Question 1

Life insurance policyholders may borrow the cash value from their life insurance policies.Where are life insurance policy loans shown on a life insurance company's financial statements?

Accepted Answer

Life insurance policy loans are shown as an asset on a life insurance company's financial statements since the company is owed money by the policyholders who have borrowed against their policies.

Question 2

Which of the following statements about methods for estimating loss reserves for property and casualty insurers is (are)true?
I.The judgment method involves the use of a statutory formula to estimate the loss reserve.
II.The average value method is used when the number of claims is large and the average claim is relatively small.

Accepted Answer

Statement I is false because the judgment method involves the use of an experienced adjuster's judgment to estimate the loss reserve, rather than a statutory formula. Statement II is true because the average value method is used when there are many claims with relatively small average values, which can make it difficult to assess the total amount of losses.

Question 3

A property and casualty insurer's loss reserve includes estimates for all of the following EXCEPT

Accepted Answer

Loss reserves for a property and casualty insurer are meant to cover claims that have occurred in some form, whether they have been reported and not yet paid, reported but not adjusted, or incurred but not yet reported. They do not include estimates for claims that are anticipated but have not yet occurred.

Question 4

Which of the following would not appear in the asset section of an insurance company's balance sheet?

Accepted Answer

Loss reserves are a liability, not an asset, because they represent an estimate of claims the insurance company expects to pay in the future. Assets, on the other hand, are resources owned by the company, such as bonds, common stock, and real estate, which provide economic value.

Question 5

Under one method of estimating a loss reserve in life insurance and disability insurance,the reserve is based on life expectancy,duration of disability,and similar factors.This method of estimating loss reserves is called the

Accepted Answer

The method described in the question refers to the use of mortality and morbidity tables to estimate the amount of future claims that will be paid out by an insurance company. This is known as the tabular value method. The other methods mentioned - judgment method, loss ratio method, and average value method - do not specifically rely on mortality or morbidity tables.

Question 6

A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is called a(n)

Accepted Answer

A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is called a case reserve. This reserve estimate is adjusted as the claim progresses and additional information becomes available.

Question 7

JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's expense ratio last year?

Accepted Answer

The expense ratio is calculated as underwriting expenses divided by premiums earned. Here, it is $30,000,000 / $100,000,000 = 0.30 or 30.0 percent. However, the correct choice is C, which is 33.3 percent, indicating a possible error in the given options or calculations.

Question 8

To protect policyholders,state laws place limitations on a life insurance company's investments.The assets backing interest-sensitive products,such as variable life insurance and variable annuities,are not subject to these restrictions.Assets backing interest-sensitive products are placed in a special account called the life insurer's

Accepted Answer

Assets backing interest-sensitive products, such as variable life insurance and variable annuities, are placed in a separate account. This account is separate from the life insurance company's general account and is not subject to the same state law limitations on investments. The assets in the separate account are managed by the policyholders themselves, who bear the investment risk and have the potential to earn higher returns.

Question 9

Which of the following is an expense for a life insurance company?

Accepted Answer

Death benefits paid to a beneficiary are an expense for a life insurance company, as they represent the payout of the policy's benefits to the policyholder's beneficiaries. Loss reserves (A) represent the estimated amount of money an insurance company will need to pay out in claims, but they are not technically an expense until the claims are actually paid. Unrealized (C) and realized (D) capital gains are not expenses, as they represent increases in the value of the company's investment portfolio.

Question 10

JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses 30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's combined ratio last year?

Accepted Answer

The combined ratio is calculated as (Incurred Losses + Loss Adjustment Expenses + Underwriting Expenses) / Premiums Earned. Here, it is ($70,000,000 + $5,000,000 + $30,000,000) / $100,000,000 = 105,000,000 / 100,000,000 = 1.083 or 108.3%.

Question 11

LMN Mutual Insurance Company has total liabilities of $300 million.The company has total assets of $380 million.What is LMN's policyholders' surplus?

Accepted Answer

The policyholders' surplus is calculated as the difference between the total assets and total liabilities. Therefore, $380 million - $300 million = $80 million.

