Deck 3: Financial Services: Insurance

Question 1

3-15 By regulation,the payments on an annuity contract must stop when the annuity holder dies.

Answer 1

False

Question 2

3-4 Adverse selection is a situation where customers who most need insurance are more likely to apply for insurance.

Answer 2

True

Question 3

3-10 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.

Answer 3

True

Question 4

3-9 The policyholder can vary the premium payments on an endowment life policy.

Question 5

3-17 Life insurance companies also manage private pension plans that may include guaranteed investment contracts (GICs).

Question 6

3-11 Employers that sponsor non-contributory group life insurance require the employee to pay the insurance premiums.

Question 7

3-13 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 8

3-19 By 2009,life insurance companies were managing over 40% of all private pension plans.

Question 9

3-7 A term life policy allows the policyholder to vary the maturity of the policy.

Question 10

3-16 The rate of growth in the annuities market is increasing primarily because of the recent changes in the capital gains tax rates.

Question 11

3-8 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 12

3-5 In 2008,ordinary life accounted for over 80% of policies in force.

Question 13

3-2 Due to a recent increase in demand for new insurance products,the number of life insurance companies as been increasing in the United States.

Question 14

3-18 Pension fund management is a relatively small portion of the life insurance industry.

Question 15

3-1 In recent years,the total assets of insurance companies in the U.S.have been decreasing.

Question 16

3-20 Loss exposures faced by insurers in accident and health lines are more similar to those faced by traditional life insurance than by property-casualty insurance.

Question 17

3-6 Term life insurance includes a savings element as well as the pure insurance element.

Question 18

3-14 Annuities are popular retirement savings products because investment returns on contributions are tax-deferred.

Question 19

3-12 Annuities are the reverse of life insurance in that they are different means of liquidating a fund.

Question 20

3-3 The process of life insurance uses risk pooling to transfer income-related uncertainties from a group of individuals to an insured individual.

Question 21

3-29 A permanent guarantee fund for the insurance industry does not exist.

Question 22

3-36 PC underwriting risk only exists when the premiums generated on a given insurance line are less than the claims (losses)on the line.

Question 23

3-40 Automobile liability insurance provides protection against theft or damage to the vehicle.

Question 24

3-32 In the case of an insurance company failure,policyholders immediately receive a payout of the cash surrender value of their policies.

Question 25

3-21 Although life insurance companies also provide health and accident insurance,they underwrite less than 35% of all health insurance policies.

Question 26

3-33 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 27

3-28 Insurance guarantee funds are administered by federal insurance regulators.

Question 28

3-35 Property insurance involves coverage against the loss of personal property as well as protection against legal liability claims.

Question 29

3-27 State-sponsored insurance guarantee funds are run and administered by private insurance companies operating in the state.

Question 30

3-37 The largest property-casualty (PC)insurance companies have become less influential over the past decade.

Question 31

3-25 As of 2009,chartering of life insurance companies can be done only at the state level.

Question 32

3-31 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 33

3-22 The cash surrender value of a life insurance policy represents the payment to the insured's beneficiaries at the time of death.

Question 34

3-23 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 35

3-24 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 36

3-30 As currently structured,contributions to a state-sponsored guarantee fund are collected only after the actual failure of an insurance company.

Question 37

3-34 The growth of HMOs has increased the amount of health insurance premiums collected by life insurance companies.

Question 38

3-38 In general,maximum levels of losses are more predictable for liability lines than for property lines.

Question 39

3-39 The expected loss potential is more difficult to determine with low-severity,high-frequency events.

Question 40

3-26 Insurance guaranty funds involve a permanent fund similar to the FDIC for the purpose of compensating the policyholders of failed insurers.

Question 41

3-61 The largest asset category on the balance sheet of U.S.life insurance companies as of year-end 2009 was

A)government securities.
B)corporate bonds.
C)corporate stock.
D)cash.
E)mortgages.

Question 42

3-49 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 43

3-54 An insurance policy in which fixed premium payments are invested in mutual funds of stocks,bonds,and money market instruments is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 44

3-45 Insurance companies have resisted the investment in technology that banks and other financial service firms have pursued.

