Finance 341 Exam 3
The financial services field is currently experiencing consolidation and convergence. If both of these trends continue, in the future we should observe: - fewer financial institutions offering a wider range of financial services products.
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The function of an actuary is to determine premium rates.
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The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the A) loading.
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The process of transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options is knows as securitization of risk.
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The underwriting process begins with the : agent.
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The unearned premium reserve of an insurer is a liability representing the unearned portion of gross premiums on outstanding policies.
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The unit of measurement used in property and casualty insurance pricing is called the exposure unit.
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LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMNʹs policyholdersʹ surplus? A) $680 million B) $340 million C) $80 million
C) $80 million
All of the following are reasons why mutual insurance companies convert to stock insurance companies EXCEPT A) Stock companies can offer stock options to attract and retain key personnel. B) Stock companies can raise new capital more easily. C) Stock companies are exempt from state insurance regulation. D) Stock companies offer greater flexibility to expand through acquisitions.
C) Stock companies are exempt from state insurance regulation.
Which of the following statements about stock insurers is true? A) They issue assessable policies. B) They are not permitted to write property and liability insurance. C) Stockholders bear any losses and share in any profits. D) They are owned by their policyowners.
C) Stockholders bear any losses and share in any profits.
Advantages of the direct response system for marketing life insurance include which of the following? I. Advertising can be specifically directed to selected markets.
I. Advertising can be specifically directed to selected markets.
Which of the following statements about methods for estimating loss reserves for property and casualty insurers is (are) true? I. The judgment method involves the use of a statutory formula to estimate the loss reserve. II. The average value method is used when the number of claims is large and the claims are settled quickly.
II only
Sue double-majored in mathematics and statistics in college. She also enrolled in a number of finance courses. After graduation, she was hired by Econodeath Insurance Company. Her job is to calculate premium rates for life insurance coverages. Sue is a(n) A) actuary.
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Temporary evidence of insurance until a policy is actually issued is provided by a(n) A) binder.
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Ross studied engineering in college. After graduation, he went to work for an insurance company. Ross visits properties insured by his company. He conducts inspections and makes recommendations about alarm systems, sprinkler systems, and building construction. In what functional area does Ross work? loss control
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A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is call a(n) case reserve.
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A personal lines insurance company initiating banking and investment services for its policyowners demonstrates which financial services industry trend? A) convergence
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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 facultative reinsurance.
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Beverly lives in a sparsely populated area in northern Idaho. Some insurance companies marketing coverage in northern Idaho cannot afford to have full-time adjustors there. Several insurers hire Beverly to adjust claims for their insureds. Beverly charges the insurers a fee for each claim that she settles. Beverly is a(n) independent adjustor.
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Catastrophe bonds are made available to institutional investors in the capital markets through an entity that is specially created for that purpose. This is entity is called a special purpose reinsurance vehicle.
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David has always been successful in sales. Recently, he was approached by a life insurer interested in hiring him. Initially, David was not interested in the job because he feared it would require a lot of administrative work. ʺYouʹre a super salesperson, David,ʺ he was told, ʺWeʹre hiring you to do one thing and one thing onlySELL!ʺ David accepted the position. David is a(n) B) personal-producing general agent.
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Easy Pay Insurance Company may require insureds who suffer a loss to submit a sworn statement to substantiate that a loss occurred and to describe the conditions under which the loss occurred. This sworn statement is called a proof of loss.
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Huge 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 an excess-of-loss reinsurance treaty.
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If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n) A) inspection report.
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In 2008, Liberty Mutual Insurance Company acquired Safeco Insurance Company. This acquisition demonstrates which financial services industry trend? consolidation
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Insurers obtain data which can be used to determine rates from: insurance advisory organizations.
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Jan is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Jan assigns the applicant to a rating category based on the applicantʹs degree of risk. Jan is a(n) A) underwriter.
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Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airlineʹs liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as quota-share reinsurance.
