Deck 6: Financial Services: Insurance

Question 1

Adverse selection is a situation where customers who most need insurance are more likely to apply for insurance.

Answer 1

True

Question 2

Adverse selection cannot be reduced by insurance companies so it is considered to be a cost of doing business.

Answer 2

False

Question 3

Due to a recent increase in demand for new insurance products, the number of life insurance companies as been increasing in the United States.

Answer 3

False

Question 4

In recent years, the total assets of insurance companies in the U.S.have been decreasing.

Question 5

Ordinary life insurance includes term life, whole life and endowment life in addition to the two newer forms like variable life and universal life.

Question 6

Economies of scope represent the principal advantage of group life over ordinary life policies for insurance companies.

Question 7

The policy that will pay a specific dollar benefit to beneficiaries and remains in effect as long as premiums are paid is called whole life.

Question 8

With variable life insurance, the term "variable" refers to the variable nature of the benefit because premium payments are invested in mutual funds whose return can vary over time.

Question 9

Annuities are the reverse of life insurance in that they are different means of liquidating a fund.

Question 10

Employers that sponsor non-contributory group life insurance require the employee to pay the insurance premiums.

Question 11

The policyholder can vary the premium payments on an endowment life policy.

Question 12

Credit default swaps are a product offered by insurance companies.

Question 13

In group life insurance, lower rates on policies can be offered because of cost economies as a result of mass administration of plans and reduced selling and commission costs.

Question 14

The payments from an annuity offered by a life insurance company can either begin immediately or may be deferred to start at some future date.

Question 15

The process of life insurance uses risk pooling to transfer income-related uncertainties from a group of individuals to an insured individual.

Question 16

A term life policy allows the policyholder to vary the maturity of the policy.

Question 17

Commercial banks sold over 25% of fixed-return annuities, an insurance product, in 2015.

Question 18

As of 2015, there were less than 900 life insurance companies and aggregate industry assets were approximately $6.5 trillion.

Question 19

Term life insurance includes a savings element as well as the pure insurance element.

Question 20

The benefit payment of a credit life policy usually varies based on the outstanding principal and interest of the loan it is intended to insure.

Question 21

Separate accounts business represents those policies and annuities whose return or payout is dependent on the return earned on the premiums invested in the separate account.

Question 22

Annuities are popular retirement savings products because investment returns on contributions are tax-deferred.

Question 23

Although life insurance companies also provide health and accident insurance, they underwrite less than 35% of all health insurance policies.

Question 24

The rate of growth in the annuities market is increasing primarily because of the recent changes in the capital gains tax rates.

Question 25

Because of the large amounts of policy reserves that life insurance companies carry as liabilities, they are rarely surprised by unexpected fluctuations in expected future payouts.

Question 26

As of 2014, sales of annuities and sales of traditional life insurance policies were approximately equal.

Question 27

Returns on an insurer's asset portfolio and new premium income flows act as a backup to unexpected policy losses.

Question 28

Insurance companies can increase the spread between premium income and policy payouts only by increasing the premium payments.

Question 29

As of 2015, the Federal Reserve oversees approximately one-third of U.S.insurance company assets.

Question 30

By regulation, the payments on an annuity contract must stop when the annuity holder dies.

Question 31

Separate accounts business only appears as a liability on a life insurer's balance sheet.

Question 32

As of 2015, chartering of life insurance companies can be done only at the state level.

Question 33

The policy reserves on the liability side of the balance sheet of a life insurance company are estimated based on actuarial assumptions of expected future liability commitments on currently existing contracts.

Question 34

Life insurance companies also manage private pension plans that may include guaranteed investment contracts (GICs).

Question 35

Pension fund management is a relatively small portion of the life insurance industry.

Question 36

The Wall Street Reform and Consumer Protection Act (2010) led to the Federal Reserve becoming a major supervisor of insurance firms.

Question 37

By 2015, life insurance companies were managing approximately 40% of all private pension plans.

Question 38

Life insurance companies tend to concentrate their investments at the longer term of the investment spectrum.

