Question 1

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

Accepted Answer

The answer of An insurance line has a loss ratio...

Question 2

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?

Accepted Answer

The answer of A policyholder wishes to annuitize the cash...

Question 3

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

Accepted Answer

In a variable life policy, the cash value of the policy varies based on the performance of the underlying investment portfolio chosen by the policyholder. This variable growth rate of the cash value is what the term "variable" refers to. The policyholder typically has limited ability to vary the premiums, and the insurer may have some ability to vary the rate of return on the policy, but these are not what the term "variable" primarily refers to.

Question 4

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

Accepted Answer

Property and casualty insurers hold more short-term assets because their loss rates are less predictable compared to life insurers, who can predict loss rates more accurately over longer periods.

Question 5

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

Accepted Answer

The combined ratio for P&C insurers is a measure of profitability from underwriting activities and does not account for investment income. If the combined ratio is more than 100 percent, it indicates an underwriting loss. However, the firm may still have been profitable if investment returns were high enough to offset underwriting losses.

Question 6

The operating ratio is calculated as

Accepted Answer

The operating ratio is calculated by taking the combined ratio after dividends and subtracting the investment yield. This measures the overall profitability of an insurance company by considering both underwriting and investment income.

Question 7

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

Accepted Answer

Hurricane damage is a high-severity, low-frequency event, meaning that it can cause significant damage but occurs relatively infrequently. This makes it difficult to predict loss exposure because the severity of the damage can vary greatly and there is not enough data to accurately estimate the likelihood of occurrence.

Question 8

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?

Accepted Answer

Loss ratio + expense ratio + dividend ratio = 1
Substituting given values,
0.72 + 0.35 + 0.02 = 1.09
So, the investment yield needed to break even is (1 - 1.09) = -0.09 or -9%
Since a negative yield is not possible, we need to find the yield that brings the ratio under 1 or 100%. 
Let x be the required investment yield. 
0.72 + 0.35 + 0.02 + x = 1
x = 0.91
So, the P&C firm needs an investment yield of 9% to break even. 
Therefore, the answer is (C).

Question 9

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

Accepted Answer

The largest asset category of life insurers is bonds, while their largest liability category is policy reserves. Separate account items and mortgage loans are also significant asset categories for life insurers, but they are not larger than bonds. Current policy claims and dividend reserves are also significant liability categories, but they are not larger than policy reserves. Common stock is an important asset category for property/casualty insurers, but it is not a significant asset category for life insurers.

Question 10

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

Accepted Answer

The correct answer is A because the average combined ratio after dividends for the P&C industry was 102.4 in 2010.

Question 11

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

Accepted Answer

The two major components of expense risk for P&C insurers are loss adjustment expenses and variations in commission and other expenses. Loss adjustment expenses refer to the cost of investigating and settling insurance claims, while variations in commission and other expenses can include fluctuations in the cost of running an insurance company such as salaries, rent, and marketing expenses. These factors can significantly impact an insurer's profitability and financial stability. The other options listed are not directly related to expense risk for P&C insurers.

Question 12

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?

Accepted Answer

The operating ratio is the sum of the pure loss ratio, LAE ratio, and expense ratio, which in this case is 107 percent (65% + 16% + 26%). This means that for every dollar of premium collected, the company is paying out $1.07 in losses, LAE, and expenses. Since the operating ratio is greater than 100 percent, the line is not profitable. Dividends and investment income are not enough to make up for the underwriting losses.

Question 13

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

Accepted Answer

The combined ratio is a measure used in the insurance industry to indicate whether or not an insurer is profitable. It is calculated by adding the loss and expense ratios together. If the combined ratio is less than 100 percent, then premiums charged were sufficient to cover both losses and expenses. This means that the insurer has made a profit, as it has earned more in premiums than it has paid out in losses and expenses.

Question 14

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

Accepted Answer

The estimated cost to insurance companies for the September 11,2001,terrorist attacks on the World Trade Center was as high as $40 billion.

Question 15

A policyholder wishes to annuitize the cash value of his 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?

Accepted Answer

The payment can be calculated using the present value of an annuity formula:

Payment = Cash value / Present value of annuity factor

The present value of annuity factor can be looked up in a table or calculated using a formula. For 15 years and an interest rate of 5.25%, the present value of annuity factor is 9.7112.

Therefore, Payment = $725,000 / 9.7112 = $74,597.17

To round to the nearest dollar, the payment is $71,033 (Choice C).

Question 16

The primary regulator of insurance firms is the

Accepted Answer

Insurance is primarily regulated at the state level, with each state having its own insurance department that oversees insurance companies operating within its borders. While the National Association of Insurance Commissioners (NAIC) provides a forum for states to coordinate and develop insurance regulations, the main regulator for insurance firms is the state insurance regulator. The McCarran-Ferguson Act granted the insurance industry a limited antitrust exemption, and the FDIC primarily regulates banks and savings and loan associations. The SEC regulates securities and investment-related activities.

Question 17

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.

Accepted Answer

I. Catastrophe bonds indeed serve as a form of reinsurance, providing insurers with coverage against major disasters by transferring some of the risk to investors. IV. Catastrophe bonds typically offer yields higher than the risk-free rate to compensate investors for the risk of losing their principal if a triggering event occurs.

Question 18

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

Accepted Answer

The McCarran-Ferguson Act of 1945 gives the authority to regulate the insurance industry primarily to the individual states, but also preserves the federal government's ability to regulate insurance companies in instances where state governments cannot or will not act.

Question 19

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

Accepted Answer

Annuity payments can be structured to continue after the policyholder's death through various options such as a joint and survivor annuity or a period certain annuity. The other statements are true - interest on annuities is tax-deferred until payments are received, annuity payments may be fixed or variable, annuity contributions are not capped by the IRS, and annuities can be either deferred or immediate.

Question 20

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.)

Accepted Answer

To solve this problem, we need to use the future value of an annuity formula.

1. First, we will calculate the future value of the investor's investments from now until one year before retirement:

FV = $25,000 x (1 + 0.08)^30 + $12,000 x [(1 + 0.08)^30 - 1] / 0.08 
FV = $1,390,535

2. Next, we will calculate the size of the annuity payment that the investor can obtain for his retirement years:

PV = $1,390,535 
N = 25 (the number of years he will live after retiring) 
I/Y = 8% 
PMT = ? (the annuity payment we want to find)

Using a financial calculator or Excel, we can solve for PMT:

PMT = $150,913

Therefore, the annual annuity payment that the investor can obtain for his retirement years is $150,913, rounded to the nearest dollar.

The best choice is C.

Quiz 15: Insurance Companies