Deck 7: Insurance Operations

Question 1

In the credit crisis of 2008, credit default swaps were used to insure mortgage-backed securities.

Answer 1

True

Question 2

Brokers are most active in the suburbs and among small insureds.

Answer 2

False

Question 3

Life insurance does not involve the group sharing of individual losses.

Answer 3

False

Question 4

Brokers are a more significant part of the marketing mechanism in personal lines of business than in commercial liability business.

Question 5

An agent legally represents the company, whereas a broker represents the buyer.

Question 6

Producer is another name for both agents and brokers.

Question 7

Exclusive agents are permitted to represent only their company or a company in an affiliated group of insurance companies.

Question 8

Redlining decisions are made by considering individual insurance applicants.Most often, the redlining is in rich metropolitan areas, placing low-income inner-city dwellers at great advantage.

Question 9

Even very sick people such as AIDS patients can obtain life insurance through a group policy.

Question 10

Those who purchase insurance through the independent agent are considered by both insurers and agents to be the agent's customers rather than the insurer's.

Question 11

A personal producing general agent sells for one or more insurers.

Question 12

Subagents are agents of the general agent rather than of the insurer.

Question 13

An independent agent owns the x-date.This means that the insurance firm cannot contact the insured directly in case of delay in payment of premiums, but have to inform the agent who contacts the insured.

Question 14

Insuring common risks in high volume leads to less accuracy in predicting losses, and these vanish because they have been aggregated by the insurer.

Question 15

Like the independent agent, the exclusive agent owns the x-date.

Question 16

Incurred losses are both paid losses plus known but not yet paid losses.

Question 17

For the life insurance industry, the largest component of liabilities is reserves for pensions.

Question 18

Using insurer forms, the independent agent binds an insurer, sends underwriting information to the insurer, and later delivers a policy to the insured.

Question 19

The branch manager employs and trains agents for the company and can employ these agents without the consent of the company.

Question 20

AIG was one of the largest issuers of mortgage-backed securities at the time of the credit crisis.

Question 21

Identify the correct statement about the general agency system.

A)A special agent is authorized by contract with the insurer to sell insurance in a specified territory.
B)The primary responsibilities of the general agent are to select, train, and supervise subagents.
C)Subagents are agents of the general insurer rather than of the insurer.
D)Unlike the special agent, a general agent has no incentive to recommend a high-commission product.
E)General agents are also known as special agents.

Question 22

Identify the correct statement about independent agents.

A)They usually represent a single insurance company.
B)They are compensated on a salary basis by the insurance firm.
C)They pay all agency expenses.
D)They have the responsibility of collecting premiums on all circumstances.
E)Legally, they represent the customers.

Question 23

An independent agent owns the x-date.Identify the correct explanation for this statement.

A)The agent has he right to contact the customer when a policy is due for renewal.
B)The agent pays all agency expenses.
C)The agent has the responsibility of collecting premiums in all circumstances.
D)The agent makes all decisions concerning how the agency operates.
E)The agent makes all decisions about the insureds method of paying premiums.

Question 24

Identify the process that occurs when an insurer designates a geographical area in which it chooses not to provide insurance, or to provide it only at substantially higher prices.

A)Actuarial
B)Redlining
C)Gentrification
D)Blockbusting
E)Underwriting

Question 25

Which of the following statements is true about the managerial system?

A)Branch managers can employ agents without the consent of the company.
B)Compensation plans for agents trained and employed by the branch manager is determined by the branch manager.
C)All expenses of maintaining the branch office are paid by the branch manager.
D)A branch office is an independent business entity started by the branch manager of an insurance firm.
E)The insurance company has complete control over the details of the operations of branch offices.

Question 26

Which of the following statements is true about agents and brokers?

A)Both agents and brokers legally represent the company.
B)Both agents and brokers represent the buyer.
C)Both agents and brokers are compensated by the insurer.
D)A broker legally represents the company, whereas an agent represents the buyer.
E)Both agents and brokers are compensated by the insured.

Question 27

Nonproportional obligates the reinsurer to pay losses when they exceed a designated threshold.

Question 28

Which of the following statements is correct about exclusive agents and independent agents?

A)The compensation of independent agents is lower than those paid to exclusive agents.
B)Like for independent agents, the customer is considered to be the exclusive agents' rather than the insurers.
C)Unlike independent agents, exclusive agents do not own the x-date.
D)The exclusive agent has as much independence as those who operate under the independent agency system.
E)Average operating expenses and premiums for personal lines of insurance tend to be higher for exclusive agents than for those in the independent agency system.

Question 29

For life insurance, actuaries use _____, which predict the percentage of people in each age group who are expected to die each year.

A)longevity tables
B)morbidity tables
C)accident rates
D)mortality tables
E)life expectancy tables

Question 30

Identify the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate.

