Question 1

Through securitisation, general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.

Accepted Answer

Securitization involves converting assets or risks into marketable securities, typically involving the financial markets, rather than transferring them to another insurance company, which would be considered reinsurance.

Question 2

Adverse selection is a situation where customers who most need insurance are more likely to apply for insurance.

Accepted Answer

Adverse selection occurs when those who are most likely to experience losses seek insurance coverage, leading to higher costs for the insurer and potentially making the insurance policy unsustainable.

Question 3

Property-casualty insurers tend to have a higher level of liquidity risk than life insurers.

Accepted Answer

Property-casualty insurers typically have a higher level of liquidity risk due to the nature of their business, which involves making payments for claims in a shorter period of time than life insurers. This requires them to hold more liquid assets to meet their obligations, which can impact their liquidity position. Life insurers, on the other hand, have longer-term liabilities and typically invest in longer-term assets, which can provide a more stable cash flow and lower liquidity risk.

Question 4

Insurance companies are not subject to regulatory capital adequacy rules.

Accepted Answer

Insurance companies are subject to regulatory capital adequacy rules, which help to ensure that they have sufficient funds to cover their liabilities and protect policyholders. These rules vary by jurisdiction but are typically set by government agencies or industry organizations.

Question 5

Investments in hedge funds are restricted to more wealthy clients.

Accepted Answer

This is true. Hedge funds are typically only available to accredited investors, which generally means individuals with a net worth of at least $1 million or an annual income of at least $200,000. This is due to regulatory requirements designed to protect less sophisticated investors from the risks associated with hedge funds.

Question 6

Superannuation funds manage funds saved throughout an employee's working life with the aim of providing the employee with a retirement income.

Accepted Answer

This statement is true. Superannuation funds are designed to manage funds saved throughout an employee's working life with the goal of providing a retirement income.

Question 7

In general, the maximum levels of losses are less predictable for property lines than liability lines.

Accepted Answer

The answer of In general, the maximum levels of losses...

Question 8

Pure insurance companies are exposed to a single risk only, this being insurance risk.

Accepted Answer

Pure insurance companies are primarily exposed to insurance risk, which involves claims and underwriting risks, but they also face other types of risks such as market risk, credit risk, operational risk, and liquidity risk, among others.

Question 9

In firm commitment underwriting, the investment banker acts as a principal, purchasing securities from the issuer at one price and seeking to place them with public investors at a slightly higher price.

Accepted Answer

In a firm commitment underwriting, the investment banker assumes the risk by acting as a principal and purchases securities from the issuer at a set price, and then sells them to the public at a slightly higher price to make a profit.

Question 10

SOARS stands for Supervisory Oversight and Regulations System.

Accepted Answer

SOARS stands for Significant Observations Alert and Reporting System.

Question 11

Reinsurance companies sell insurance products directly to the customer.

Accepted Answer

Reinsurance companies do not sell insurance products directly to the customer. They provide insurance coverage to primary insurers such as insurance companies, who then sell the products to customers.

Question 12

Reinsurance is insurance purchased by insurers from other insurers to limit the total loss an insurer would experience in case of a disaster.

Accepted Answer

This statement is true. Reinsurance is a way for insurers to transfer some of the risk they take on to other insurers. In case of a disaster or large loss, the reinsurer would pay some or all of the costs, limiting the amount the primary insurer would have to pay out of its own reserves.

Question 13

Loans on policy are loans made by insurance companies to its policyholders using their policies as collateral.

Accepted Answer

Loans on policy are a common form of loan provided by insurance companies where policyholders can borrow money by pledging their policies as collateral.

Question 14

An individual's life insurance policy usually covers the policyholder plus the policyholder's spouse and family.

Accepted Answer

An individual's life insurance policy typically covers only the policyholder, not the spouse or family members. Coverage for family members would require separate policies or a specific family coverage plan.

Question 15

... is a procedure of adjusting asset and balance sheet values to reflect current market prices.

Accepted Answer

Marking to market is the process of adjusting asset and balance sheet values to reflect current market prices. Hedging refers to the practice of protecting investments from potential losses by taking offsetting positions. Underwriting involves guaranteeing loans or securities issuance. Balancing is a more general term that can refer to various financial practices such as ensuring a budget is balanced or balancing a portfolio.

Question 16

Annuities are the reverse of life insurance in that they are different means of liquidating a fund.

Accepted Answer

Annuities are a means of liquidating a fund over time, while life insurance provides a lump sum payment to beneficiaries upon the death of the policyholder.

Question 17

Investments in ... are restricted to more wealthy clients.

Accepted Answer

Hedge funds typically require investors to meet certain wealth and income criteria and often have minimum investment requirements, making them a more suitable option for wealthier clients. Superannuation, managed funds, and trusts may or may not have restrictions on who can invest, depending on the specific fund and its requirements.

Question 18

While insurance companies are exposed to credit, operational and investment risk, there is no direct regulation for these risks set out by APRA.

Accepted Answer

APRA primarily regulates prudential standards for insurance companies in relation to solvency and capital adequacy, but credit, operational, and investment risks are generally managed internally by the insurance companies themselves. However, APRA does require insurance companies to regularly report on their risk management practices and has the power to intervene if any risks are deemed to be excessive or not adequately managed.

Question 19

Insurance services offered by FIs protect individuals and businesses (policyholders) from the financial impact of adverse events.

Accepted Answer

Insurance services are designed to protect policyholders from financial losses caused by unexpected events such as accidents, natural disasters, or medical emergencies. FIs offer various types of insurance policies for individuals and businesses to mitigate their financial risks.

Question 20

Which of the following did not occur in the life insurance industry during the most recent financial crisis?

Accepted Answer

Policy premium increasing as more households and small businesses attempt to transfer risk to insurance companies did not occur during the most recent financial crisis.

Quiz 3: The Financial Service Industry: Other Financial Institutions