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Life insurance policyowners may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance companyʹs financial statements? A) as an asset
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Most insurance companies require their marketing representatives to submit an evaluation of the prospective insured. This important source of underwriting information is called the agentʹs report.
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Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a A) surplus lines broker.
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New Liability Insurance Company began operations last year and has been very successful. The companyʹs ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately, while not realizing premiums received as income until some time has passed. Reinsurance is often used in such cases for which of the following purposes? to reduce the unearned premium reserve
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One item that appears on an insurance companyʹs financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurerʹs loss reserve.
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One method through which reinsurance is provided is through an organization of insurers that underwrites insurance on a joint basis. Through the organization, financial capacity is available for large commercial risks. This reinsurance arrangement is a(n) reinsurance pool.
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Pac-Coast Insurance (PCI) concentrates its underwriting activities in California. The company is concerned that if a catastrophic earthquake occurs, it might threaten the solvency of the company. To address this risk, PCI issued some debt securities. If a catastrophic earthquake occurs, PCI does not have to repay the borrowed funds or pay interest. The securities PCI issued are called catastrophe bonds.
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Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarahʹs agency owns the expiration rights to the business she sells. Sarah is a(n) A) independent agent.
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To protect policyholders, state laws place limitations on a life insurance companyʹs investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets backing interest-sensitive products are placed in a special account called the life insurerʹs separate account.
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Under one life insurance marketing system, an insurer sells its products through established agents who are already engaged in life insurance sales. Under this system, an insurer enters into contracts with successful agents who agree to sell the insurerʹs products. This life insurance marketing system is called the B) nonbuilding agency system.
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Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the: tabular value method.
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Which of the following statements about adjustment bureaus is (are) true? I. They are frequently used to settle claims when a large number of losses occur in a given geographic location as a result of a catastrophic event.
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Which of the following statements about property and casualty insurance company operating results is (are) true? I. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes.
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Which of the following statements about the investments of property and liability insurers is (are) true? I. Income from investments is important in offsetting any unfavorable underwriting experience.
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Which of the following statements about treaty reinsurance is true? D) Using a reinsurance pool provides financial capacity to write large amounts of insurance.
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Which of the following statements about treaty reinsurance is true? The reinsurer must accept all business that falls within the scope of the treaty.
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Which of the following statements about underwriting policy is (are) true? I. A company must establish an underwriting policy consistent with company objectives.
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catastrophe bonds - high interest rates
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Which of the following statements about Lloydʹs of London is true? A) Coverage is actually written by syndicates who belong to Lloydʹs of London. B) Its underwriters specialize in writing life and health insurance. C) It operates as an admitted insurer throughout the United States. D) It allows underwriters to write coverage without meeting stringent financial requirements.
A) Coverage is actually written by syndicates who belong to Lloydʹs of London.
9) Which of the following statements about brokers is (are) true? I. They legally represent the insured rather than the insurance company. II. They are prohibited from being licensed as agents. A) I only B) II only C) both I and II D) neither I nor II
A) I only
R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.ʹs loss exposures. The company that R.I.P. formed is called a A) captive insurer.
A) captive insurer.
A property and casualty insurerʹs loss reserve includes estimates for all of the following EXCEPT A) claims anticipated but not yet incurred. B) claims reported and adjusted but not yet paid. C) claims reported and filed but not yet adjusted. D) claims incurred but not yet reported to the company.
A) claims anticipated but not yet incurred.
All of the following would appear in the asset section of an insurance companyʹs balance sheet EXCEPT A) loss reserves. B) bonds. C) common stock. D) real estate.
A) loss reserves
Some investors decided to start an insurance company. Each investor contributed $50,000 to raise the capital required to charter a new company. Each investor received an ownership interest in the company. The company will raise additional capital by selling ownership rights to other investors. Under this type of organization, the customer and owner functions are separate. This type of insurer is called a A) stock company.
