Deck 6: Insurance Companies

Question 1

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

Answer 1

True

Question 2

In recent years, the total assets of insurance companies in Canada have been decreasing.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Due to a recent increase in demand for new insurance products, the number of life insurance companies as been increasing in Canada.

Question 5

By regulation, the payments on an annuity contract must stop when the annuity holder dies.

Question 6

Annuities are popular retirement savings products because investment returns on contributions are tax-deferred.

Question 7

The cash surrender value of a life insurance policy represents the payment to the insured's beneficiaries at the time of death.

Question 8

Pension fund management is a relatively small portion of the life insurance industry.

Question 9

The payments from an annuity offered by a life insurance company can either begin immediately or may be deferred to start at some future date.

Question 10

Loss exposures faced by insurers in accident and health lines are more similar to those faced by traditional life insurance than by property & casualty insurance.

Question 11

Life insurance companies also manage private pension plans that may include guaranteed investment certificates (GICs).

Question 12

The policy that will pay a specific dollar benefit to beneficiaries and remains in effect as long as premiums are paid is called whole life.

Question 13

Term life insurance includes a savings element as well as the pure insurance element.

Question 14

Employers that sponsor non-contributory group life insurance require the employee to pay the insurance premiums.

Question 15

The policy reserves on the liability side of the balance sheet of a life insurance company are estimated based on actuarial assumptions of expected future liability commitments on currently existing contracts.

Question 16

In group life insurance, lower rates on policies can be offered because of cost economies as a result of mass administration of plans and reduced selling and commission costs.

Question 17

Because of the large amounts of policy reserves that life insurance companies carry as liabilities, they are rarely surprised by unexpected fluctuations in expected future payouts.

Question 18

The policyholder can vary the premium payments on an endowment life policy.

Question 19

A term life policy allows the policyholder to vary the maturity of the policy.

Question 20

The process of life insurance uses risk pooling to transfer income-related uncertainties from a group of individuals to an insured individual.

Question 21

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

Question 22

Assuris is administered by CDIC.

Question 23

The largest property & casualty (P&C) insurance companies have become less influential over the past decade.

Question 24

The primary function of insurance companies is to

A)generate fees for the banks that sell insurance products.
B)sell a variety of consumer investment products.
C)protect policyholders from adverse events.
D)assist in the transfer of wealth into the future.
E)provide contracts that encourage policyholders to save current income.

Question 25

In the case of an insurance company failure, policyholders immediately receive a payout of the cash surrender value of their policies.

Question 26

Assuris is a private, non-profit corporation run and administered by private life and health insurance companies in Canada.

Question 27

Assuris is a corporation similar to CDIC for the purpose of compensating the policyholders of failed insurers.

Question 28

The problem of adverse selection

A)implies that many people who do not need insurance coverage have it through group plans.
B)means that those people who apply for insurance are the least likely to need insurance coverage.
C)causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.
D)creates a savings element along with the insurance component of the premium and policy.
E)does not exist in the insurance industry.

Question 29

The expected loss potential is more difficult to determine with low-severity, high-frequency events.

Question 30

Unlike the banking industry, globalization of financial services is having little or no effect on the insurance industry.

Question 31

In general, maximum levels of losses in the property &casualty industry are more predictable for liability lines than for property lines.

Question 32

One reason for the recent decline in the expense ratio for PC insurers is an increased dependence on independent brokers to sell and distribute insurance policies.

Question 33

Insurance companies have resisted the investment in technology that banks and other financial service firms have pursued.

Question 34

During the most recent financial crisis, life insurance companies with large proportions of separate accounts business were well-protected from the decline in the debt and equity markets.

Question 35

Automobile liability insurance provides protection against theft or damage to the vehicle.

Question 36

Property & casualty underwriting risk only exists when the premiums generated on a given insurance line are less than the claims (losses) on the line.

Question 37

Unexpected increases in inflation cause loss rates to increase more for long-tail risk than for short-tail risks.

Question 38

Property insurance involves coverage against the loss of personal property as well as protection against legal liability claims.

Question 39

Loss adjustment expenses refer to the costs surrounding the loss settlement process.

Question 40

As currently structured, Assuris continues to collect premium payments and honour life policies and annuity obligations of a failed life and health insurance company.

Question 41

Underwriting risk faced by property & casualty insurance companies may result from unexpected

A)increases in loss rates.
B)decreases in loss adjustment expenses.
C)increases in investment yields.
D)cancellations of policies by customers.
E)increases in policy premiums.

Question 42

Which of the following is pure life insurance with a savings element built in

A)term life.
B)universal life.
C)endowment life.
D)variable universal life.
E)variable life.

Question 43

Annuities offered by life insurance companies are a financial contract that

A)is used to build up a fund.
B)pays only fixed returns to groups of employees.
C)is used to liquidate a fund.
D)pays only variable returns to individuals.
E)None of these.