A)Redlining
B)Gentrification
C)Actuary
D)Blockbusting
E)Underwriting

Question 31

Treaty and facultative reinsurance arrangements may be proportional or nonproportional.

Question 32

Once it is determined that insurance can be issued, the next decision is to apply the proper premium rate.Premium rates are determined for classes of insureds by the:

A)actuarial department.
B)underwriting department.
C)blockbusting department.
D)redlining department.
E)process of gentrification.

Question 33

Large volumes of group business are also placed through direct negotiations between employers and insurers.In these direct negotiations, the insurer typically is represented by:

A)a general agent.
B)a branch manager.
C)a broker.
D)a salaried group sales representative.
E)an agent.

Question 34

Identify the characteristic feature of a broker than differentiates him/her from an agent.

A)They are compensated by the insured.
B)They do not represent the insurance company or the buyer.
C)They legally represent the insurance company.
D)They act as the insured's legal agent when the business is placed with an insurer.
E)They work under the agent, who hire and train them and pay them a monthly salary.

Question 35

This analysis is a highly specialized mathematic analysis that deals with the financial and risk aspects of insurance.This analysis takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge.Identify this analysis.

A)Gentrification
B)Underwriting analysis
C)Actuarial analysis
D)Blockbusting analysis
E)Redlining analysis

Question 36

The insured goes with the independent agent if the agent no longer sells for the insurance company.This ownership right can be sold to another agent, and when the independent agent decides to retire or leave the agency, the right to contact large numbers of customers creates a substantial market value for the agency.This marketing system is known as:

A)the managerial agency system.
B)the American agency system.
C)the general agency system.
D)the branch office system.
E)the special agency system.

Question 37

Direct writer market insurance through:

A)independent agents.
B)general agents.
C)subagents.
D)special agents.
E)exclusive agents.

Question 38

They are composed of sophisticated statistical and technological mathematical equations and analysis that help predict future occurrences of natural and human-made disastrous events with large severity of losses.They rely on computer technology to synthesize loss data, assess historical disaster statistics, incorporate risk features, and run event simulations as an aid in predicting future losses.Identify the topic of discussion.

A)Incident command system
B)Environmental impact assessment
C)Attribution theory
D)Data mining
E)Catastrophe modeling

Question 39

Identify the correct statement about financial planners.

A)They have no incentive to recommend a high-commission product.
B)They legally represent the insurance company.
C)They represent the insureds.
D)They are also known as producers.
E)They are federal government agents who recommend insurance products to clients.

Question 40

Which of the following statements is true about a general agent?

A)They are employees of insurance companies.
B)While working for an insurance company, they are given the title of agent or special agent.
C)They may be agent or brokers for the insurer.
D)They are authorized by contract with the insurer to sell insurance in a specified territory.
E)Their primary responsibility is to selling insurance to multimillion dollar companies.

Question 41

During the credit crisis of 2008, subprime loans were sold to investment banks, who bundled them into exotic investment vehicles.These securities, derived mainly from subprime mortgages, ordinarily would be comparable to junk bonds in their risk assessment.Nevertheless, by dividing them into different investment classifications and purchasing insurance, investment banks were able to acquire acceptable grades on these securities from the major rating agencies.Identify these exotic investment vehicles.

A)Credit swaps
B)Mortgage-backed securities
C)Nondepository credit securities
D)Corporate securities
E)Exotic interest rate securities

Question 42

The company taking over the risk in a reinsurance arrangement is the:

A)assuming insurer.
B)demutual insurer.
C)contingent insurer.
D)ceding insurer.
E)facultative insurer.

Question 43

Glen works in the insurance industry.His new job role includes investigating the circumstances surrounding a loss, determining whether the loss is covered or excluded under the terms of the contract, deciding how much should be paid if the loss is covered, paying valid claims promptly, and resisting invalid claims.Identify Glen's profession.

A)Actuary
B)Underwriter
C)Claims adjuster
D)Redliner
E)Gentrifyer

Question 44

Identify the incorrect statement about reinsurance.

A)It increases the financial stability of insurers by spreading risk.
B)It facilitates direct assess of the original insured to the reinsurance company.
C)It facilitates placing large or unusual exposures with one company.
D)It helps small insurance companies stay in business, thus increasing competition in the industry.
E)It increases the likelihood of the original insurer to be able to pay its claims.

Question 45

Summarize the process reinsurance.

Question 46

Identify the arrangement by which an insurance company transfers all or a portion of its risk under a contract (or contracts) of insurance to another company.

A)Demutualization
B)Reverse stocking
C)Reinsurance
D)Rationalization
E)Amortization

Question 47

Under this reinsurance arrangement, the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged contract, and the reinsurer is obligated to accept certain responsibilities for the specified insurance.Thus, the reinsurance coverage is provided automatically for many policies.Identify this arrangement.