Question 45

3-46 The Insurance Regulatory Information System (IRIS)is a standardized exam to measure the profitability of insurance companies.

Question 46

3-55 Which of the following involves fixed premium payments and a benefit payout at the time of death that will depend on investment returns over the life of the policy?

A)Term life.
B)Variable life.
C)Whole life.
D)Endowment life.
E)Universal life.

Question 47

3-60 Variable universal life insurance policies

A)have fixed premiums and a fixed benefit payout.
B)have fixed premiums,but allow the benefit payout to vary with investment returns.
C)have a fixed benefit payout,but allow the premium to vary with investment returns.
D)allow both the premium and benefit payout to vary with investment returns.
E)allow both the premium and benefit payout to vary with investment returns,but have a fixed maturity date.

Question 48

3-47 Unlike the banking industry,globalization of financial services is having little or no effect on the insurance industry.

Question 49

3-56 An insurance policy that often is the least expensive to the insured because of the policy does not include a savings plan is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 50

3-48 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 51

3-58 Which of the following insurance products protects a lender against a borrower's death prior to repayment of the debt?

A)Credit life.
B)Universal life.
C)Whole life.
D)Endowment life.
E)Variable life.

Question 52

3-50 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 53

3-62 The largest liability category on the balance sheet of U.S.life insurance companies as of year-end 2009 was

A)net policy reserves.
B)policy claims.
C)premium and deposit funds.
D)commission,taxes and expenses.
E)capital surplus.

Question 54

3-41 Unexpected increases in inflation cause loss rates to increase more for long-tail risk than for short-tail risks.

Question 55

3-43 Property-casualty insurers tend to have a higher level of liquidity risk than life insurers.

Question 56

3-42 Loss adjustment expenses refer to the costs surrounding the loss settlement process.

Question 57

3-57 An insurance policy that allows both the premium amount and the maturity of the life contract to be changed by the insured is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 58

3-44 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 59

3-53 An insurance policy that protects an individual over an entire lifetime is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 60

3-59 An annuity is a financial contract that

A)is used to build up a fund.
B)pays only fixed returns to groups of employees.
C)is used to liquidate a fund.
D)pays only variable returns to individuals.
E)None of the above are correct.

Question 61

3-67 As of 2009,the primary regulator of both the life and property-casualty insurance industry is/are the

A)state insurance commissions.
B)NAIC.
C)Federal Reserve.
D)IRIS.
E)new federal oversight commission yet to be named.

Question 62

3-64 The surrender value of an insurance policy is

A)the expected payment commitment on existing policy contracts.
B)a fund established and held separately from the company's other assets.
C)the cash value paid to the policyholder if the policy is terminated before it matures.
D)the same as the endowment payout.
E)the price at which the company may repurchase the policy.

Question 63

3-75 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

A)0.88 implying that this line of insurance is profitable.
B)0.88 implying that this line of insurance is unprofitable.
C)1.13 implying that this line of insurance is profitable.
D)1.13 implying that this line of insurance is unprofitable.
E)0.22 implying that this line of insurance is profitable.

Question 64

3-71 Property-casualty insurance involves

A)insurance coverage related to the loss of real and personal property.
B)insurance protection against legal liability exposure.
C)insurance protection against injuries in employment related work.
D)Answers A and B only.
E)Answers A and C only.

Question 65

3-74 If losses on a particular line of medical malpractice insurance were $650 million and premiums earned were $575 million,the loss ratio would be

A)1.13 implying that this line of insurance is profitable.
B)1.13 implying that this line of insurance is unprofitable.
C)0.88 implying that this line of insurance is profitable.
D)0.88 implying that this line of insurance is unprofitable.
E)-$75 million implying that this line of insurance is unprofitable.

Question 66

3-76 For property-casualty insurers,loss rates are more predictable for

A)low-severity high-frequency events.
B)low-severity low-frequency events.
C)high-severity high-frequency events.
D)high severity low-frequency events.
E)low severity medium-frequency events.

Question 67

3-77 Higher uncertainty of losses forces property-casualty firms to

A)invest in more short-term assets than life insurance firms.
B)invest in more long-term assets than life insurance firms.
C)hold a lower percentage of capital and reserves than life insurance firms.
D)invest in riskier equity securities than life insurance firms.
E)conduct more separate accounts business than life insurance firms.