Question 39

Annuities must be purchased using a single lump sum of money.

Question 40

The cash surrender value of a life insurance policy represents the payment to the insured's beneficiaries at the time of death.

Question 41

Property insurance involves coverage against the loss of personal property as well as protection against legal liability claims.

Question 42

During the most recent financial crisis, life insurance companies with large proportions of separate accounts business were well-protected from the decline in the debt and equity markets.

Question 43

As with the life insurance industry, property-casualty firms tend to invest the majority of their assets and long-term investments.

Question 44

The total assets of property-casualty insurers were approximately 35 percent of life insurer's total assets as of 2015.

Question 45

Insurance guarantee funds are administered by federal insurance regulators.

Question 46

As currently structured, contributions to a state-sponsored guarantee fund are collected only after the actual failure of an insurance company.

Question 47

PC (property-casualty) insurers tend to offer products that combine features of property insurance and liability insurance into single policy packages.

Question 48

The largest property-casualty (PC) insurance companies have become less influential over the past decade.

Question 49

In general, maximum levels of losses in the property-casualty industry are more predictable for liability lines than for property lines.

Question 50

The expected loss potential is more difficult to determine with low-severity, high-frequency events.

Question 51

In the case of an insurance company failure, policyholders immediately receive a payout of the cash surrender value of their policies.

Question 52

Property-casualty underwriting risk only exists when the premiums generated on a given insurance line are less than the claims (losses) on the line.

Question 53

State-sponsored insurance guarantee funds are run and administered by private insurance companies operating in the state.

Question 54

Insurance guaranty funds involve a permanent fund similar to the FDIC for the purpose of compensating the policyholders of failed insurers.

Question 55

Unlike the life insurance industry, property-casualty insurers have more uncertainty about the timing of policy payouts.

Question 56

Industry leaders appear to be increasing their share of the PC business over time.

Question 57

As currently structured, state guarantee funds will continue to collect premium payments and honor life policies and annuity obligations of a failed insurance company.

Question 58

PC insurers are forbidden from marketing similar products to both individuals and commercial firms.

Question 59

A permanent guarantee fund for the insurance industry does not exist.

Question 60

The property casualty insurance industry is concentrated where a few large firms dominate the market.

Question 61

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.

Question 62

Unexpected increases in inflation cause loss rates to increase more for long-tail risk than for short-tail risks.

Question 63

A reasonable way to overcome some of the risk of adverse selection in the life insurance business can be accomplished by

A)refusing to underwrite policies.
B)industrial life.
C)endowment life.
D)variable universal life.
E)variable life.

Question 64

Automobile liability insurance provides protection against theft or damage to the vehicle.

Question 65

The Insurance Regulatory Information System (IRIS) is a standardized examination system used to measure the profitability of insurance companies.

Question 66

One reason for the recent decline in the expense ratio for PC insurers is an increase dependence on independent brokers to sell and distribute insurance policies.

Question 67

Life insurance protects against morbidity or ill health and health insurance protects against mortality risk and accidents.

Question 68

The surrender value of a policy is the cash value of a policy received from the insurer if a policy holder surrenders the policy after the maturity date.

Question 69

Hurricane Sandy, which struck the east coast of the United States in 2012, continues to be the worst catastrophe for the PC industry.

Question 70

Insurance companies have resisted the investment in technology that banks and other financial service firms have pursued.

Question 71

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.

Question 72

The McCarran-Ferguson Act of 1945 represents legislation confirming the primacy of state over federal regulation of insurance companies.

Question 73

Unlike the banking industry, globalization of financial services is having little or no effect on the insurance industry.

Question 74

The four basis classes or lines of life insurance are ordinary life, group life, industrial life, and credit life.

Question 75

Property-casualty insurers tend to have a higher level of liquidity risk than life insurers.

Question 76

An operating ratio greater than 100 indicates that the insurance product line was profitable for a giving year.

Question 77

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.

Question 78

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.

Question 79

Loss adjustment expenses refer to the costs surrounding the loss settlement process.

Question 80

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.