Question 44

The two policy categories offered by property & casualty insurers that are most likely to be subject to rate regulation in Canada are

A)auto insurance and worker's compensation.
B)homeowner multiple peril and commercial multiple peril.
C)earthquake and flood.
D)surety bonds and financial guaranty.
E)product liability and farm owner multiple peril.

Question 45

Variable universal life insurance policies

A)have fixed premiums and a fixed benefit payout.
B)have fixed premiums, but allow the benefit payout to vary with investment returns.
C)have a fixed benefit payout, but allow the premium to vary with investment returns.
D)allow both the premium and benefit payout to vary with investment returns.
E)allow both the premium and benefit payout to vary with investment returns, but have a fixed maturity date.

Question 46

The primary regulator of both the life and property & casualty insurance industry is/are the

A)OSFI.
B)CDIC.
C)The Bank of Canada.
D)The Minister of Finance.
E)Provincial/territorial regulators.

Question 47

Which of the following involves fixed premium payments and a benefit payout at the time of death that will depend on investment returns over the life of the policy?

A)Term life.
B)Variable life.
C)Whole life.
D)Endowment life.
E)Universal life.

Question 48

PACICC

A)is sponsored by provincial/territorial insurance regulators.
B)is an industry-sponsored fund.
C)requires contributions from each province and territory when there is a failure of an insurance company in Canada.
D)makes policyholder payments immediately in the event of an insurance company failure.
E)is regulated by OSFI.

Question 49

The insurance company that was the largest beneficiary of U.S. federal bailout funds during the most recent financial crisis was

A)Manulife Financial.
B)UBS.
C)State Farm.
D)AIG.
E)New York Life.

Question 50

The surrender value of an insurance policy is

A)the expected payment commitment on existing policy contracts.
B)a fund established and held separately from the company's other assets.
C)the cash value paid to the policyholder if the policy is terminated before it matures.
D)the same as the endowment payout.
E)the price at which the company may repurchase the policy.

Question 51

An insurance policy that often is the least expensive to the insured because of the policy does not include a savings plan is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 52

If losses on a particular line of medical malpractice insurance were $650 million and premiums earned were $575 million, the loss ratio would be

A)1.13 implying that this line of insurance is profitable.
B)1.13 implying that this line of insurance is unprofitable.
C)0.88 implying that this line of insurance is profitable.
D)0.88 implying that this line of insurance is unprofitable.
E)-$75 million implying that this line of insurance is unprofitable.

Question 53

An insurance policy that protects an individual over an entire lifetime as long as the premiums are paid is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 54

Separate accounts business of a life insurance company represents

A)policies written that cover individuals as a group.
B)liabilities owed to other life insurance companies as a result of reinsurance.
C)the cumulative cash value paid to policyholders if the policies are terminated before maturity.
D)a fund established separately from the other funds of the insurance company and invested without regard to the usual diversification restrictions.
E)the cumulative price that the company may repurchase policies from existing customers.

Question 55

An insurance policy in which fixed premium payments are invested in mutual funds of stocks, bonds, and money market instruments is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 56

An insurance policy that allows both the premium amount and the maturity of the life contract to be changed by the insured is called

A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.

Question 57

Which of the following insurance products protects a lender against a borrower's death prior to repayment of the debt?

A)Credit life.
B)Universal life.
C)Whole life.
D)Endowment life.
E)Variable life.

Question 58

Property & casualty insurance involves

A)insurance coverage related to the loss of real and personal property.
B)insurance protection against legal liability exposure.
C)insurance protection against injuries in employment related work.
D)insurance coverage related to the loss of real and personal property, and insurance protection against legal liability exposure.
E)insurance coverage related to the loss of real and personal property, and insurance protection against injuries in employment related work.

Question 59

Insurance policy benefits are classified on an insurance company's balance sheet as

A)liabilities, because the insurance company may have to pay out the benefits.
B)assets, because policy benefits are valuable to the company.
C)liabilities, because customers may fall behind on their premium payments.
D)assets, because policy benefits are fully covered by premium payments.
E)liabilities, because insurance companies must maintain a capital base to cover the payments of benefits.

Question 60

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

A)0.88 implying that this line of insurance is profitable.
B)0.88 implying that this line of insurance is unprofitable.
C)1.13 implying that this line of insurance is profitable.
D)1.13 implying that this line of insurance is unprofitable.
E)0.22 implying that this line of insurance is profitable.

Question 61

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?

A)Short-tail losses.
B)Adverse selection.
C)Moral hazard.
D)Long-tail losses.
E)Social inflation.

