Deck 15: Insurance Companies

Question 1

Premiums on standard annual renewable term life will generally increase as the policyholder ages.

Answer 1

True

Question 2

Life insurance policy reserves are the estimated current worth of expected future payouts.

Answer 2

True

Question 3

Life insurers write over 50% of all health insurance premiums.

Answer 3

True

Question 4

Most states maintain a permanent reserve fund to resolve insurance company failures.

Question 5

In property and casualty insurance the combined ratio is equal to the ______________________ divided by total premiums written.

A) sum of the loss ratio plus loss adjustment expenses
B) sum of the loss ratio plus general expenses and broker's commissions
C) operating ratio minus dividends paid to policyholders
D) nominal ratio plus real ratio
E) 1 minus Operating ratio

Question 6

The McFadden Act grants states the primary right to regulate insurance companies.

Question 7

In a typical variable life policy the policyholder may vary the premium payments and the maturity date of the policy.

Question 8

The following type(s) of life insurance policies do not have a savings feature:

A) Term life
B) Whole life
C) Variable life
D) Universal life
E) Both C and D do not

Question 9

The National Association of Insurance Commissions (NAIC) examines and regulates insurance companies.

Question 10

The primary asset for P&C insurers are bonds.

Question 11

The cash surrender value of a life insurance policy is the present value of expected future payouts on the policy.

Question 12

In a universal life policy the cash value of the contract grows at a fixed-rate set by the life insurer.

Question 13

Liability lawsuits related to asbestos claims are an example of long tail losses.

Question 14

Policy reserves are the primary asset of the typical life insurer.

Question 15

Liability losses are more subject to social inflation than property losses.

Question 16

A man has what he believes is a mild heart attack but he doesn't go to the hospital. Instead he calls his insurance agent and doubles the amount of his life insurance. This is an example of the moral hazard problem in insurance.

Question 17

Property loss risk is generally easier to estimate than liability loss risk.

Question 18

The top ten property and casualty firms underwrite just under half of all the P&C premiums written.

Question 19

A 65-year-old person has saved $1,250,000 and wishes to receive 10 annual annuity payments, beginning in one year. If the annuity rate is 5.75%, he can expect to receive $167,829 per year.

Question 20

Policy reserves are a(n)

A) balance sheet liability.
B) balance sheet asset.
C) separate account item.
D) insurance guarantee fund payment.
E) income statement revenue item.

Question 21

A policyholder wishes to annuitize the cash value of her insurance policy at retirement. The cash value is $725,000. What payment (to the nearest dollar) can he expect if he wishes to receive 15 years of payments (starting next year) and interest rates are 5.25%?

A) $43,333
B) $55,555
C) $71,033
D) $60,524
E) $29,250 Payment = $725,000/PVIFA (15 yrs, 5.25%)

Question 22

Hurricane damage in a given area is an example of a ____________________ for which it is difficult to predict loss exposure.

A) low severity, low frequency event
B) high severity, high frequency event
C) low severity, high frequency event
D) high severity, low frequency event

Question 23

The operating ratio is calculated as

A) the loss ratio minus the underwriting cycle lag.
B) the loss ratio plus the loss adjustment expense ratio plus the commission to premium ratio.
C) the combined ratio after dividends minus the investment yield.
D) the combined ratio minus the loss ratio.
E) none of the above

Question 24

Estimates of the cost of the September 11, 2001 terrorist attacks on the World Trade Center indicate that the cost to insurance companies was as high as

A) $20 billion
B) $30 billion
C) $40 billion
D) $50 billion
E) $60 billion

Question 25

For P&C insurers, if the combined ratio is more than 100%, that firm

A) could not have been profitable.
B) must have been profitable.
C) may have been profitable if investment returns were high enough.
D) was profitable if the LAE was low enough.

