Deck 17: Insurance,investment Companies and Superannuation

Question 1

Insurance companies use an important mathematical principle,the law of large numbers,to reduce the pure risk of their operations.

Answer 1

False

Question 2

To help assure that only fortuitous losses are covered,insurers often require the insured to provide evidence of losses.

Answer 2

False

Question 3

The underwriting cycle is the writing of insurance on just about any risk to get the premium dollars to invest at high interest rates.

Answer 3

False

Question 4

The goal of the insurer when developing an insurance rate is to charge enough to cover claims and administrative expenses.

Question 5

Use of retention to mitigate risk includes transferring the risk to another party through a contract.

Question 6

The many different types of superannuation funds can be classified by the type of benefits they provide and whether they are public or private sector funds.

Question 7

One of the aims of Singapore's Central Provident Fund is to ensure a property is fully owned before retirement.

Question 8

In Australia there are two broad types of insurance: life and general.

Question 9

The risk that an insurer faces once it has accepted the transfer of risk from insurance purchasers is called objective risk.

Question 10

Pure risks provide three possible outcomes: loss,no loss or gain.

Question 11

A restrictive covenant is:

A)a process by which insurers shift some of the risk that they have insured to another insurance company.
B)where an insurance company offers variable-life insurance policies.
C)a legal obligation imposed in a contract to do or not to do something.
D)a process by which an insurance company protects catastrophic losses.

Question 12

Renewable term insurance is a policy that allows the insured to renew it with evidence they are still insurable.

Question 13

Whole-life insurance provides coverage for all of life,up to and in some cases beyond age 100.

Question 14

Insurance is shifting the responsibility of bearing the risk from one party to another.

Question 15

A restrictive covenant is the process by which insurers shift some of the risk that they have insured to another insurance company.

Question 16

The sale of term life insurance was an important factor explaining the growth and large size of life insurance companies.

Question 17

Insurance premiums are directly related to expected dollar losses.

Question 18

Insurance is a luxury for individuals,small businesses and large corporations.

Question 19

Insurance companies generate profits by collecting from a range of clients' insurance premiums that are then pooled and used to pay claims on these policies.

Question 20

Risk transfer means:

A)transferring of a pure risk to an entity that pools the risk of loss and provides payment if a loss occurs.
B)shifting the responsibility of bearing the risk from one party to another.
C)losses suffered by a few insured are spread over the entire group so that insurance purchasers substitute the average loss for the uncertainty that they might suffer a large loss.
D)combining pure risk and objective risk.

Question 21

A market-neutral hedge fund investment strategy seeks to:

A)invest long and short in specific sectors of the economy.
B)eliminate market risk by equally balancing long and short positions.
C)specialise in specific geographic regions.
D)provide consistent,above-market rates of return while substantially reducing the risk of loss.

Question 22

Public unit trusts are:

A)managed funds that invest in a range of publicly listed companies on the ASX
B)managed funds that invest in a range of publicly listed companies across a range of markets
C)a form of managed investment that can be bought and sold on a stock exchange each day like shares.
D)investment funds that are governed by a trust deed.

Question 23

Cash flow underwriting is:

A)the writing of insurance on just about any risk to get the premium dollars to invest at high interest rates.
B)the writing of risk free or very low risk insurance in order to reduce the amount of money that will be paid out.
C)the writing of insurance at a price that covers claims and administrative expenses and makes a profit.
D)the writing of insurance policies that are payable 12 months in advance and that are completely covered for the writer by reinsurers

Question 24

Which of the following statements identifies how insurance benefits society?

A)it reduces fear and worry because if a loss occurs,the insurer provides a payment to mitigate the loss.
B)provides an incentive for loss control because insurance premiums are determined by the chance of loss,and loss control reduces the chance of loss.
C)helps to facilitate credit by protecting collateral pledged to secure loans.
D)all of the statements are correct

Question 25

Cash management trusts are:

A)managed funds that invest in wholesale money-market securities such as short- and medium-term Commonwealth government securities,international government securities and banking and corporate debt,both national and international.
B)funds that offer superannuation products to the public on a commercial for profit basis.
C)superannuation entities where the sponsoring employer is a government agency or a business enterprise that is majority government-owned.
D)funds that draw members from a range of employers across a single industry (or group of related industries)and are usually established under an agreement between parties to an industrial award.

