Deck 6: The Insurance Solution and Institutions

Question 1

If there is no transfer of at least 10 percent of the risk, regulators regard the transaction as a noninsurance transaction that has less favorable accounting treatment for losses and taxes.

Answer 1

True

Question 2

Risk increases as the number of exposures increases.

Answer 2

False

Question 3

Property/casualty insurance excludes insurance to cover the possibility of being held legally liable to pay damages to another person.

Answer 3

False

Question 4

The use of deductibles to eliminate insurance reimbursement for frequent small losses makes automobile collision premiums unattractive for the insureds.

Question 5

In the U.S., flooding is covered by the federal government, not by private insurers.

Question 6

The stated purpose of mutual insurers is to make a profit for stockholders rather than to provide low-cost insurance.

Question 7

The larger the number of exposures, the lower the risk of missing the prediction of future losses.

Question 8

Staff in the group underwriting division are trained to look for risk factors that influence the frequency and severity of claims among individuals and families.

Question 9

Insurance Services Office (ISO) is a data collection and statistical analysis organization that helps small insurers reduce the uncertainty in predicting losses by providing them with data that exists in the insurance industry.

Question 10

The risk of an insurer with more exposures is relatively higher than that of an insurer with fewer exposures under the same expected distribution of losses.

Question 11

The suicide clause, in life insurance contracts, is a provision designed to reduce adverse selection.

Question 12

Unemployment and workers' compensation insurance are forms of involuntary social insurance provided by the government.

Question 13

Insurance can reduce the financial and noneconomical uncertainty of risk.

Question 14

Insurance is created by an insured that, as a professional risk-bearer, assumes the financial aspect of risks transferred to it by insurer.

Question 15

In order for the law of large numbers to work, the pooled exposures must be heterogeneous.

Question 16

Risk retention groups and captives are forms of self-insurance.

Question 17

Being part of pooling is an insurance arrangement by itself.

Question 18

Risk pooling is done across ages, not by ages.

Question 19

The insurer does not guarantee that the event insured against will not happen.

Question 20

Pooling the exposures together permits less accurate statistical prediction of future losses.

Question 21

The insurer assumes the insureds risk by promising to pay whatever loss may occur as long as it:

A)is not a catastrophic loss and the insurer has enough funds to cover it.
B)fits the description given in the policy and is not larger than the amount of insurance sold.
C)is not covered by the federal insurance agencies.
D)has reinsured the risk to a larger insurer or a federal insurance agency.
E)premiums are paid.

Question 22

These programs began as arrangements between insurers and reinsurers, but they can also be arrangements between any business and an insurer.Premiums paid by the corporation to finance potential losses are placed in an experience fund, which is held by the insurer.Over time, the insured pays for his or her own losses through a systematic payment plan, and the funds are invested for the client.Identify the risk program in discussion.

A)Infinite risk program
B)Reinsurance risk program
C)Noneconomic risk program
D)Finite risk program
E)Predictable risk program

Question 23

All states administer unemployment compensation insurance programs.

Question 24

Individuals who transfer risk to a third-party are known as:

A)insurers.
B)insureds.
C)reinsurers.
D)reinsureds.
E)beneficiaries.

Question 25

Exposure units are susceptible to dependent loss when:

A)frequency of loss affects the severity of loss of an exposure unit.
B)loss of one exposure units causes the loss of a complimentary unit.
C)adverse selection occurs due to a moral hazard.
D)the frequency and severity of two exposure units are identical.
E)loss to one exposure unit affects the probability of loss to another.

Question 26

These individuals are charged with determining appropriate rates (prices) for insurance coverage.They estimate the frequency and severity of losses and the loss distribution to determine rates for coverage.Identify them.

A)Underwriters
B)Assessors
C)Reinsurers
D)Demographers
E)Actuaries

Question 27

Insurers pool similar risk exposures together to compute their own risk of missing the prediction.Identify this process of evaluating a risk and classifying it with similar risks.

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

Question 28

Insurable losses must be fortuitous; that is, they must:

A)have high severity of loss.
B)be reasonably predictable.
C)not occur twice to the same person.
D)be a matter of chance.
E)have low frequency of loss.

Question 29

The insurer cannot replace sentimental value or bear the psychological cost of a loss.The death of a loved one can cause almost unbearable mental suffering that is in no way relieved by receiving a sum of money from the insurer.Because these noneconomic risks create uncertainty, it is apparent that:

A)insurance is not required.
B)insurers should pay for the claims in financial and nonfinancial terms.
C)insurance cannot completely eliminate uncertainty.
D)insureds need not take an insurance policy.
E)large insurers do not have an edge over small insurers.

Question 30

The pooling of risk leads to an overall reduction of risk in society because:

A)insurers' accuracy of prediction improves as the severity of exposures increase.
B)insureds' anxiety of risk decreases as the number of exposures increases.
C)insureds' risk appetite reduces as the severity of exposures increases.
D)insurers' accuracy of prediction improves as the number of exposures increases.
E)insureds' attitude towards risk changes as the number of insurers increases.