Question 26

The most important federal legislation affecting the regulation of life insurance companies prior to 1999 was the

A) McCarran-Ferguson Act
B) McFadden Act
C) Investment Company Act
D) SEC Act
E) Insurance Freedom Act

Question 27

Property and casualty insurers hold _____________ short-term assets than life insurers because property and casualty loss rates are _____________ predictable than life insurance loss rates.

A) more; more
B) more; less
C) less; less
D) less; more

Question 28

Which one of the following statements concerning annuities offered by insurers is not true?

A) Interest on annuities is not taxed until the investor receives the payments.
B) Annuity payments may be fixed or variable.
C) Annuity contributions are not capped by the IRS.
D) Annuities can be deferred or immediate.
E) Annuity payments must cease upon the policyholder's death.

Question 29

An insurance line has a loss ratio of 72%, an expense ratio of 35%, and the firm pays 2% of premiums to policyholders as dividends. What level of investment yield is needed to make the P&C firm break-even?

A) 5%
B) 7%
C) 9%
D) 11%
E) 18%

Question 30

An insurance line has a loss ratio of 62%, an expense ratio of 35%, the firm pays 2% of premiums to policyholders as dividends, and has an investment yield to premium ratio of 9%. The operating ratio for this line is

A) 86
B) 90
C) 95
D) 106
E) 109 Operating ratio = 62 + 35 + 2 - 9

Question 31

At P&C insurers, if the combined ratio is less than 100%, the premiums charged were sufficient to cover

A) losses only.
B) expenses only.
C) both losses and expenses.
D) losses, expenses, and investment returns on premiums.

Question 32

In 2010 the average combined ratio after dividends for the P&C industry was ___________.

A) 102.3
B) 105.6
C) 107.2
D) 97.6
E) 93.5

Question 33

The term "variable" in a variable life policy refers to the

A) policyholder's ability to vary the premiums.
B) insurer's ability to vary the rate of return on the policy.
C) variable growth rate of the cash value of the policy.
D) insurer's ability to vary the premiums.
E) the policyholder's ability to cancel the plan.

Question 34

A policyholder wishes to annuitize the cash value of her insurance policy at retirement. She desires an annual payment of $95,000 per year and the cash value is expected to be $1,100,000 at retirement. Approximately how many payments can she expect to receive if annuity interest rates are 5.122%?

A) 18
B) 16
C) 14
D) 12
E) 10 $1,100,000/$95,000 = PVIFA (5.122%, N yrs); N = 18; log rule or financial calculator required

Question 35

The largest asset category of life insurers is _______________ and the largest liability category is ___________.

A) bonds; separate account items
B) separate account items; current policy claims
C) bonds; policy reserves
D) policy reserves; mortgage loans
E) common stock; dividend reserve

Question 36

Which of the following statements are true?
I) Catastrophe bonds may be used as a form of reinsurance.
II) Catastrophe bonds are structured so that if an insured event results in large losses for an insurer, the bond's required payments increase.
III) Buyers of catastrophe bonds benefit if the adverse event occurs.
IV) When issued, catastrophe bonds will have promised yields above the risk-free rate.

A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
E) III and IV only

Question 37

The two major components of expense risk for P&C insurers are

A) the combined ratio and the premium ratio.
B) loss adjustment expenses and variations in commission and other expenses.
C) investment yield and premiums earned.
D) dividend ratio and investment yield.
E) none of the above

Question 38

The primary regulator of insurance firms is the

A) NAIC
B) McCarran-Ferguson Commission
C) FDIC
D) state insurance regulator
E) SEC

Question 39

An insurance line has a pure loss ratio of 65%, LAE of 16%, an expense ratio of 26%, the firm pays 3% of premiums to policyholders as dividends, and has an investment yield to premium ratio of 6%. Which one of the following statements is true?

