Deck 8: Insurance Markets and Regulation

Question 1

Insurance companies are required to submit uniform financial statements to the regulators.These statements are based on statutory accounting (SAP) as opposed to the generally accepted accounting (GAP) system.

Answer 1

True

Question 2

The solvency of an insurer depends partly on the amount and quality of its assets, and how the assets' liquidity matches the needs of liquidity to pay losses.

Answer 2

True

Question 3

If the actual combined ratio for homeowner's is 106, the industry is experiencing negative results because homeowner's have the lowest break-even combined ratio levels.

Answer 3

True

Question 4

Life insurers have less stringent investment regulations than property/casualty insurers.

Question 5

Risk-based capital describes assets with values that may vary widely over time.

Question 6

In states that use the file-and-use method, n insurer or its rating bureau must file its new rates and have them approved by the commissioner before using them.

Question 7

Depending on the investment income contribution of each line of insurance, the longer tail lines have a smaller break-even combined ratio level.

Question 8

Reinsurers, by the nature of their business, suffer to a greater extent than insurers when catastrophes hit.

Question 9

In a soft market, when insurance capacity is low.

Question 10

National Association of Insurance Commissioners (NAIC) model laws cannot be modified by the state; this is to ensure uniformity in insurance regulations.

Question 11

Stock insurers do not show "capital" on their balance sheets.

Question 12

Combined ratio does not include income from investments.

Question 13

In 2002, in the wake of a series of corporate financial scandals, including those affecting Enron, Arthur Andersen, and WorldCom, the Gramm-Leach-Bliley Act of 2002 was adopted.

Question 14

The life and health insurance markets do not show similar underwriting cycles.

Question 15

The commissioner of insurance generally has more control over insurers not licensed in the state.

Question 16

Insurance rates are considered dynamic because of the actuarial cycle.

Question 17

An insurer must have a license from each state in which it conducts business.

Question 18

Each line of business has its own break-even point.

Question 19

The investment activity of the life/health industry is similar to that of the property/casualty segment.

Question 20

All states have state guaranty fund associations for both property/casualty and life/health insurance.

Question 21

A combined ratio above one hundred means that, for:

A)every dollar given out for expenses, more than a dollar was spent on losses.
B)every premium dollar taken in, more than a dollar was spent on losses and expenses.
C)every dollar spent on expenses, more than a premium dollar is taken in.
D)every premium dollar taken in, more than a dollar is gained as profit through investment.
E)every dollar spent for insurance claims, more than a premium dollar is taken in.

Question 22

Combined ratio is:

A)loss ratio plus expense ratio.
B)premium ratio plus claims ratio.
C)premium ratio minus expense ratio.
D)loss ratio minus expense ratio.
E)expense ratio by premium ratio.

Question 23

Fire and allied lines as well as homeowner's have the lowest break-even combined ratio levels because:

A)the expenses and claims are expected to be low.
B)the level of investment income is expected to be low.
C)the premiums rates are high.
D)the level of investment income is expected to be high.
E)the expenses and claims are expected to be high.

Question 24

Identify the characteristics of a market.

A)Insurance rates and insurance capacity are high
B)Insurance rates are high and insurance capacity is low
C)Insurance rates are low and insurance capacity is high
D)Insurance rates and insurance capacity are low
E)Insurance rates are negligible and insurance capacity is very high

Question 25

Which of the following explains the movement of insurance prices through time?

A)Redlining cycle
B)Demutualization
C)Actuarial cycle
D)Amortization cycle
E)Underwriting cycle

Question 26

Identify the line of insurance that has the largest break-even combined ratio.

A)Personal auto
B)Homeowners'
C)Fire
D)Workers' compensation
E)Medical malpractice

Question 27

Soft market conditions occur when:

A)insurance losses and insurance prices are high.
B)insurance losses are high and prices are very competitive.
C)insurance losses are low and prices are very competitive.
D)insurance gains are low and prices are very competitive.
E)insurance gains and insurance prices are very low.

Question 28

An insurer may be profitable even if the combined ratio is over 100 percent because of:

A)premium income.
B)lack of insurance claims.
C)decrease in expenses.
D)investment income.
E)reinsurance.

Question 29

Churning is inducing a policyholder to cancel one contract and buy another by misrepresenting the facts or providing incomplete policy comparisons.

Question 30

The industry uses cash flow underwriting when the:

A)combined ratio is low.
B)solvency margin is high.
C)reinsurance retention ratio is low.
D)combined ratio is high.
E)solvency margin is low.

Question 31

The level of combined ratio that is required for each line of business to avoid losing money is called the:

A)cash flow combined ratio level.
B)goodwill combined ratio level.
C)break-even combined ratio level.
D)amortization combined ratio level.
E)horizontal combined ratio level.

