Question 1

Which of the following statements is (are)true with respect to catastrophe bonds?
I.The bonds are issued by the U.S.Government.
II.The bonds have relatively high interest (coupon)rates.

Accepted Answer

Catastrophe bonds are issued by insurance and reinsurance companies, not the U.S. government. These bonds typically have high interest rates due to the high risk of losses to investors in the event of a catastrophic event, such as a hurricane or earthquake.

Question 2

New Liability Insurance Company began operations last year and has been very successful.The company's 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?

Accepted Answer

Reinsurance can be used to reduce the unearned premium reserve which will allow New Liability Insurance Company to free up more capital that can be used for growth and expansion.

Question 3

Liability Insurance Company (LIC)was approached by a regional airline to see if LIC would write the airline's 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

Accepted Answer

This reinsurance arrangement is a quota-share, where LIC and the reinsurer share the premium and losses based on a predetermined percentage.

Question 4

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 hired an outside firm to investigate the applicant and to prepare a report about the applicant.This report is called a(n)

Accepted Answer

The report that Mark hired an outside firm to prepare about the applicant is called an inspection report. This report will help Mark determine if the applicant is a high-risk customer who is more likely to commit fraud.

Question 5

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)

Accepted Answer

Beverly is an independent adjustor, as she is hired by multiple insurance companies to adjust claims and charges them a fee for each claim. Public adjustors work for the insureds and are not hired by insurance companies, adjustment bureaus are organizations that provide adjusting services to insurance companies, and company adjustors work directly for the insurance company.

Question 6

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?

Accepted Answer

Ross works in the loss control functional area which involves risk management and minimizing potential losses for the insurance company by conducting inspections, recommending safety measures and providing guidance to the insured.

Question 7

Functions of an insurance company's legal department include which of the following?
I.Lobbying for legislation favorable to the insurance industry.
II.Drafting policy provisions.

Accepted Answer

The legal department of an insurance company would be responsible for drafting policy provisions and would also likely be involved in lobbying efforts to promote legislation favorable to the insurance industry. Therefore, both options I and II are correct.

Question 8

Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance.Delta has a retention limit of $200,000,and nine lines of insurance are ceded to Eversafe.How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss?

Accepted Answer

The answer of Delta Insurance Company has a surplus-share treaty...

Question 9

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 a(n)

Accepted Answer

Excess-of-loss reinsurance treaty provides protection against losses that exceed a specific amount. In this case, Huge Insurance Company is looking to protect itself against cumulative losses that exceed $200 million during the year, making excess-of-loss reinsurance treaty the best choice for them. The other options, quota-share and surplus-share reinsurance treaties, do not provide the same level of protection against such large losses. A reinsurance pool is a shared arrangement where multiple insurers pool their risk, which may not be suitable for Huge Insurance Company's specific needs.

Question 10

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(n)

Accepted Answer

The sworn statement required by the insurance company in this scenario is called a proof of loss. This document outlines the details of the loss and helps the insurer to assess the validity of the claim. A binder is a temporary insurance agreement issued before the policy is finalized, an inspection report is typically conducted by the insurer to assess risk and condition of the property being insured, and a notice of loss is simply a notification by the insured to the insurer that a loss has occurred.

Question 11

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 applicant's degree of risk.Jan is a(n)

Accepted Answer

The job responsibilities described in the question match those of an underwriter. Underwriters review insurance applications and determine whether the applicant meets their company's underwriting guidelines. They also assign a rating or premium amount based on the assessed risk of the applicant. Actuaries use statistical analysis to assess risk and develop insurance policies, loss control engineers focus on preventing losses, and claims adjustors investigate and settle claims.

Question 12

The process of transferring risk to the capital markets through the use of financial instruments such as bonds,futures contracts,and options is known as

Accepted Answer

Securitization of risk involves transferring risk to the capital markets using financial instruments such as bonds, futures contracts, and options. This allows the risk to be spread out among a large number of investors rather than being concentrated in just one entity. The other options, consolidation of risk, avoidance of risk, and compartmentalization of risk, do not involve utilizing financial instruments to transfer risk to the capital markets.

Question 13

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)

Accepted Answer

An actuary is a professional who uses statistical and financial methods to assess and evaluate risks, usually for insurance companies. Sue's job of calculating premium rates for life insurance coverages involves using mathematics, statistics, and finance, which are skills typically possessed by actuaries.

Question 14

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

Accepted Answer

Antonio's first step should be to verify that a covered loss has occurred. This involves investigating the details of the loss, reviewing the insurance policy to determine if the loss is covered, and confirming that the insured meets any policy requirements for filing a claim. Only after this step is complete can Antonio move forward with determining the amount of the loss and processing the claim payment. Options B and D are unethical and unlawful, and option A would come after verifying that the loss is covered.

Question 15

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.
II.Because premium income is continually being received,the investment objective of liquidity is of little importance.

Accepted Answer

The first statement is true, as income from investments is an important source of revenue for insurers to offset any losses from underwriting. The second statement is false, as liquidity is still an important investment objective for insurers to ensure that they can meet any potential claims or obligations.

Question 16

All of the following are methods that a property and liability insurance company can use to protect against catastrophic losses EXCEPT

Accepted Answer

The purchase of common stock is not a method that a property and liability insurance company can use to protect against catastrophic losses. Common stock is an investment in a company and does not provide protection against catastrophic losses. The other choices - sale of catastrophe bonds, purchase of excess-of-loss reinsurance, and quota share reinsurance with a low retention percentage - are all methods used to protect against catastrophic losses.

Question 17

Amy heads the legal staff of a large property and liability insurance company.Amy's staff is likely involved in which of the following activities?

Accepted Answer

Amy heads the legal staff, so it is likely that her staff is involved in reviewing language and policy provisions in insurance contracts to ensure compliance with legal regulations and protect the company's interests. The other options are typically the responsibility of different departments such as finance and underwriting.

Question 18

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 full amount borrowed or pay interest.The securities PCI issued are called

Accepted Answer

The debt securities that PCI issued are called catastrophe bonds, which transfer the risk of a catastrophic event (in this case, an earthquake) to investors. If the event occurs, PCI does not have to repay the full amount borrowed or pay interest. This type of bond is a form of insurance-linked securities (ILS), which are becoming more popular as a way for companies to manage their exposure to catastrophic risk. Option A (catastrophe futures contracts) and option D (contingent options contracts) are not correct because they are not typically used to manage catastrophic risk in the insurance industry. Option B (interest rate swaps) is not correct because it is a financial contract that allows two parties to exchange interest rate payments, and does not relate to catastrophic risk management.

Question 19

All of the following statements about life insurance company investments are true EXCEPT

Accepted Answer

The statement "The majority of these investments are short-term investments" is false. While some life insurance company investments may be short-term, life insurance companies typically make long-term investments that align with their long-term liabilities. These long-term investments typically include stocks, bonds, and real estate.

Question 20

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.

Accepted Answer

Life insurance companies typically invest the majority of their general account assets in bonds for stability and predictable income. Separate account assets, on the other hand, are often invested in stocks to provide higher potential returns for policyholders, reflecting the different risk and return objectives of these accounts.

Quiz 6: Insurance Company Operations

Which of the following statements is (are) true with respect to catastrophe bonds? I.The bonds are issued by the U.S.Government. II.The bonds have relatively high interest (coupon) rates.