Question 68

3-63 Guaranteed investment contracts (GICs)offered by a life insurance company

A)are endowment life policies marketed to group insurance policyholders.
B)are short- and medium-term debt instruments sold to fund their pension plan business.
C)can only be purchased by a group life insurance plan.
D)earn a return based on the consumer price index (CPI).
E)Short- and medium-term investments in venture capital firms.

Question 69

3-65 Which of the following did NOT occur in the life insurance industry during the most recent financial crisis?

A)Low equity values reduced asset-based fees on separate account assets.
B)Losses were incurred on holding of commercial mortgage-backed securities and commercial loans.
C)Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns.
D)Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies.
E)Policy premium increased as more households and small businesses attempted to transfer risk to insurance companies.

Question 70

3-68 The insurance company that was the largest beneficiary of federal bailout funds during the most recent financial crisis was

A)Globe Life.
B)UBS.
C)State Farm.
D)AIG.
E)New York Life.

Question 71

3-79 Factors that affect the predictability of claims loss exposure include

A)unexpected increases in inflation.
B)the frequency and severity of loss.
C)the concept of long-tail risk.
D)property versus liability coverage.
E)All of the above.

Question 72

3-78 For property-casualty insurers,losses are higher for lines that are exposed to

A)long tails and low inflation.
B)long tails and high inflation.
C)short tails and low inflation.
D)short tails and high inflation.
E)short tails and no inflation.

Question 73

3-82 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

A)$88,333.33.
B)$119,277.03.
C)$59,638.51.
D)$56,262.75.
E)$112,525.50.

Question 74

3-73 The two policy categories offered by property-casualty insurers that are most likely to be subject to rate regulation are

A)auto insurance and worker's compensation.
B)homeowner multiple peril and commercial multiple peril.
C)earthquake and flood.
D)surety bonds and financial guaranty.
E)product liability and farm owner multiple peril.

Question 75

3-66 The McCarran-Ferguson Act of 1945

A)separated commercial banking from insurance activities.
B)mandated federal insurance company charters.
C)stipulated that insurance companies are to be regulated at the state level.
D)initiated a national insurance guaranty fund.
E)limited insurance company assets to low risk government securities.

Question 76

3-80 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

A)commissions and other expenses are 15 percent and investment yields are 10 percent.
B)commissions and other expenses are 5 percent and investment yields are 6 percent.
C)commissions and other expenses are 16 percent and investment yields are 20 percent
D)commissions and other expenses are 15 percent and investment yields are 12 percent.
E)commissions and other expenses are 6 percent and investment yields are 4 percent.

Question 77

3-69 Underwriting risk faced by property-casualty insurance companies may result from unexpected

A)increases in loss rates.
B)decreases in loss adjustment expenses.
C)increases in investment yields.
D)cancellations of policies by customers.
E)increases in policy premiums.

Question 78

3-81 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

A)if dividends paid to policyholders is $4 million and income generated on investments is $4 million.
B)if dividends paid to policyholders is $10 million and income generated on investments is $14 million.
C)if dividends paid to policyholders is $6 million and income generated on investments is $2 million.
D)if dividends paid to policyholders is $10 million and income generated on investments is $4 million.
E)if dividends paid to policyholders is $4 million and income generated on investments is $2 million.

Question 79

3-72 As of year-end 2009,asset of property-casualty insurers totaled approximately ________,which was ______ of the assets of the life insurance industry.

A)$ 900 billion; 20 percent
B)$ 1,500 billion; 33 percent c $ 4,250 billion; 90 percent
D)$ 5,750 billion; 105 percent
E)$ 7,700 billion; 120 percent

Question 80

3-70 Life insurance guaranty funds

A)are sponsored by state insurance regulators.
B)involve a permanent reserve fund similar to the FDIC's bank deposit reserve.
C)require uniform contributions from each state when there is a failure of an insurance company.
D)make policyholder payments immediately in the event of an insurance company failure.
E)are regulated by the Federal Reserve Bank.