A) stock company.
All of the following are reasons for a primary insurer to use reinsurance EXCEPT A) to increase the unearned premium reserve. B) to increase underwriting capacity. C) to protect against catastrophic losses. D) to stabilize profits.
A) to increase the unearned premium reserve.
MedProf Insurance markets medical malpractice insurance. The companyʹs combined ratio in 2009 was 95.4. Its expense ratio was 25.4. What was the companyʹs loss ratio? A) 60.4 B) 70.0 C) 88.2 D) 120.8
B
All of the following statements about the general agency system used for selling life insurance are true EXCEPT A) A general agent is responsible for hiring, training, and motivating new agents. B) A general agent is a salaried employee whose responsibilities are limited to selling life insurance. C) A general agent may receive an allowance for the expenses of maintaining an agency office. D) A general agent receives a commission based on the amount of business produced.
B) A general agent is a salaried employee whose responsibilities are limited to selling life
Which of the following statements about a reciprocal exchange is (are) true? I. It usually specializes in health insurance. II. It is an unincorporated mutual insurance company. A) I only B) II only
B) II only
Which of the following statements about the managerial system of marketing life insurance is (are) true? I. It uses branch offices run by independent agents who represent several companies. II. The branch manager is an employee of the insurer who has the responsibility for hiring and training new agents. A) I only B) II only C) both I and II D) neither I nor II
B) II only
Which of the following statements is (are) true about savings bank life insurance (SBLI)? I. Each depositor at the savings bank receives life insurance equal to his or her savings account balance. II. The goal of SBLI is to provide low-cost life insurance to consumers. A) I only B) II only
B) II only
Which of the following statements is (are) true with respect to the financial services industry? I. The number of firms operating in the industry continues to increase at a high rate. II. The Financial Modernization Act of 1999 permits financial institutions to compete in other financial markets outside their core business area. A) I only B) II only C) both I and II D) neither I nor II
B) II only
The corporate structure of mutual insurers is changing rapidly. All of the following are current trends EXCEPT A) Demutualization of some insurers. B) Sharp increase in the number of mutual insurance companies. C) Increase in company mergers. D) Formation of mutual holding companies.
B) Sharp increase in the number of mutual insurance companies.
All of the following statements about business objectives in designing a rating system are true EXCEPT A) The rating system should encourage loss control activities. B) The rating system should be independent of long-run changes in economic conditions. C) The rating system should be simple to understand. D) The rating system should be stable over short periods so that consumer satisfaction can be maintained.
B) The rating system should be independent of long-run changes in economic conditions.
All of the following statements about fraternal insurers are true EXCEPT A) They are a form of mutual insurer. B) They specialize in writing property and liability insurance. C) They enjoy tax advantages because of their nonprofit or charitable status. D) They market their coverage to members of a social organization or religious group.
B) They specialize in writing property and liability insurance.
Which of the following is characteristic of a typical mass merchandising plan? A) higher commission scales for agents and higher administrative expenses B) payment of premiums through payroll deduction C) group rather than individual underwriting D) contributions by the employer to the cost of coverage
B) payment of premiums through payroll deduction
All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT: A) sale of catastrophe bonds. B) purchase of common stock. C) purchase of excess-of-loss reinsurance. D) quota share reinsurance with a low retention percentage.
B) purchase of common stock.
One type of insurer is a community-oriented health insurer. In most states, this insurer is set-up as a non-profit organization that provides coverage for hospital services, physiciansʹ and surgeonsʹ fees, and other medical services. This type of insurer is called Blue Cross/Blue Shield Plan.
Blue Cross/Blue Shield Plan.
Factors that may result in more restrictive underwriting decisions include which of the following? I. Inadequate rates. II. The unavailability of reinsurance at favorable terms.
Both
Functions of an insurance companyʹs legal department include which of the following? I. Lobbying for legislation favorable to the insurance industry. II. Drafting policy provisions.
