchange

Due to the possibility of an environmental pollution exposure resulting in extensive losses, several insurers in a particular state have joined together to insure the exposure. No single insurer was willing to insure the entire risk. This insurance arrangement is typical of

An insurance pool

All corporations are obligated to promote the well-being of society. At the minimum, this obligation demands that the insurer should...

Avoid causing any public harm

To support current ratings, well-managed and highly rated insurers typically must maintain which one of the following levels in excess of the minimum amounts required?

Capitalization levels

Pedro's Chemical Sprays (Pedro's) has been unable to obtain the liability coverage for its products. Insurers consider Pedro's to be uninsurable. Pedro's risk manager, Johanna, believes that the company can cover and fund the losses. Which one of the following plans is Johanna considering for Pedro's?

Captive

Insurers face external constraints that might prevent them from meeting their goals. Which one of the following is an external constraint? Competition Expertise Size Financial Resources

Competition

What is an insurer goal that creates a conflict between the profit goal and customer needs goal?

Complying with legal requirements

Mellfor Insurance Company has recently contributed funds to their state insolvency fund and also paid expenses of numerous filings for their company. Mellfor's complying with legal requirements goal presents a conflict between the profit goal and

Customer needs goal

Keithly Insurance Company traditionally has written business in coastal states. Over the last decade, there has been a high concentration of losses in these areas due to catastrophes. Keithly's CEO Nicholas has now developed a plan to write business in non coastal states. Which one of the following insurer goals is Nicholas specifically trying to achieve with the development of his new plan?

Diversify risk.

Which insurer goal is most commonly associated with proprietary insurers?

Earn a profit

What is an internal constraint that might prevent an insurer from meeting all of its goals?

Efficiency

Which one of the following situations would have the have the greatest impact on the profitability goal of Cintriell Insurance Company?

Emilia, the new workers compensation claims manager for Cintriell consistently underestimates indemnity loss reserves.

What is a true statement regarding internal constraints that insurers face?

Financial constraints can affect insurers' ability to achieve profit goals.

To determine profitability, and insurer should consider whether growth resulted from rate increase or new policies. Insurers should be concerned with growth due to which one of the following?

Inadequate insurance rates.

Insurer Y is small but has a speciality insurance market for high-value vehicles. In competing with a larger insurer with a broader market, Insurer Y is likely to have which one of the following advantages?

Insurer Y can be more nimble, allowing it to respond quickly to an emerging trend or change.

The difference between underwriting gain or loss or operating gain or loss is that operating gain or loss includes

Investment income

The primary sources of revenue for insurers are insurance premiums and

Investment income

What is not a type of insurance but a marketplace such as a stock exchange? Mutuals Cooperatives Lloyd's Reciprocals

Lloyd's

With regard to the various forms of ownership of property-casualty insurers...

Lloyd's and insurance exchanges are each examples of an insurance marketplace.

One of the biggest problems in measuring insurer profitability arises from errors in estimating

Loss reserves.

State insurance departments market conduct regulatory actions are a good indication of an insurer's success or failure in meeting which one of the following major goals?

Meet legal requirements.

The insurance industry is highly regulated, and the expense associated with compliance can be substantial. To the extent that these expenses increase the cost of insurance, they create a conflict between the insurer's profit goal and the insurer's goal of

Meeting customer's needs

which one of the following insurer performance goals is the most difficult to evaluate?

Meeting social responsibilities

Which one of the following cases illustrates and external constraint for meeting insurer goals?

Mellfor Insurance Company has lost investment income making it difficult to pay increased workers compensation losses.

What is a case that illustrates an internal constraint for meeting insurer goals?

Millwright Insurance Company's website is not interactive and does not provide rate quotes on line.

Insurer Z is a large national insurer that provides low-cost insurance to its policyholders, who are the owners of Insurer Z. The insurer issues no common stock and has no stockholders. Its policyholders have voting rights, and they elect Insurer Z's board of directors. The board of directors appoints officers to manage the insurer. Insurer Z is a

Mutual insurer.

Insurer Q has earned premium of $5 million and unearned premium of $3 million. Its incurred losses are $3 million while underwriting expenses are $1 million for the calculation period. As far as underwriting performance, Insurer Q has a

Net gain of $1 million.

Which one of the following formulas calculates the return on equity?

Net income divided by owner's equity

Juan has a poor driving record and has been unable to obtain auto liability coverage from private insurers. Auto liability coverage is mandatory in his state. Since affordability is a concern, Juan wants auto liability coverage only. Which one of the following is an option for Juan to obtain coverage?

Obtain coverage through his state's residual market.

What is a source of capital for cooperative insurers?

Policyholder premium

Under certain circumstances, a cooperative insurer can obtain additional capital by borrowing funds using surplus notes. These notes can usually be repaid only from

Profits

The two major types of insurers by legal form of ownership are...

Proprietary and cooperative

What is an external constraint insurers contend with that may prevent them from meeting their goals?

Public Opinion

Which one of the following consists of a series of private contract in which subscribers or members of the group agree to insure each other?

Reciprocal insurance exchanges

The only unincorporated insurers permitted in most states are Alien insurers Lloyds associations Reciprocal insurance exchanges Captive insurers

Reciprocal insurance exchanges.

An insurer develops a new policy designed specifically for the construction industry. The insurer is anxious to market this product which will increase its writings and boost its profits. The policy form is not approved in time to meet the product's planned launch date. This is an example of which one of the following types of external constraints?

Regulation

Insurance pools operate either as a syndicate or through....

Reinsurance

Because Janine has had many driving accidents due to her own carelessness, she has been unable to find private insurers willing to provide her with automobile insurance. In most states, Janine would be able to purchase auto liability insurance through a

Residual market plan

One of the most telling measurements of customer satisfaction is

Retention ratio.

Insurer Y is involved in recycling and reusing materials used in policy production and claims handling and reporting. The insurer has also been keenly interested in salvage programs having learned that these programs are better for the environment and more cost-effective for insureds. By participating in these programs and activities, Insurer Y is meeting which one of the following insurer goals?

Social responsibility goals

With regard to the various forms of ownerships of property-casualty insurers?

State and federal governments provide insurance for exposures that are significant but not commercially insurable.

Which one of the following types of insurers are the most prevalent in the US?

Stock insurers.

What is an external constraint that may prevent insurers from meeting their established goals?

The insurer's competition

Which one of the following statements is correct regarding premium growth and an insurer's success?

To determine profitability, an insurer should consider how its premium growth is being achieved.

Three specific ratios are used to measure an insurer's underwriting performance: the loss ratio, the expense ratio, and the

Trade basis combined ratio

With regard to an insurer's goals, a proprietary insurer must

earn competitive profits to raise the capital needed to operate.

Specific measures of an insurer's operational performance are the investment income ratio, overall operating ratio, and the

return on equity ratio

The combined ratio is the

sum of an insurer's loss ratio and its expense ratio.