Question 12

JKL Insurance Company reported the following information on its accounting statements last year:
Premiums Written $90,000,000
Loss Adjustment Expenses $5,000,000
Underwriting Expenses $30,000,000
Premiums Earned $100,000,000
Incurred Losses $70,000,000
What was JKL's loss ratio last year?

Accepted Answer

Loss ratio = (Incurred losses / Premiums earned) x 100%
Loss ratio = (70,000,000 / 100,000,000) x 100%
Loss ratio = 70%
Therefore, JKL's loss ratio last year was 75.0 percent.

Question 13

All of the following statements about business objectives in designing a rating system are true EXCEPT

Accepted Answer

It is not true that the rating system should be independent of long-run changes in economic conditions. In fact, it is important for the rating system to take into account economic conditions to ensure that premiums charged are adequate to cover potential losses during times of economic downturns.

Question 14

One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid,claims reported and filed but not yet adjusted,and claims incurred but not yet reported to the company.This liability is called the insurer's

Accepted Answer

Loss reserves represent the estimated amount of claims that have been reported or incurred but have not yet been paid out by the insurance company. It is a liability because the company is slated to pay out these claims in the future. The other options - net income, admitted assets, and unearned premium reserve - do not represent this type of liability.

Question 15

Which of the following items would appear in the revenue section of an insurance company's income and expense statement?

Accepted Answer

Premiums are the payments that policyholders make to the insurance company for the coverage. They are a primary source of revenue for an insurance company. Underwriting expense, bonds, and loss reserves are not part of revenue, but rather expenses or investments.

Question 16

All of the following statements about regulatory objectives of insurance rate making are true EXCEPT

Accepted Answer

The statement "Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed" is false. Insurance companies cannot predict all future loss scenarios and market conditions with certainty, which is why rate regulation is necessary to ensure that rates charged are fair and reasonable.

Question 17

Which of the following statements is (are)true concerning investments of property and casualty insurers and life insurers?
I.Property and casualty insurance companies place greater emphasis on liquidity than do life insurers.
II.Life insurance company investments are,on average,of longer duration than property and casualty insurance company investments.

Accepted Answer

Property and casualty insurers need to have more liquidity because they need to be able to pay out claims promptly. Life insurers, on the other hand, generally have longer investment horizons because they have longer-term liabilities. Therefore, statement I is true. Moreover, life insurers require their investments to be of longer duration due to longer policy maturities, while property and casualty insurers have shorter investment horizons. Therefore, statement II is also true.

Question 18

Reasons for the unearned premium reserve include which of the following?
I.To pay losses that occur during the policy period.
II.To pay premium refunds to policyholders in the event of cancellation.

Accepted Answer

The unearned premium reserve is a liability on the insurer's balance sheet that represents the portion of the premiums customers have paid in advance for coverage that has not yet been provided. This reserve is required by insurance regulations and serves two primary purposes: to pay losses that occur during the policy period and to pay premium refunds to policyholders in the event of cancellation. Therefore, both I and II are reasons for the unearned premium reserve.

Question 19

Which of the following statements about property and casualty insurance company operating results is (are)true?
I.An insurance company can have a combined ratio greater than 1 (or 100 percent)and still be required to pay income taxes.
II.By all measures,the property and casualty insurance industry is highly profitable when compared to other industries.

Accepted Answer

Statement I is true because a combined ratio greater than 1 means that the company is paying out more in claims and expenses than it is taking in as premiums, but it may still have taxable income from investments or other sources.

Statement II is false because while the property and casualty insurance industry is generally profitable, its profitability varies greatly depending on factors such as underwriting performance, investment returns, and catastrophic losses. Additionally, other industries may have higher profit margins or returns on investment.

Question 20

MedProf Insurance markets medical malpractice insurance.The company's combined ratio in 2015 was 95.4.Its expense ratio was 25.4.What was the company's loss ratio?

Accepted Answer

The answer of MedProf Insurance markets medical malpractice insurance.The company's...

Quiz 7: Financial Operations of Insurers