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Fin 431 Final Test 2 recap
Terms in this set (50)
The primary function of an actuary is to
determine premium rates
The US insurance market is highly concentrated. There are fewer than 50 insurance companies and the largest insurer accounts for almost 50% of total premiums. (T/F)
Assume that Apex fire insurance has a surplus share treaty with Geneva Re. Apex has a retention limit of $300,000 for a single policy and that three lines ($900,000) are ceded to Geneva Re. Assume a $400,000 policy is issued. A $100,000 loss occurs. How much does Geneva Re. pay of that loss?
A wholesale insurance broker is an intermediary between
a retail agent and an insurance company
An insurer has the following data: loss ratio=70%; combined ratio=125%; investment profit (or income) ratio=10%; expense ratio=35%. It made an operating ___ of _____
Loss 15%. (125-10=115. 100-115 = -15)
TRUE FALSE: The Federal Insurance Office (FIO) has the authority to represent the federal government in international discussions of insurance regulation.
Reasons for regulation of insurance include which of the following?I. Maintaining insurer solvency II. Ensuring reasonable rates
Both I and II
Insurer A has the following data.
Net Premiums Written 206. Premiums Earned 205. Net Investment Income 18. Losses & Loss Adjustment Expenses Incurred 147. Underwriting Expenses 64
Between 30 and 40%. (64/206*100)
The basis for current state regulation of insurance is
The McCarran-Ferguson Act
An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n)
Assume an actual loss ratio of 100% and an expected loss ratio of 50%. According to the loss ratio ratemaking method, how much should premiums increase in the next period?
R.I.P. Company manufactures herbicide and pesticide. The company had difficulty finding affordable liability insurance. R.I.P. established its own insurance company based in Bermuda for the purpose of insuring R.I.P.'s loss exposures. The company that R.I.P. formed is called a
Insurance is regulated primarily at the _____ level
Scott owns a property and liability insurance agency. He is authorized to represent several insurance companies and he is compensated by commissions. Scott's agency owns the expiration rights to the business he sells. Scott is a(n)
______ is the tendency of people with a higher-than-average chance of loss to seek insurance at standard rates.
The price per unit of insurance is called the
All of the following statements about the independent agency system are true EXCEPT
Agents are never authorized to adjust small claims
Temporary evidence of insurance until a policy is actually issued is provided by a(n)
RST Insurance Company does not have any agents. Instead, the company sells insurance through radio ads, telemarketers, and newspaper and magazine inserts. This distribution method is called
Direct response system
Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?
A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called
Insurer ABC has the following data.
Net Premiums Written 206Premiums Earned 205Net Investment Income 18Losses & Loss Adjustment Expenses Incurred 147Underwriting Expenses 64
Between 70 and 80%. (147/206*100)
Which of the following statements about Lloyd's of London is true?
New individual members or Names who belong to the various syndicates have limited legal liability.
All of the following are reasons for a primary insurer to use reinsurance EXCEPT
to decrease underwriting capcity
Which of the following statements about state insurance guaranty funds is (are) true?I. They limit the amount that policyholders can collect if an insurer becomes insolvent.II. They are usually funded by general revenues of the states.
Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?
Jan is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Jan assigns the applicant to a rating category based on the applicant's degree of risk. Jan is a(n)
Which of the following statements about reinsurance is true?
The amount of insurance transferred to a reinsurer is called cession
The National Association of Insurance Commissioners (NAIC) administers an "early warning system" to help ensure insurance company solvency. This system uses data provided in the annual statement to identify companies that may pose a solvency risk. This early warning system is called
The insurance regulatory system (IRIS)
Morgan was hired by an insurance company after she graduated from college. Upon completion of a training program, Morgan was assigned to a territory where she adjusts claims of the insurer's policyowners. Morgan is a(n)
Staff claims representative
An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n)
The purpose of the Financial Analysis Solvency Tracking (FAST) system employed by the NAIC is to:.
prioritize insurance companies for additional regulatory action.
A systemic risk is a risk that
Can be the cause of the collapse of an entire system
Which of the following statements about stock insurers is false?
They are owned by their policyholders
Big Mutual Insurance Company would like to take advantage of financial services deregulation by acquiring a bank and a stock brokerage firm. Big Mutual, however, would have trouble raising the funds needed to make these acquisitions under the mutual form of organization. Big Mutual is planning to switch from the mutual form of organization to the stock form, and to issue shares of common stock to raise capital. This change in organizational structure is called
Assume that you have an actual loss ratio of 100% and expected loss ratio of 50%. Further assume a credibility factor of 0.25. According the experience ratemaking method, how much should premiums increase in the next period?
Which of the following is not an example of a merit ratemaking method/plan?
Liability Insurance Company (LIC) was approached by a regional airline to see if LIC would write the airline's liability coverage. LIC agreed to write the coverage and entered into an agreement with a reinsurer. Under the agreement, LIC retains 25 percent of the premium and pays 25 percent of the losses, and the reinsurer receives 75 percent of the premium and pays 75 percent of the losses. This reinsurance arrangement is best described as
Lloyd's of London is not an insurance market, it is an insurance company. (T/F)
The process of transferring risk to the capital markets through the use of financial instruments such as bonds, futures contracts, and options is known as
Securitization of risk
Under what type of rate regulation are insurers required to obtain approval of rates before using them?
Prior approval law
Sarah works in property and liability insurance marketing. She legally represents insurance purchasers, rather than insurance companies. Sarah is paid a commission on the insurance placed with insurers. Sarah is a(n)
Assume that ABC Insurance has a surplus share treaty with DEF Re. ABC has a retention limit of $200,000 for a single policy and four lines are ceded to DEF Re. Assume that a $150,000 property insurance policy is issued. How much does DEF Re pay if a $100,000 loss occurs?
Most guaranty funds are funded ____ any insurance companies in the state become insolvent.
Insurance producers are responsible for
By misrepresenting the true facts, Gretchen was able to convince someone to replace an existing life insurance policy with another company and to purchase a new policy from the company that Gretchen represents. Gretchen has engaged in an illegal sales practice called
An insurer has a combined ratio=103%, an investment profit (or income) ratio of 5%, and an expense ratio of 20%. Its operating ratio is
Greater than 96% but less than 100%. (103-5)
Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n)
Excess of loss reinsurance treaty
An insurer has a Loss Ratio of 60%, an Expense Ratio of 45%, and an investment profit ratio of 2%. It has made an underwriting ______ of ______
Loss 5%. (60+45=105. 100-105=-5)
You have a house that you would like to insure for $200,000. The rate per $1,000 of coverage is $80 per year. What would be annual premium?
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