Question 62

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

A)commissions and other expenses are 15 percent and investment yields are 10 percent.
B)commissions and other expenses are 5 percent and investment yields are 6 percent.
C)commissions and other expenses are 16 percent and investment yields are 20 percent
D)commissions and other expenses are 15 percent and investment yields are 12 percent.
E)commissions and other expenses are 6 percent and investment yields are 4 percent.

Question 63

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

A)Policy reserves.
B)Conditional reserve funds.
C)Reinsurance.
D)Unearned premiums.
E)Surplus notes.

Question 64

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

A)long tails and low inflation.
B)long tails and high inflation.
C)short tails and low inflation.
D)short tails and high inflation.
E)short tails and no inflation.

Question 65

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

A)Publicly held companies have access to equity markets for additional capital for future business expansion.
B)Mutual organizations are subject to higher regulatory standards than public companies.
C)Ability to offer more insurance products than those allowed under mutual ownership.
D)Publicly held insurance companies can convert to federal charters but mutual organizations cannot.
E)Mutual organizations can only underwrite policies in the province or territory in which they are chartered while publicly held organizations can operate across Canada.

Question 66

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.

A)$137,990.27.
B)$275,980.53.
C)$298,058.98.
D)$149,029.49.
E)$220,000.00.

Question 67

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

A)low-severity high-frequency events.
B)low-severity low-frequency events.
C)high-severity high-frequency events.
D)high severity low-frequency events.
E)low severity medium-frequency events.

Question 68

What does the loss ratio measure in any particular year?

A)Payouts on policies to premiums earned.
B)Amount of premiums earned relative to the payout on policies.
C)Overall underwriting profitability of a line.
D)Loss adjustment expenses to premiums earned.
E)Commission and other acquisition costs to premiums written.

Question 69

Higher uncertainty of losses forces property & casualty firms to

A)invest in more short-term assets than life insurance firms.
B)invest in more long-term assets than life insurance firms.
C)hold a lower percentage of capital and reserves than life insurance firms.
D)invest in riskier equity securities than life insurance firms.
E)conduct more separate accounts business than life insurance firms.

Question 70

The operating ratio for a P&C insurer equals

A)loss ratio plus the ratios of loss adjustment expenses to premiums earned.
B)loss ratio plus expense ratio plus dividend ratio.
C)combined ratio minus dividends paid to policyholders.
D)acquisition costs plus dividends paid as a proportion of premiums earned.
E)combined ratio after dividends minus the investment yield.

Question 71

Factors that affect the predictability of claims loss exposure include

A)unexpected increases in inflation.
B)the frequency and severity of loss.
C)the concept of long-tail risk.
D)property versus liability coverage.
E)All of these.

Question 72

Calculate the annual cash flows of a $2 million, 10-year fixed-payment deferred annuity earning a guaranteed 8 percent per year if annual payments are to begin at the end of the sixth (6^th) year.

A)$218, 973.21.
B)$202, 752.97.
C)$343, 321.86.
D)$405, 505.95.
E)$437, 946.42.

Question 73

You start an annuity with $1 million 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

A)$88,333.33.
B)$119,277.03.
C)$59,638.51.
D)$56,262.75.
E)$112,525.50.

Question 74

Calculate the annual cash flows of a $500,000, 12-year fixed-payment deferred annuity earning a guaranteed 5 percent per year if annual payments are to begin at the end of year 4.

A)$32,652.38.
B)$79,018.76.
C)$62,195.01.
D)$65,304.76.
E)$31,097.50.

Question 75

Calculate the annual cash flows of a $500,000, 12-year fixed-payment annuity earning a guaranteed 6 percent per year if annual payments are to begin at the end of the current year.

A)$59,638.51.
B)$56,262.75.
C)$29,819.26.
D)$83,841.52.
E)$28,131.37.

Question 76

Which of the following is NOT a possible result when a property & casualty company purchases reinsurance?

A)improved capital position.
B)limits on losses on reinsured policies.
C)stabilized cash flows.
D)dilution of earnings per share.
E)All of these are possible results of purchasing reinsurance.

Question 77

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

A)Pressure from policyholders.
B)Additional premiums.
C)Access to equity markets.
D)Tax concerns.
E)Regulatory requirement.

Question 78

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.

A)Unearned premiums.
B)Prepaid premiums.
C)Premium reserves.
D)Policy reserves.
E)Outstanding premiums.

Question 79

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

A)if dividends paid to policyholders is $4 million and income generated on investments is $4 million.
B)if dividends paid to policyholders is $10 million and income generated on investments is $14 million.
C)if dividends paid to policyholders is $6 million and income generated on investments is $2 million.
D)if dividends paid to policyholders is $10 million and income generated on investments is $4 million.
E)if dividends paid to policyholders is $4 million and income generated on investments is $2 million.

Question 80

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

A)Expected premium payments.
B)Existing policies.
C)Unearned premiums.
D)Guarantee funds.
E)Government of Canada bonds.