Question 26

Superannuation is:

A)managed funds that aim to match the return from a particular market index,such as the ASX200.
B)funds seeking to obtain higher equity income by investing in stocks with relatively high dividend yields and prospects.
C)a government-supported investment strategy aimed at providing resources that can be used upon retirement.
D)most suitable for aggressive investors with long-term investment horizons.

Question 27

Socially Responsible Investment funds:

A)are extremely speculative investments that strive for big profits from capital gains.
B)invest primarily in ordinary shares that are judged to have above-average growth potential.
C)hold a balanced portfolio of both stocks and bonds.
D)are an investment process that considers the social and environmental consequences of investments,both positive and negative,within the context of rigorous financial analysis.

Question 28

What is objective risk and what are the methods that an insurance company can use to reduce objective risk?

Question 29

Discuss some of the benefits of insurance to society.

Question 30

Securitisation of risk means:

A)insurance designed to provide regular payment to policyholders if they are unable to work for an extended period because of illness or accident.
B)insurance that provides a benefit if the insured becomes totally and permanently disabled through accident or injury,preventing him or her from working.
C)insurance that permits the term coverage to be switched to whole-life insurance without providing evidence of insurability.
D)the transference of insurable risk to the capital markets through the creation of a financial instrument.

Question 31

Event-driven investing is a strategy that seeks to:

A)buy and sell a basket of stocks or other securities and taking a counter position in index futures contracts to capture differences due to inefficiencies in the market.
B)take long and short positions in bonds with the expectation that the yield spreads between them will return to historical levels.
C)profit from price imbalances or fluctuations.
D)sell securities that are overvalued from either a technical or fundamental viewpoint.

Question 32

Open-end investment companies:

A)are a collective investment fund that allows additional investment from existing and new investors,and allows existing investors to withdraw funds.
B)are a trust with pro rata interests in an unmanaged pool of assets.
C)let people obtain professional investment management,diversification and variable denominations at low cost.
D)gather funds from savers for investment in capital and money-market instruments or investment in specialised assets,such as real estate.Investment managers invest these funds on behalf of the investors according to the principles of that fund.

Question 33

A closed-end investment company initially:

A)sells its shares to government to obtain cash to invest and then operates with a fixed number of shares outstanding.
B)sells its shares to investment banks to obtain cash to invest and then operates with a fixed number of shares outstanding.
C)sells its shares to the public to obtain cash to invest and then operates with a fixed number of shares outstanding.
D)sells its shares to commercial banks to obtain cash to invest and then operates with a fixed number of shares outstanding.

Question 34

Pure risks are:

A)the deviation between actual losses and expected losses
B)situations in which one outcome is possible: loss
C)situations in which two outcomes are possible: loss or no loss
D)situations in which three outcomes are possible: loss,no loss or gain

Question 35

A defined benefits superannuation plan is:

A)a fund whose trustee has elected for it to become a public offer fund.
B)a superannuation plan in which the employer states the benefit that the employee will receive at retirement. c a superannuation fund that pays out the sum of the contributions made by the employee and the earnings on those funds.
D)a plan offering superannuation products to the public,usually on a commercial basis

Question 36

Redlining traditionally refers to:

A)insurance companies refusing to issue insurance to individuals with particular characteristics.
B)the fact that life insurance companies are publicly listed companies.
C)the risk of immoral behaviour that has negative consequences because the person causing the problem does not suffer any (or much of the)loss or perhaps even benefits from it.
D)a situation in which two parties do not have the same information.

Question 37

The investment goal of a growth fund is for:

A)capital appreciation.
B)expansion.
C)diversification.
D)all of the above.

Question 38

The risk that an insurer faces once it has accepted the transfer of risk from insurance purchasers is called:

A)pure risk.
B)objective risk.
C)speculative risk.
D)risk transfer.

Question 39

The term adverse selection was originally used in the life insurance industry and refers to a situation in which:

A)those at greatest risk of loss are more likely to insure than others.
B)information asymmetries exist between buyers and sellers.
C)risk adverse individuals are more likely to buy insurance.
D)insurance includes a covenant clause.

Question 40

'Insurance has been described as 'the product everyone buys but no one wants to use'.What does this statement imply?

Question 41

How do insurance companies make money?

Question 42

How does a restrictive covenant minimise objective risks?