Question 31

The phenomenon of selecting an insurer that charges lower rates for a specific risk exposure is known as:

A)moral hazard.
B)pareto efficiency.
C)adverse selection.
D)morale hazard.
E)self serving bias.

Question 32

The bulk of the premium required by the insurer to assume risk is used to compensate those who incur covered losses.Loss sharing is accomplished through premiums collected by the insurer from all insureds-from those who may not suffer any loss to those who have large losses.In this regard, the losses are shared by all the risk exposures.This is the essence of:

A)risk acceptance.
B)risk pooling.
C)risk severity.
D)risk mapping.
E)risk transfer.

Question 33

A risk transference group is a special form of self-insurance.

Question 34

In order for the law of large numbers to work, the pooled exposures must have approximately the same probability of loss.Insurers must therefore:

A)classify exposures according to expected loss.
B)restrain from insuring individuals with significant differences in the probability of loss.
C)encourage underwriters to concentrate on loss frequency rather than severity.
D)encourage actuaries to concentrate on frequency of losses.
E)concentrate on tapping heterogeneous exposures.

Question 35

All risks are not insurable.Identify the feature that does not meet the requirement of a risk that is perfectly suited for insurance.

A)The losses that occur are accidental.
B)The number of similar exposure units is small.
C)The probability distribution of losses can be determined.
D)A catastrophe cannot occur.
E)Losses are definite.

Question 36

The risk of an insurer with more exposures is relatively lower than that of an insurer with fewer exposures under the same expected distribution of losses.How do small insurers reduce the uncertainty in predicting losses?

A)They use the sharing of data that exists in the insurance industry.
B)They try to reduce the severity of exposures.
C)They use the risk avoidance method to reduce losses.
D)They use the risk retention method to reduce losses.
E)They cannot reduce the uncertainty in predicting losses.

Question 37

The combination of two elements of insurance physically reduces the risk, both in number and in the anxiety it causes.Identify these elements.

A)Risk pooling and risk mapping
B)Risk mapping and risk transfer
C)Risk acceptance and risk mapping
D)Risk pooling and risk transfer
E)Risk severity and risk transfer

Question 38

Identify the element of insurance that uses the law of large numbers to reduce the possibility of missing future loss predictions.

A)Risk mapping
B)Risk transfer
C)Risk severity
D)Risk acceptance
E)Risk pooling

Question 39

All of the following are requirements of risk that are perfectly suited for insurance.Identify the requirement that influences the consumer demand for insurance.

A)The cost of coverage is economically feasible.
B)The probability distribution of losses can be determined.
C)A catastrophe cannot occur.
D)The losses that occur are accidental.
E)Losses are definite.

Question 40

The law of large numbers holds that:

A)risk increases as the number of exposures increases.
B)risk is independent of the number of exposures.
C)risk decreases as the number of exposures increases.
D)the severity of risk increases as the number of exposures increases.
E)the frequency of risk increases as the number of exposures decreases.

Question 41

Differentiate between stock insurers and mutual insurers.What is demutualization?

Question 42

Discuss the importance of the law of large numbers.

Question 43

Which of the following explains why insurance companies have separate divisions within its underwriting department for personal lines, group lines, and commercial business?

A)The method of forecasting and calculating frequency of losses is different in each type of insurance.
B)The legal procedures are different in each type of insurance.
C)The criterion to assign insureds into their appropriate risk pool for rating purposes is different for each type of insurance.
D)The level of expertise in group and commercial lines are much higher than those of personal lines, which include individuals.
E)The level of reserves needed for each type of insurance is different and should be kept separately for effective handling of funds.

Question 44

The _____ holds that, as a sample of observations increases in size, the relative variation about the mean declines.

Question 45

In states where an insurer is not licensed, it is considered a nonadmitted insurer.States primarily allow such nonadmitted insurers to sell only coverage that is unavailable from their licensed insurers.This generally unavailable coverage is known as:

A)third-party lines insurance.
B)excess and surplus lines insurance.
C)a last resort lines insurance.
D)virtual lines insurance.
E)limited lines insurance.

Question 46

All states also have guaranty funds that provide partial or complete coverage in cases of insurance company failure from all insurers in the market.This ensures that the results of insolvencies are not borne solely by certain policyowners.Financing is provided on a postloss assessment basis (except for in New York) by:

A)contributions from the federal government.
B)contributions from the state government.
C)involuntary contribution of the reinsurer insuring the insurer.
D)voluntary contributions of the charity organizations located in the state.
E)involuntary contributions from all insurance companies licensed in the state.

Question 47

Identify the analysis that insurance companies use to determine whether they should bring a new product to the market.

A)Cost-benefit analysis
B)Regression analysis
C)Cost-utility analysis
D)Cost-minimization analysis
E)Cost-effectiveness analysis

Question 48

Identify the term used to describe insurers of the insurance companies.

