Deck 25: Insurance Operations

Question 1

A ____ life insurance company is owned by its policyholders; most life insurance companies are ____.

A) stock-owned; mutual
B) mutual; mutual
C) stock-owned; stock-owned
D) mutual; stock-owned

Answer 1

D

Question 2

Which of the following statements is incorrect?

A) Insurance provides a payment to the insured under conditions specified by the insurance policy contract.
B) Individuals who are less exposed to specific conditions that cause financial damage are more likely to purchase insurance against those conditions.
C) Insurance can cause the insured to take more risks because they are protected.
D) Insurance companies employ underwriters to calculate the risk of specific insurance policies.

Answer 2

B

Question 3

____ effectively reallocates a portion of an insurance company's return and risk to other insurance companies.

A) Reinsurance
B) Cash flow underwriting
C) Factor insurance
D) Universal insurance

Answer 3

A

Question 4

Which of the following is not a characteristic commonly assessed by insurance regulators to detect any problems in an insurance company?

A) liquidity of the asset portfolio
B) relative size of operating expenses
C) return on investment
D) All of the above are assessed by regulators.

Question 5

Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.

A) less; less
B) more; more
C) less; more
D) none of the above

Question 6

The most common use of funds for property and casualty insurance companies is for

A) corporate bonds and municipal securities.
B) Treasury bills.
C) corporate stock.
D) commercial paper.

Question 7

____ are the most popular assets of life insurance companies.

A) Corporate stocks and corporate debt securities
B) Treasury securities
C) Mortgages and mortgage-backed securities
D) State and local bonds

Question 8

____ is(are) not a typical source of funds for life insurance companies.

A) Deposit insurance premiums
B) Annuity plans
C) Investment income
D) Life and health insurance premiums

Question 9

____ insurance covers losses due to a contract not being fulfilled.

A) Fidelity bond
B) Credit line
C) Surety bond
D) Business interruption

Question 10

Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy.

A) whole life insurance
B) term insurance
C) variable life insurance
D) universal life insurance

Question 11

Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?

A) whole life
B) term
C) decreasing term
D) universal life

Question 12

The ratio of an insurance company's net profit to policyholders' surplus is called

A) liquidity ratio.
B) return on net worth.
C) net underwriting margin.
D) return on assets.

Question 13

Which of the following is not involved in the regulation of the insurance industry?

A) the National Association of Insurance Commissioners (NAIC)
B) the Insurance Regulatory Information System (IRIS)
C) the Federal Deposit Insurance Corporation (FDIC)
D) All of the above are involved in the regulation of the insurance industry.

Question 14

Individuals who are insured under a managed health care plan can usually choose any provider of health care services.

Question 15

____ insurance provides insurance for a policyholder only over a specified period.

A) Term
B) Whole life
C) Universal
D) A and C

Question 16

____ insurance covers losses due to dishonest employees.

A) Key employee
B) Credit line
C) Malpractice
D) Fidelity bond

Question 17

Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies?

A) Property and casualty policies are longer term.
B) The type of policies offered by life insurance companies are less focused.
C) Future compensation amounts paid on property and casualty policies are more difficult to forecast.
D) Life insurance companies need to maintain a more liquid asset portfolio.

Question 18

Life insurance companies can attempt to reduce their exposure to interest rate risk by

A) increasing their proportion of long-term assets.
B) diversifying the age distribution of their customer base.
C) increasing their proportion of short-term assets.
D) concentrating on an older age distribution of their customer base.

Question 19

Which type of life insurance policy does not build a cash value for policyholders?

A) whole life
B) term
C) universal life
D) All of the above build a cash value.

Question 20

Which type of life insurance policy can offer flexibility on the size and timing of premium payments?

A) whole life
B) term
C) universal life
D) decreasing term

Question 21

Real estate values usually have little impact on the market value of a life insurance company's asset portfolio and only affect property and casualty insurance companies.

Question 22

Property and casualty insurance and life insurance are similar in terms of the predictability of payouts to cover claims.

Question 23

The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising premiums when interest rates decline is called:

A) cyclical rate adjusting.
B) collateralizing premiums.
C) cash flow underwriting.
D) reinsurance.

Question 24

Mortgage insurance protects:

A) homeowners against damage to their home such as from storms or fire.
B) homeowners in the event that they cannot make their mortgage payments.
C) the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
D) all of the above

Question 25

Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.

Question 26

An insurance company's liquidity is measured as

A) net profit minus losses
B) premium income minus policy expenses
C) invested assets divided by loss reserves and unearned premium reserves
D) none of the above

Question 27

With a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ, depending on the assets backing the policy.

A) universal life
B) whole life
C) variable life
D) group life
E) none of the above

Question 28

The most common type of mortgage held by life insurance companies are ____ mortgages.

A) commercial
B) residential
C) farm
D) none of the above

Question 29

The moral hazard problem as related to the insurance industry means that some people take more risks once they are insured.

Question 30

Property and casualty (PC) insurance companies may use cash flow underwriting, in which they tend to lower their premium prices as interest rates rise.

Question 31

_____ insurance provides a financial payout if specified employees of a business become disabled or die.

A) Best person
B) Employment liability
C) Key employee
D) Credit line

Question 32

Bond insurance is available only for corporate bonds and not for municipal securities.

Question 33

Group insurance policies are very popular for employers and employees.

Question 34

The primary source of funds for a life insurance company income is

A) life insurance premiums.
B) annuity plans.
C) health insurance premiums.
D) investment income.
E) none of the above

Question 35

The adverse selection problem as related to the insurance industry means that people who have insurance are less likely to suffer losses than people who do not have insurance.

Question 36

The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.

A) Securities and Exchange Commission
B) Federal Deposit Insurance Corporation
C) National Association of Insurance Commissioners
D) National Association of Securities Dealers
E) none of the above