Question 1

Which account refers to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided?

Accepted Answer

Unearned premiums refer to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided. Prepaid premiums are also a reserve set-aside, but they refer to premiums that have been paid in advance for coverage that will be provided in the future. Premium reserves and policy reserves are not specific to unearned premiums and may refer to other types of reserves within an insurance policy.

Question 2

For property-casualty insurers,loss rates are more predictable for

Accepted Answer

Low-severity high-frequency events are more predictable because they occur regularly, allowing insurers to gather more data and better estimate future losses.

Question 3

Which of the following arises in policies in which the insured event occurs during a coverage period but a claim is not filed or reported until many years later?

Accepted Answer

Long-tail losses arise in policies where the effects of the insured event are not immediately apparent and a claim may not be filed or reported until years later. This can lead to challenges for insurers in assessing the total cost of claims and setting reserve amounts. Examples of policies with long-tail losses include liability insurance for products, environmental damages, and professional malpractice.

Question 4

Which of the following is an advantage of converting from a mutual insurance company to a stockholder-controlled company?

Accepted Answer

By converting to a stockholder-controlled company, the company can access equity markets and raise capital easily, which can be used for future business expansion. This can lead to more growth opportunities and a better financial position for the company.

Question 5

Calculate the annual cash flows of a $2 million,10-year fixed-payment annuity earning a guaranteed 8 percent annually if the payments are to start at the end of this year.

Accepted Answer

11efb84d_bbf7_b3c2_9137_e9dcfe844d08_TB1314_00 We can use the formula for calculating the fixed-payment annuity:

Annual Payment = (PV x r) / [1 - (1+r)^(-n)]

Where PV is the present value or initial investment, r is the annual interest rate, and n is the number of periods (or years in this case).

Given:

PV = $2 million
r = 8%
n = 10 years

Substituting the values in the formula, we get:

Annual Payment = (2,000,000 x 0.08) / [1 - (1+0.08)^(-10)]
Annual Payment = $298,058.98

Therefore, the correct answer is C, which means the annual cash flows of the $2 million, 10-year fixed-payment annuity earning a guaranteed 8 percent annually if the payments are to start at the end of this year is $298,058.98.

Question 6

If the loss ratio on a line of insurance is 70 percent and loss adjustment expenses are 33 percent,then the line is profitable before dividends if the ratio of

Accepted Answer

Losses + Adjustment Expense = 70 + 33 = 103
Need a net investment yield of at least 3 percent to reach profitability. That is, investment yields have to be at least 3 percent higher than commissions and other expenses. The only selection that meets this criteria is [commissions and other expenses are 16 percent and investment yields are 20 percent].

Question 7

Which of the following is used as collateral when an insurance company issues policy loans?

Accepted Answer

When an insurance company issues policy loans, they often use the policy itself as collateral. This means that if the policyholder cannot pay back the loan, the insurance company can use the value of the policy to recoup their losses. Therefore, existing policies would be the best choice as collateral for insurance company policy loans.

Question 8

Higher uncertainty of losses forces property-casualty firms to

Accepted Answer

Property-casualty firms face higher uncertainty in losses, requiring them to maintain liquidity to cover claims, thus they invest in more short-term assets compared to life insurance firms.

Question 9

Factors that affect the predictability of claims loss exposure include

Accepted Answer

All of the options are factors that affect the predictability of claims loss exposure. Unexpected increases in inflation can affect the costs of claims, the frequency and severity of loss can impact the overall number and size of claims, the concept of long-tail risk means that claims may be made many years after an incident occurred, and property versus liability coverage can impact the types of claims that might be made. Therefore, all options should be considered when assessing claims loss exposure.

Question 10

What does the loss ratio measure in any particular year?

Accepted Answer

The loss ratio measures the amount of payouts on policies relative to the premiums earned in a particular year. It is expressed as a percentage and is used by insurers to assess the profitability of their underwriting activities in a given line of business. A higher loss ratio indicates that the company is paying out more in claims than it is taking in through premiums, which can lead to financial losses if not effectively managed.

