Deck 15: Insurance Companies

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

The primary asset for P&C insurers is bonds.

Question 9

Insurance companies charge different premiums to people based on preexisting health conditions in order to reduce the adverse selection problem.

Question 10

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

Question 11

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

Question 12

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

Question 13

The adverse selection problem arises in situations when the policyholders engage in risky activities that increase the probability of an insurance payoff.

Question 14

The top 10 property and casualty firms underwrite half of all the P&C premiums written.

Question 15

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

Question 16

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

Question 17

A whole life insurance policy pays the face value of the contract on death of the policyholder to the beneficiaries.

Question 18

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 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 percent,he can expect to receive $167,829 per year.

Question 20

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

Question 21

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

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

Question 22

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 23

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 percent?

A)18
B)16
C)14
D)12
E)10

Question 24

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
E)no; highly

Question 25

In 2016 the average combined ratio after dividends for the P&C industry was________.

A)100.01
B)105.6
C)107.2
D)97.6
E)93.5

Question 26

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 27

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 percent,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

Question 28

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 29

The primary regulator of insurance firms is the

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

Question 30

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 31

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 32

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
E)low-frequency,high-frequency event

Question 33

For P&C insurers,if the combined ratio is more than 100 percent,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 34

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 35

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 36

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

A)the sum of the loss ratio plus loss adjustment expenses
B)the sum of the loss ratio plus the expense ratio
C)the operating ratio minus dividends paid to policyholders
D)the nominal ratio plus the real ratio
E)1 minus the operating ratio

Question 37

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 variable life and universal life

Question 38

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 these options are correct.

Question 39

At P&C insurers,if the combined ratio is less than 100 percent,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 40

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 these options are correct.

Question 41

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 percent,how much less per year will he receive if he chooses the 20-year annuity?

Question 42

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 43

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 44

Insurance companies face the problem of ________ when people with highest probability of getting the insurance payoffs are the ones who purchase insurance.

A)moral hazard
B)adverse selection
C)fraud
D)over-insurance
E)agency costs

Question 45

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

Question 46

What are the main lines of P&C insurance?

Question 47

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 48

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

Question 49

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 50

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 51

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

Question 52

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

Question 53

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 54

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

Question 55

An insurance line has a pure loss ratio of 65 percent,LAE of 16 percent and an expense ratio of 26 percent; the firm pays 3 percent of premiums to policyholders as dividends and has an investment yield to premium ratio of 6 percent. 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.

Question 56

What three main sources of underwriter risk exist for P&C insurers?

Question 57

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

Question 58

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

A)86.
B)90.
C)95.
D)106.
E)109.

Question 59

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 percent?

A)$43,333
B)$55,555
C)$71,033
D)$60,524
E)$29,250

Question 60

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

Question 61

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 62

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