A)Redliners
B)Underwriters
C)Reinsurers
D)Actuaries
E)Assessors

Question 49

Which of the following statements is true about group insurance?

A)It is insurance that is purchased by individuals and families for their risk needs.
B)It includes insurance like auto, homeowner, and long-term care.
C)It is property/casualty insurance for businesses and other organizations.
D)It covers property exposures such as direct and indirect losses of property caused by perils like fire, windstorm, and theft.
E)It is insurance provided by the employer for the benefit of employees.

Question 50

Which of the following statements is true about stock insurers?

A)They are owned and controlled by their policyowners.
B)They have no stockholders and issue no capital stock.
C)People become owners by purchasing an insurance policy from the mutual insurer.
D)They are organized in the same way as other privately owned corporations.
E)Profits are shared with owners as policyowners' dividends.

Question 51

Which of the following is a company that provides insurance coverage to its parent company and other affiliated organizations?

A)Stock insurance company
B)Reinsurance company
C)Mutual insurance company
D)Demutual insurance company
E)Captive insurance company

Question 52

When top managers of a mutual company decide they need to raise capital and become stock companies, they may go through a process called:

A)demutualization.
B)reverse stocking.
C)reinsurance.
D)rationalization.
E)amortization.

Question 53

Identify the correct statement about captive insurance company.

A)Forming a captive insurer is an inexpensive undertaking.
B)All captives sell coverage to nonaffiliated organizations.
C)It is self-controlled and independent of its policyholder-parent.
D)They are forms of self-insurance.
E)Its formation does not require capital contribution.

Question 54

Differentiate between personal insurance, group insurance, and commercial insurance.

Question 55

Identify the correct statement about life and health insurance.

A)Private life insurance companies provide insurance, and individuals have to buy their products on an involuntary basis.
B)Property/casualty insurers do not sell health insurance.
C)Life and health insurance is available only on an individual basis.
D)The Social Security program provides substantial amounts of life/health insurance, and individuals voluntarily decide whether or not to buy their products.
E)It covers exposures to the perils of disability and old age.

Question 56

Why is discrimination or classification of exposures necessary for the law of large numbers to work?

Question 57

The third party that accepts the risks transferred by insureds is known as the _____.

Question 58

Which of the following statements is true about joint underwriting associations (JUAs)?

A)They provide medical malpractice insurance coverage to those who cannot obtain insurance in the regular markets.
B)They are created by federal legislation.
C)They provide licenses to insurers who have been denied licenses by the state.
D)They provide coverage to individuals whose insurers are no longer active.
E)They are formed by the owners of the biggest firms in the industry as per federal legislation.

Question 59

Which of the following is a correct statement about insurance?

A)Private sector provides about one-third more personal insurance than the government.
B)A private insurer can be classified as either a life/health or a property/casualty insurer.
C)Our society has elected to provide certain levels of death, health, retirement, and unemployment insurance on an involuntary basis through private agencies.
D)If we desire to supplement the benefit levels of social insurance or to buy property/casualty insurance, government insurers provide the protection.
E)Most private insurance is purchased involuntarily.

Question 60

In this insurers' corporate structure, company officers are appointed by a board of directors that is elected by policyowners.The stated purpose of the organization is to provide low-cost insurance rather than to make a profit for stockholders.Identify the corporate structure in discussion.

A)Smart insurers
B)Part insurers
C)Mutual insurers
D)Stock insurers
E)Demutual insurers

Question 61

When the actuary must rely on judgment rather than facts, the estimates are termed _____.

Question 62

In return for accepting the variability in outcomes (risk) of insureds, the insurer receives a(n) _____.

Question 63

_____ occurs when insurance is purchased more often by people and/or organizations with higher-than-average expected losses than by people and/or organizations with average or lower-than-average expected losses.

Question 64

_____ insurance is insurance that is purchased by individuals and families for their risk needs.Such insurance includes life, health, disability, auto, homeowner, and long-term care.

Question 65

_____ risk programs are financial methods that can be construed as financing risk assumptions.

Question 66

_____ insurers are organized in the same way as other privately owned corporations created for the purpose of making a profit and maximizing the value of the organization for the benefit of the owners.

Question 67

A(n) _____ loss to an insurer is one that could imperil the insurer's solvency.

Question 68

In the U.S., flood is insured by the federal government through the _____.

Question 69

A major requirement for insurability is _____; that is, there must be large numbers of exposure units involved.

Question 70

_____ underwriting looks at the characteristics and demographics, including prior experience, of the employee group.

Question 71

Lloyd's does not assume risks in the manner of other insurers.Instead, individual members of Lloyd's, called _____, accept insurance risks by providing capital to an underwriting syndicate.

Question 72

A(n) _____ has the job of determining which risk category is appropriate for each insured.

Question 73

_____ reserves are funds for future claims.

Question 74

For mutual insurers, profits are shared with owners as _____.

Question 75

A(n) _____ insurance policy requires the insurer not only to pay money on behalf of the insured to a third party but also to provide legal and investigative services needed when the event insured against occurs.