Question 11

The largest asset on property-casualty insurers' balance sheet as of 2015 was

Accepted Answer

Property-casualty insurers typically invest their premiums in fixed income securities, primarily bonds. The largest asset on their balance sheet is usually their bond portfolio, which generates income to support claims payments and operational expenses. Cash, common stock, and short-term securities are typically minor components of their balance sheet compared to bonds.

Question 12

What explains the recent increase in many large insurance companies conversion to stockholder controlled companies?

Accepted Answer

The recent increase in many large insurance companies' conversion to stockholder-controlled companies can be attributed to access to equity markets. This allows them to raise additional capital by selling shares, which helps them fund expansion plans or manage risk better.

Question 13

If losses on a particular line of fire insurance were $430 million,premiums earned were $595 million,and loss adjustment expenses were $95 million,the combined ratio would be

Accepted Answer

11efb84c_ceaa_7ee0_9137_77ad3e742784_TB1314_00
The line is profitable because the loss ratio is less than one.

Question 14

An insurance company collected $31.0 million in premiums and disbursed $28 million in losses.Loss adjustment expenses amounted to $5.0 million.The firm is profitable

Accepted Answer

Investment income must be at least $2 million higher than dividends paid.The only selection where this is the case is [if dividends paid to policyholders is $10 million and income generated on investments is $14 million].

Question 15

For property-casualty insurers,losses are higher for lines that are exposed to

Accepted Answer

Long tail lines such as liability and workers' compensation tend to have higher losses in high inflation environments due to the increased cost of medical care and loss of future earnings. Short tail lines such as auto and property tend to have lower losses in low inflation environments as the cost of repairs and replacements are lower.

Question 16

Which of the following is NOT a possible result when a property-liability company purchases reinsurance?

Accepted Answer

The purchase of reinsurance generally leads to improved risk sharing, limits on losses on reinsured policies, stabilized cash flows, and an improved capital position for property-liability companies. However, dilution of earnings per share is not a common result of purchasing reinsurance. Instead, the cost of the reinsurance premium may affect earnings. Therefore, option D is the correct answer as it is the only one that does not typically result from the purchase of reinsurance.

Question 17

The largest liability on property-casualty insurers' balance sheet as of 2015 was

Accepted Answer

Loss reserve and loss adjustment expenses are the estimated amount of future claims that have been incurred but not yet reported to the insurer or settled. This liability represents a potential cost to the insurer and is the largest liability on their balance sheet. Unearned premiums represent premiums that have been collected but have not yet been earned as the policy period has not yet ended. Cash and policyholder surplus are not liabilities but rather assets and equity, respectively.

Question 18

You start an annuity with $1million and expect to receive 12 equal payments beginning at the end of the first year.The guaranteed annual interest rate is 6 percent.The annual payments that you expect to collect are

Accepted Answer

11efb84d_a0a4_4f71_9137_b92ceeccc350_TB1314_00 To calculate the annual payments, we use the formula for the present value of an annuity:
PV = P*(1-(1+r)^(-n))/r
where PV is the present value, P is the payment, r is the interest rate per period, and n is the number of periods.

We know that PV = $1million, r = 6% or 0.06, and n = 12. We need to solve for P:
$1million = P*(1-(1+0.06)^(-12))/0.06
$1million*0.06 = P*(1-(1+0.06)^(-12))
0.06 = 1-(1+0.06)^(-12)
(1+0.06)^(-12) = 0.943
P = $1million/0.943
P = $1,192,770.28

Therefore, the annual payments that you expect to collect are $119,277.03 (rounded to the nearest cent), which is option B.

Question 19

What is essentially understood to be insurance for property-casualty insurance companies?

Accepted Answer

Reinsurance is essentially insurance for insurance companies, allowing them to transfer part of their risk portfolios to other parties to reduce the likelihood of paying a large obligation resulting from an insurance claim.

Question 20

Which of the following observations concerning reinsurance is FALSE?

Accepted Answer

Reinsurance can improve an insurer's capital position by transferring risk off its balance sheet. This allows the insurer to free up capital that would have been required to cover potential losses, which can then be used for other purposes such as growth or dividends. Therefore, statement C is false.

Quiz 6: Financial Services: Insurance Companies