Question 1

If the loss ratio on a line of insurance is 70 percent and loss adjustment expenses are 33 percent, then the line is profitable before dividends if the ratio of

Accepted Answer

The answer of If the loss ratio on a line...

Question 2

Which of the following is NOT a possible result when a property-liability company purchases reinsurance?

Accepted Answer

Dilution of earnings per share is not a possible result when a property-liability company purchases reinsurance because reinsurance helps to limit losses on reinsured policies, improve capital position, and stabilize cash flows, which are all possible positive outcomes.

Question 3

The largest asset on property-casualty insurers' balance sheet as of 2015 was

Accepted Answer

Bonds are typically the largest asset on the balance sheets of property-casualty insurers. This is because bonds provide a relatively stable and predictable stream of income, which is important for insurers to meet their future liabilities.

Question 4

Calculate the annual cash flows of a $2 million, 10-year fixed-payment annuity earning a guaranteed 8 percent annually if the payments are to start at the end of this year.

Accepted Answer

The answer of Calculate the annual cash flows of a...

Question 5

Which account refers to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided?

Accepted Answer

Unearned premiums refer to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided.

Question 6

Which of the following arises in policies in which the insured event occurs during a coverage period but a claim is not filed or reported until many years later?

Accepted Answer

Long-tail losses refer to claims that are not reported until years after the insured event occurs, such as mesothelioma claims from asbestos exposure. This can result in uncertainty for insurers and make it difficult to accurately predict future losses.

Question 7

For property-casualty insurers, loss rates are more predictable for

Accepted Answer

Low-severity, high-frequency events are more predictable for property-casualty insurers because they have a large amount of data on these types of events, allowing for more accurate predictions and risk assessments.

Question 8

The largest liability on property-casualty insurers' balance sheet as of 2015 was

Accepted Answer

Loss reserve and loss adjustment expenses represent the estimated future costs of settling claims from policyholders. This liability can be significant, as it includes claims that have been reported but not yet settled, as well as claims that may arise in the future from past events. Unearned premiums represent premiums that have been paid by policyholders but have not yet been earned by the insurer, so they are not a liability but rather a deferred revenue. Cash is an asset, not a liability. Policyholder surplus is the amount by which assets exceed liabilities, so it is not a liability. Conditional reserve funds are not a commonly used term and are not a liability on insurers' balance sheet.

Question 9

The two policy categories offered by property-casualty insurers that are most likely to be subject to rate regulation are

Accepted Answer

Auto insurance and worker's compensation are the two policy categories most commonly subject to rate regulation due to their widespread necessity and the potential for significant financial impact on consumers and businesses.

Question 10

You start an annuity with $1million and expect to receive 12 equal payments beginning at the end of the first year.The guaranteed annual interest rate is 6 percent.The annual payments that you expect to collect are

Accepted Answer

Using the formula for annuity payments:
PMT = (PV * r) / (1 - (1 + r)^(-n))
where PV = Present Value, r = interest rate per period, n = number of periods, and PMT = payment per period

PV = $1,000,000
r = 6% / 12 = 0.5% per month
n = 12 (since there are 12 equal payments)
PMT = ($1,000,000 * 0.005) / (1 - (1 + 0.005)^(-12))
PMT = $119,277.03

Therefore, the annual payments that you expect to collect are $119,277.03, which is found in choice B.

Question 11

Higher uncertainty of losses forces property-casualty firms to

Accepted Answer

Property-casualty firms face higher uncertainty of losses due to the nature of the risks they insure, such as natural disasters or accidents. This uncertainty requires them to have more liquidity to cover potential claims, leading them to invest in more short-term assets compared to life insurance firms, which face more predictable and long-term liabilities.

Question 12

An insurance company collected $31.0 million in premiums and disbursed $28 million in losses.Loss adjustment expenses amounted to $5.0 million.The firm is profitable

Accepted Answer

The firm's profitability is determined by its total income (premiums + investment income) minus its total expenses (losses + loss adjustment expenses + dividends). In option B, the total income is $31 million (premiums) + $14 million (investment income) = $45 million, and the total expenses are $28 million (losses) + $5 million (loss adjustment expenses) + $10 million (dividends) = $43 million. Since the total income exceeds the total expenses, the firm is profitable in this scenario.

Question 13

If losses on a particular line of medical malpractice insurance were $650 million and premiums earned were $575 million, the loss ratio would be

Accepted Answer

The loss ratio is calculated by dividing losses by premiums earned. In this case, loss ratio = $650 million / $575 million = 1.13. A loss ratio greater than 1 indicates that losses are higher than premiums earned, making the line of insurance unprofitable.

Question 14

Life insurance guaranty funds

Accepted Answer

Life insurance guaranty funds are sponsored by state insurance regulators to protect policyholders in the event that an insurance company fails. These funds are state-specific and not regulated by the Federal Reserve Bank, do not involve a permanent reserve fund similar to the FDIC's bank deposit reserve, do not require uniform contributions from each state, and may not make policyholder payments immediately upon an insurance company's failure.

Question 15

If losses on a particular line of fire insurance were $430 million, premiums earned were $595 million, and loss adjustment expenses were $95 million, the combined ratio would be

Accepted Answer

The answer of If losses on a particular line of...

Question 16

Factors that affect the predictability of claims loss exposure include

Accepted Answer

All of the options listed can affect the predictability of claims loss exposure. Unexpected increases in inflation can impact the cost of repairs or replacement of damaged property, while the frequency and severity of loss can affect the overall amount of claims that an insurer will have to pay out. Long-tail risks, such as asbestos-related illnesses or environmental damage, can make it difficult to predict when these claims will arise and how much they will cost. The type of coverage, whether it is property or liability, can also impact the types of claims that are filed and the amount of losses that are incurred.

Question 17

Which of the following is an advantage of converting from a mutual insurance company to a stockholder-controlled company?

Accepted Answer

Converting from a mutual insurance company to a stockholder-controlled company allows access to equity markets for additional capital, which can be used for future business expansion. This can provide significant financial advantages for the company, including increased resources for research and development of new products, expansion into new markets, and the ability to respond quickly to changes in the industry.

Question 18

What explains the recent increase in many large insurance companies conversion to stockholder controlled companies?

Accepted Answer

Many insurance companies are converting to stockholder controlled companies in order to gain access to equity markets, allowing them to raise more capital and potentially expand their business.

Question 19

Property-casualty insurance involves

Accepted Answer

Property-casualty insurance covers both the loss of real and personal property as well as protection against legal liability exposure. It does not typically involve coverage for injuries in employment related work, which would fall under workers' compensation insurance.

Question 20

For property-casualty insurers, losses are higher for lines that are exposed to

Accepted Answer

Lines with long tails (i.e. where claims can be reported years after the policy period) and high inflation (which can inflate the cost of claims) tend to have higher losses for property-casualty insurers. This is because the insurer may need to pay out a claim many years after the policy period, and the cost of that claim (such as medical expenses or legal fees) may be much higher due to inflation.

Quiz 6: Financial Services: Insurance