A) The line is profitable because the operating ratio is greater than 100.
B) The line is profitable because the operating ratio is less than 100.
C) The line is not profitable because the operating ratio is greater than 100.
D) The line is profitable because the combined ratio after dividends is greater than 100.
E) The line is profitable because the combined ratio after dividends is less than 100. Operating ratio = 65 + 16 + 26 + 3 - 6 = 104

Question 40

An investor has $25,000 that he can invest today. In addition to this amount, he can also invest $12,000 per year for 30 years (beginning one year from now) at which time he will retire. He plans on living for 25 years after he retires. If interest rates are 8%, what size annual annuity payment can he obtain for his retirement years? (All annuity payments are at year-end. Round your answer to the nearest dollar.)

A) $64,439
B) $192,501
C) $150,913
D) $161,096
E) $173,488 [($25,000 * 1.08³⁰) + ($12,000 * FVIFA (8%, 30 yrs)]/PVIFA (8%, 25 yrs)

Question 41

Why are P&C insurers dependent on investment yields? Is this an argument for changing how this industry operates and/or how we regulate the industry? Explain.

Question 42

What is the operating ratio for this line? Is the line profitable?

Question 43

A 65-year-old wishes to convert the cash value of his insurance policy into an annuity. He can select an annuity that will last 15 years or one that lasts 20 years. If the cash value is $450,000 and interest rates are 5.25%, how much less per year will he receive if he chooses the 20-year annuity?

Question 44

Why do P&C insurers place a large percentage of their investments in bonds and maintain large surpluses?

Question 45

Everything else constant, what is the maximum expected loss ratio that would yield a profitable line after including investment income?

Question 46

In terms of dollar costs, the worst U.S. catastrophe since 2000 was caused by

A) the terrorist attacks on the World Trade Center and the Pentagon.
B) Hurricane Katrina.
C) the California fires of 2007.
D) the Florida hurricanes of 2004.
E) Hurricane Rita of 2005.

Question 47

What is the combined ratio after dividends for this line? Are premiums sufficient to generate profitability for this line? Why or why not?

Question 48

Halliburton was allowed to bankrupt one of its subsidiaries in settlements of lawsuits on asbestos cases. What are the pros and cons of allowing a firm to limit its liability by shifting the liability to only one subsidiary rather than placing all of the corporation's assets at risk?

Question 49

Premiums received before the coverage period are termed

A) unearned premiums
B) lagged premiums
C) loss adjustment expenses
D) loss reserves
E) policyholder's surplus

Question 50

The P&C loss ratio on an insurance line contains
I) payouts on claims.
II) brokerage commissions incurred to market the claims.
III) costs associated with settling claims.
IV) dividend payouts to policyholders.

A) I and II only
B) I, III, and IV only
C) I and III only
D) II and IV only
E) III and IV only

Question 51

Which one of the following would provide an example of social inflation?

A) Large malpractice awards beyond the level of damages incurred.
B) Increase in costs on auto physical damage claims.
C) Increase in prescription drug cost claims.
D) Losses to repair damages caused by hurricanes in Florida.
E) Rising cost of funeral expenses due to inflation.

Question 52

What is separate account business? How important is it to life insurers?

Question 53

What additional flexibilities are provided by variable and universal life as compared to a standard whole life or endowment policy?

Question 54

The best underwriting performance since 1936 in terms of the combined ratio occurred during ____________ for property and casualty insurers.

A) 1999 and 2000
B) 2001 and 2002
C) 2002 and 2003
D) 2004 and 2005
E) 2006 and 2007

Question 55

How do insurance guarantee funds differ from bank deposit insurance funds?

Question 56

What are the main lines of P&C insurance?

Question 57

What three main sources of underwriter risk exist for insurers?

Question 58

State Farm and other P&C insurers came into conflict with policyholders over claims filed as a result of Hurricane Katrina that resulted in lawsuits. The conflict resulted from

A) insurer's refusal to pay until reinsurance funds were collected.
B) policyholder's fraudulent claims.
C) insurers' insistence that the Katrina storm surge resulted in flood damage which was not covered.
D) insurers overcharged for hurricane insurance.