Question 32

Each line of business has its own break-even point because:

A)the firm uses different strategies for each line to mitigate risks.
B)each line in an industry has a different loss payment time horizon but similar length of time for the investment of the premiums.
C)each line in an industry has varying length of time for the investment of premiums but similar loss payment time horizon.
D)all lines in an industry have similar loss payment time horizon and length of time for the investment of the premiums.
E)each line has a different loss payment time horizon and length of time for the investment of the premiums.

Question 33

When the combined ratio is low, the industry lowers its underwriting standards in order to obtain more cash that can be invested.Identify this strategy.

A)Amortization underwriting
B)Cash flow underwriting
C)Depreciation underwriting
D)Goodwill underwriting
E)Break-even underwriting

Question 34

Insurers flock to Bermuda because:

A)it is a tax haven with no taxes on income, withholding, capital gains, premiums, or profits.
B)the people are risk-averse, have a lot of money to spend, and do not have insurers.
C)its government provides full protection to insurers when catastrophes hit.
D)income earned in this country is allowed to enter other countries without verification from the host country.
E)the people are risk-seekers and have a lot of money to spend.

Question 35

When the combined ratio is low, the industry obtains more cash that can be invested by:

A)encouraging gentrification.
B)demutualizing to stock companies.
C)lowering its underwriting standards.
D)encouraging redlining.
E)increasing actuarial standards.

Question 36

At any point in time, insurance markets may be in market or soft market conditions because of:

A)the amortization cycle.
B)the actuarial cycle.
C)gentrification.
D)the underwriting cycle.
E)the redlining cycle.

Question 37

In the insurance industry, identify the consequence of having a low combined ratio.

A)Tightening of underwriting standards
B)Stringent redlining standards
C)Relaxed actuarial process
D)Loose underwriting standards
E)Decreased amount of cash that can be invested

Question 38

During the 1990s, the soft market conditions lasted longer than usual because the industry had:

A)large capacity.
B)high combined ratio.
C)high premium rates.
D)low premium rates.
E)small capacity.

Question 39

Identify the ideal strategy for a market.

A)Self-insurance
B)Risk avoidance
C)Risk transfer
D)Reinsurance
E)Insurance with copayment

Question 40

This proposal is also regarded as the insurance regulatory reform road map draft, and it has added fuel to the debate of state versus federal insurance regulation.Identify it.

A)Sarbanes-Oxley (SOX) Act
B)Gramm-Leach-Bliley Financial Services Modernization Act (GLBA)
C)State Modernization and Regulatory Transparency (SMART) Act
D)Health Insurance Portability and Accountability Act (HIPPA)
E)Federal Information Security Management Act (FISMA)

Question 41

Nonlicensed insurers are permitted to sell insurance only if:

A)no licensed company is willing to provide the coverage.
B)they pay the nonlicense operation penalty to the commissioner of insurance.
C)they conduct a joint venture with a licensed insurance firm.
D)they are licensed in atleast five other states.
E)the commissioner of insurance specifically permits it.

Question 42

In states that use this method, an insurer or its rating bureau must file its new rates and have them approved by the commissioner before using them.Identify this property/casualty rate regulation method.

A)Prior approval method
B)File-and-use method
C)Twisting method
D)Statutory accounting method
E)Remittance method

Question 43

Which of the following statements is true about types of insurers and licensing requirements?

A)If an insurer has a license in one state, he/she can conduct business in any state in the country.
B)Companies chartered in a state are known as family insurers.
C)Foreign insurers are those formed in another country.
D)Alien insurers are those organized in another state.
E)The commissioner has more control over domestic insurers than alien insurers.

Question 44

To qualify for a license, an insurer must fulfill certain financial requirements.Identify the correct statement about the financial requirements for a license.

A)Mutual insurers must have a specified amount of capital and surplus.
B)Stock insurers must have a minimum amount of surplus only because they do not show "capital" in their balance sheets.
C)Policyholders are owners in stock companies.
D)Mutual companies do not have stock.
E)A company offering only one line of insurance must have more capital (and/or surplus) than a multiple-line insurer.

Question 45

Nonadmitted or nonlicensed insurers are also called:

A)alien insurers.
B)excess and surplus lines insurers.
C)exiled insurers.
D)foreign insurers.
E)demutualized insurers.

Question 46

_____ insurers are those formed in another state.

A)Guest
B)Neighbor
C)Alien
D)Foreign
E)Family

Question 47

This act allowed financial institutions to consolidate their services, bringing sweeping changes for insurance as part of its provisions.One of the provisions of this act requires U.S.jurisdictions to adopt uniform or reciprocal agent- and broker-licensing laws by November 2002.If this requirement is not met, a National Association of Registered Agents and Brokers will be created.Identify this act.

A)Sarbanes-Oxley (SOX) Act
B)Gramm-Leach-Bliley Financial Services Modernization Act (GLBA)
C)State Modernization and Regulatory Transparency (SMART) Act
D)Health Insurance Portability and Accountability Act (HIPPA)
E)Federal Information Security Management Act (FISMA)

Question 48

The _____ is determined on the basis of how much investment income is available in each line of insurance.