Both
Reasons for the unearned premium reserve include which of the following? I. To pay losses that occur during the policy period. II. To pay premium refunds to policyholders in the event of cancellation.
Both
Which of the following statements is (are) true about life insurance company investments? I. The majority of life insurance company general account assets are invested in bonds. II. The majority of life insurance company separate account assets are invested in stocks.
Both
Which of the following statements is true regarding the information systems functional area of an insurance company? I. Computers and information systems are able to perform some tasks that previously were performed directly by employees. II. Information systems can speed the processing of policies by insurers.
Both
All of the following statements about the settlement of a claim are true EXCEPT A) The insurance policy usually has a provision specifying how a notice of loss is to be made to the insurance company. B) One step in the investigation of a claim is to determine whether the policy was in force when the loss occurred. C) The adjustor must file the proof of loss, which is a sworn statement supporting his or herdecision regarding a claim. D) A policy provision may determine how disputes over claim settlements are resolved.
C) The adjustor must file the proof of loss, which is a sworn statement supporting his or herdecision regarding a claim.
All of the following statements about the independent agency system are true EXCEPT A) Agents are often authorized to adjust small claims. B) Agents are compensated on the basis of commissions. C) The insurer rather than the agent owns the renewal rights to the business. D) The agent is an independent business person who represents several insurers.
C) The insurer rather than the agent owns the renewal rights to the business.
All of the following items would appear in the income section of an insurance companyʹs income and expense statement EXCEPT A) gain on sale of securities. B) common stock dividends. C) commissions. D) premiums.
C) commissions.
Salespersons of a direct writer are considered to be A) independent agents. B) independent contractors. C) employees. D) brokers.
C) employees.
The leaders of a religious group decided to start a life insurance organization to insure members of the religious group. The insurer will operate as a nonprofit organization, thus receiving favorable tax treatment. The insurer formed will be a A) health maintenance organization. B) stock insurer. C) fraternal insurer.
C) fraternal insurer.
The demutualization process is expensive and time consuming. As an alternative to demutualization, many states have enacted legislation allowing a mutual company to reorganize as a company that directly or indirectly controls another insurer. The other insurer is a stock company that can issue additional shares of stock to raise capital. The reorganized company is called a A) captive insurance company. B) conglomerate. C) mutual holding company.
C) mutual holding company.
Jim would like to start a business raising thoroughbred racehorses. The business would be the first of its kind in the state where he lives. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary which Jack can use to place this coverage with an insurer not admitted to his state? A) alien insurer B) general agent C) surplus lines broker D) direct writer
C) surplus lines broker
Antonio is a claims adjustor for LMN Insurance Company. After the insurer is notified that there has been a loss, Antonio meets with the insured. The first step in the claims process that Antonio should follow is to A) determine the amount of the loss. B) attempt to deny the claim regardless of whether he believes the claim is covered. C) verify that a covered loss has occurred. D) delay paying the claim if the claim is covered.
C) verify that a covered loss has occurred.
All of the following statements about claims settlement are true EXCEPT A) Agents may have the authority to settle claims. B) 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. C) Company adjustors are salaried employees who work for one insurer. D) A public adjustor is usually paid a flat fee regardless of the size of a claim.
D) A public adjustor is usually paid a flat fee regardless of the size of a claim.
Which of the following statements about the exclusive agency system for marketing property and liability insurance is true? A) Exclusive agents typically have complete ownership of policy expirations. B) A higher commission rate is usually paid on exclusive agentsʹ renewal business than on new business. C) Exclusive agents represent several different insurance companies. D) New exclusive agents usually start as employees and after a training period become independent contractors.
D) New exclusive agents usually start as employees and after a training period become independent contractors.
All of the following statements about reinsurance are true EXCEPT A) A reinsurer may also purchase reinsurance. B) Reinsurance is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance. C) The insurer transferring business to a reinsurer is called the ceding insurer. D) The amount of insurance transferred to a reinsurer is called the net retention.