A)Facultative arrangement
B)Ceding arrangement
C)Treaty arrangement
D)Contingent arrangement
E)Assumption arrangement

Question 48

Describe the dominant types of life/health marketing systems.

Question 49

The mortality curve illustrates the relationship between:

A)age and the probability of illness.
B)age and the probability of healthy life.
C)age and the probability of death.
D)age and the probability of life with illness.
E)age and the probability of insurability.

Question 50

The adjustments for various factors in life insurance premiums are known as premium elements.First, the premium is reduced because the insurer:

A)recognizes that the insured has to pay taxes.
B)expects to earn investment income.
C)expects additional administrative expenditures.
D)has transferred the risk to the insured.
E)has a risk of not predicting future losses accurately.

Question 51

Write a short note on independent agency system.

Question 52

Which of the following statements is true about premium elements of life insurance?

A)Income from the investments is an offset in the premium calculations.
B)The premium is increased because the insurer expects to earn investment income.
C)The premium is reduced to cover the insured's marketing and administrative expenses.
D)The premium is reduced to recover the taxes levied on the insurer.
E)In calculating premiums, an actuary usually reduces the premium to cover the insurer's risk of not predicting future losses accurately.

Question 53

Describe Catastrophe Modeling.

Question 54

Distinguish between underwriting and the actuarial process.

Question 55

In this reinsurance arrangement, both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract.As each insurance contract is issued, the primary insurer decides whether or not to seek reinsurance, and the reinsurer retains the flexibility to accept or reject each application for reinsurance on a case-by-case basis.Identify this arrangement.

A)Facultative arrangement
B)Ceding arrangement
C)Treaty arrangement
D)Contingent arrangement
E)Assumption arrangement

Question 56

Most insurance policies prohibit direct access from the original insured to the reinsurer.The prohibition exists because:

A)insurance companies realized that the original insured can take insurance directly from the reinsurance company and put them out of business.
B)direct assess of the original insured to the reinsurer is illegal.
C)reinsurance companies do not want to deal directly with original insureds.
D)the insurance company does not want the original insured to know that it is reinsuring the risks.
E)the reinsurance agreement is a separate contract from the primary insurance contract.

Question 57

The company transferring risk in a reinsurance arrangement is called the:

A)assuming insurer.
B)facultative insurer.
C)contingent insurer.
D)ceding insurer.
E)demutual insurer.

Question 58

_____ commissions are paid to brokers for bringing in better business and can be regarded as profit sharing.

Question 59

_____ is the process of paying insureds after they sustain losses.

A)Underwriting
B)Actuary
C)Blockbusting
D)Claims adjusting
E)Redlining

Question 60

During the credit crisis of 2008, what did insuring credit default swaps mean?

A)The banks had to bear the risks of all mortgages in case of a default.
B)The issuers of mortgage-backed securities were responsible for payment to mortgage-backed securities investors in case of a default.
C)The banks that had provided loans at sub-prime rates were responsible for payment in case of a default.
D)The insurance companies would not be responsible for payments related to mortgage-backed securities.
E)The insurer, rather than the MBS issuer, will deliver the promised payment to mortgage-backed securities investors in the event of default.

Question 61

The primary responsibilities of the general agent are to select, train, and supervise _____.

Question 62

A(n) _____ is authorized by contract with the insurer to sell insurance in a specified territory.

Question 63

A(n) _____ decides whether or not to insure exposures on which applications for insurance are submitted.

Question 64

Companies that market insurance through exclusive agents are called _____.

Question 65

The _____ agent usually represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis, and makes all decisions concerning how the agency operates.

Question 66

All expenses of maintaining the branch office are paid by the _____.

Question 67

Some insurance is sold directly to the public without sales commissions.Fee-only _____ recommend such no-load insurance to their clients.

Question 68

Capital and surplus are the equivalent of _____ on the balance sheet of any firm.

Question 69

A(n) _____ is the person who represents the insurer when the policyholder presents a claim for payment.

Question 70

_____ reinsurance requires the reinsurer to accept amounts of insurance that exceed the ceding insurer's retention limit.

Question 71

When the reinsurance agreement calls for _____ reinsurance, the reinsurer assumes a prespecified percentage of both premiums and losses.

Question 72

A(n) _____ facilitates some insurance sales by serving as a consultant on financial matters, primarily to high-income clients.

Question 73

If you are denied credit, the _____ Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within sixty days.

Question 74

The business of insurance inherently involves discrimination; otherwise, _____ would make insurance unavailable.

Question 75

_____ is the calculation of how amounts paid for losses increase (or mature) over time for the purpose of future projection.