Question 49

_____ is the quantity of insurance coverage that is available in terms of limits of coverage.

Question 50

Life insurers have more stringent investment regulations than property/casualty insurers because:

A)expected return on investment of life insurance is higher.
B)some of the contracts made by life insurers cover a longer period of time, even a lifetime.
C)expected return on investment of property/casualty insurance is higher.
D)contracts made by property/casualty insurers cover a longer period of time than life insurance contracts.
E)life insurance is considered more important in loss severity than property/casualty insurance.

Question 51

Which of the following statements is true about the insurance regulation scheme?

A)Under the current scheme, federal legislatures pass insurance laws that form the basis for insurance regulation.
B)To ensure the smooth operation of insurance markets and the solvency of insurers, insurance laws are concerned only with the operations and investments of insurers.
C)Trade practices, including marketing and claims adjustment, are not part of the law.
D)The laws provide standards of financial solvency, including methods of establishing reserves and the types of investments permitted.
E)State insurance laws are concerned not only with the licensing requirements for insurers, agents, brokers, and claims adjusters.

Question 52

Every state has an insurance department to administer insurance laws; it is known as the:

A)captain of insurance.
B)commissioner of insurance.
C)commander of insurance.
D)sergeant of insurance.
E)lieutenant of insurance.

Question 53

_____ conditions occur when insurance losses are above expectations and reserves are no longer able to cover all losses.

Question 54

Identify the correct statement about risk-based capital.

A)It is an asset that does not appreciate.
B)These are unearned premiums which may turn into a liability in the future.
C)It is an asset with values that are stagnant over time.
D)These are assets than have the lowest risk of all other assets.
E)Equities held as investments are examples of this asset.

Question 55

Identify the problems associated with insurance being regulated by the state.

A)Reinsurance of catastrophic risks
B)Licensing for claims adjuster
C)Lack of uniformity in the laws and regulation
D)Categorization of risk into appropriate categories
E)Election of the superintendent of insurance

Question 56

This act calls for auditor independence and increased disclosure regarding executive compensation, insider trading, and financial statements.It has been successful at improving corporate governance.Publicly traded stock insurance companies are required to comply with this act.Identify it.

A)Sarbanes-Oxley (SOX) Act
B)Gramm-Leach-Bliley Financial Services Modernization Act (GLBA)
C)State Modernization and Regulatory Transparency (SMART) Act
D)Health Insurance Portability and Accountability Act (HIPPA)
E)Federal Information Security Management Act (FISMA)

Question 57

Which of the following statements is true about the state guaranty association fund?

A)All the states do not have state guaranty association fund for property/casualty and life/health insurance.
B)They are security deposit pools made up of voluntary contributions
C)Its contributions are from solvent, private insurance companies doing business in their respective states.
D)It assesses each company on the basis of the percentage of its premium volume to cover the obligations to policyholders.
E)Only companies who have volunteered to pool their funds are allowed to use it during difficult times.

Question 58

Explain Gramm-Leach-Bliley Financial Services Modernization Act (GLBA) in detail.

Question 59

The most important part of insurance regulation is to:

A)ensure solvency of insurers.
B)categorize risk into appropriate categories.
C)ensure that insurers have the option of reinsurance.
D)enable insurers to insure catastrophic events.
E)ensure that the government insures risks that are not insurable by private insurers.

Question 60

Identify the people who hold special "licenses" and provide access to nonadmitted insurers.

A)Goodwill agents or brokers
B)Stock agents or brokers
C)Surplus lines agents or brokers
D)Demutualized agents or brokers
E)Amortized agents or brokers

Question 61

_____ is providing (substantial) value as an inducement to purchase insurance.

Question 62

Because solvency is considered to be affected by product pricing, _____ regulation is an important part of insurance regulation.

Question 63

Persons who hold special "licenses" as _____ agents or brokers provide access to nonadmitted insurers.

Question 64

_____ reflects the excess value a firm holds in assets over liabilities.

Question 65

In August 2004, Representative Michael Oxley, chairperson of the House Financial Services Committee, and Representative Ric Baker, chairperson of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a draft of the _____ Act.

Question 66

Companies chartered in a state are known as _____ insurers.

Question 67

Premiums collected in advance of the policy period are known as _____ premiums.

Question 68

Insurance delivers only future payment in case of a loss.Therefore, it has long been actively regulated.Most of the regulation has been at the _____ level for many years.

Question 69

Companies in which policyholders are owners are known as _____ companies.

Question 70

_____ system is the acceptable system of accounting for publicly traded firms.

Question 71

_____ insurers are those organized in another country.

Question 72

The _____ deals with the creation of model laws for adoption by the states to encourage uniformity.