D) The amount of insurance transferred to a reinsurer is called the net retention.
All of the following statements about life insurance company investments are true EXCEPT A) Funds for these investments are derived primarily from premium income, investment earnings, and maturing investments that must be reinvested. B) Income from these investments reduces the cost of insurance. C) A primary objective in making these investments is safety of principal. D) The majority of these investments are short-term investments.
D) The majority of these investments are short-term investments.
Why are some mutual insurers referred to as ʺassessment mutualsʺ? A) They charge low premiums because the loss exposures of their insureds are thoroughly assessed before a policy is written. B) They are noted for being very thorough in their assessment of investment opportunities. C) They are assessed for state premium taxes only if they make a profit. D) They can assess policyowners if premiums are insufficient to pay losses and expenses.
D) They can assess policyowners if premiums are insufficient to pay losses and expenses.
Which of the following statements about mutual insurers is true? A) They are legally organized as partnerships. B) They have a board of directors which is selected by state insurance departments. C) They are owned by their stockholders. D) They may pay dividends to their policyowners.
D) They may pay dividends to their policyowners.
Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called A) mutualization. B) retrocession. C) reinsurance. D) demutualization.
D) demutualization.
Mark has been an underwriter for 20 years. An application he recently reviewed looked odd to him. The building value in the application seemed far too high, and Mark suspected the applicant might be planning to destroy the property after it is insured. Mark contacted an outside firm and hired someone to investigate the applicant and to prepare a report about the applicant. This report is called a(n) A) agentʹs report. B) binder. C) physical inspection. D) inspection report.
D) inspection report.
Which of the following statements about claim settlement is (are) true? I. The fair payment of claims requires an insurer to adopt a very liberal claims policy. II. To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true? I. Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods. II. It is the most appropriate system for selling complex products. A) I only B) II only C) both I and II D) neither I nor II
D) neither I nor II
All of the following are expenses of life insurance companies EXCEPT A) matured endowments. B) surrender benefits. C) disability income payments. D) realized capital gains.
D) realized capital gains.
Amy heads the legal staff of a large property and liability insurance company. Amyʹs staff is likely involved in all of the following activities EXCEPT A) reviewing policy wording before policies are adopted and marketed. B) recouping subrogation recoveries from third parties who injured individuals insured by Amyʹs company. C) providing legal advice about marketing, taxation, and insurance law. D) reviewing applications to determine if the company should insure the risk.
D) reviewing applications to determine if the company should insure the risk.
Common sources of underwriting information for life and health insurance include all of the following EXCEPT A) the application. B) a physical examination. C) the Medical Information Bureau. D) the applicantʹs income tax return.
D) the applicantʹs income tax return.
All of the following are functions of the marketing department of an insurance company EXCEPT: A) to advertise the insurerʹs products. B) to develop new products. C) to identify production goals. D) to make final underwriting decisions.
D) to make final underwriting decisions.
judgement rating
It is used when the loss exposures are so diverse that a class rate cannot be calculated.
One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called? Medical Information Bureau (MIB)
Medical Information Bureau (MIB)
Which of the following statements about underwriting standards is (are) true? I. One purpose of underwriting standards is to reduce adverse selection against the insurer. II. Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses.
both
RST Insurance is an interesting company. It doesnʹt have any agents. Instead, the company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts. This distribution method is called direct response system.
direct response system.
Brian is a life insurance agent. He is licensed to represent one company and has been assigned a territory. In addition to marketing life insurance products in the territory, Brian is also responsible for recruiting, training, and motivating new agents for the company in his territory. Brian is a(n) general agent.
general agent.
Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n) insurance broker.
insurance broker.
Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurerʹs plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called mass merchandising.
mass merchandising.
ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a multiple distribution system.
multiple distribution system.
