Deck 6: Financial Services: Insurance

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

The rate of growth in the annuities market is increasing primarily because of the recent changes in the capital gains tax rates.

Question 5

As of 2011, ordinary life accounted for approximately 80% of policies in force.

Question 6

By 2012, life insurance companies were managing approximately 40% of all private pension plans.

Question 7

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 8

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 9

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

Question 10

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

Question 11

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

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

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

As currently structured, contributions to a state-sponsored guarantee fund are collected only after the actual failure of an insurance company.

Question 22

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 23

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 24

As of 2012, chartering of life insurance companies can be done only at the state level.

Question 25

State-sponsored insurance guarantee funds are run and administered by private insurance companies operating in the state.

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

A permanent guarantee fund for the insurance industry does not exist.

Question 31

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

Question 32

The largest property-casualty (PC) insurance companies have become less influential over the past decade.

Question 33

Insurance guaranty funds involve a permanent fund similar to the FDIC for the purpose of compensating the policyholders of failed insurers.

Question 34

Insurance guarantee funds are administered by federal insurance regulators.

Question 35

As currently structured, state guarantee funds will continue to collect premium payments and honor life policies and annuity obligations of a failed insurance company.

Question 36

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 37

Although life insurance companies also provide health and accident insurance, they underwrite less than 35% of all health insurance policies.

Question 38

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

Question 39

The growth of HMOs has increased the amount of health insurance premiums collected by life insurance companies.

Question 40

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

Question 41

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 42

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

Question 43

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 44

The largest line of life insurance in terms of total contract value in the U.S. is

A)ordinary life.
B)group life.
C)industrial life.
D)credit life.
E)noncontributory life.

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

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 47

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 48

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

Question 49

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 50

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

Question 51

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 52

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 53

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 54

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 55

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 the above are correct.

Question 56

The Insurance Regulatory Information System (IRIS) is a standardized examination system used to measure the profitability of insurance companies.

Question 57

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

Question 58

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 59

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

Question 60

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

Question 61

The largest liability category on the balance sheet of U.S. life insurance companies as of 2012 was

A)net policy reserves.
B)policy claims.
C)premium and deposit funds.
D)commission, taxes and expenses.
E)capital surplus.

Question 62

As of 2012, assets of property-casualty insurers totaled approximately ________, which was ______ of the assets of the life insurance industry.

A)$900 billion; 20 percent
B)$1,600 billion; 30 percent
C)$4,250 billion; 90 percent
D)$5,750 billion; 105 percent
E)$7,700 billion; 120 percent

Question 63

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 64

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)Answers A and B only.
E)Answers A and C only.

Question 65

The McCarran-Ferguson Act of 1945

A)separated commercial banking from insurance activities.
B)mandated federal insurance company charters.
C)stipulated that insurance companies are to be regulated at the state level.
D)initiated a national insurance guaranty fund.
E)limited insurance company assets to low risk government securities.

Question 66

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 67

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 68

As of 2012, the primary regulator of both the life and property-casualty insurance industry is/are the

A)state insurance commissions.
B)NAIC.
C)Federal Reserve.
D)IRIS.
E)new federal oversight commission yet to be named.

Question 69

Guaranteed investment contracts (GICs) offered by a life insurance company

A)are endowment life policies marketed to group insurance policyholders.
B)are short- and medium-term debt instruments sold to fund their pension plan business.
C)can only be purchased by a group life insurance plan.
D)earn a return based on the consumer price index (CPI).
E)Short- and medium-term investments in venture capital firms.

Question 70

Life insurance guaranty funds

A)are sponsored by state insurance regulators.
B)involve a permanent reserve fund similar to the FDIC's bank deposit reserve.
C)require uniform contributions from each state when there is a failure of an insurance company.
D)make policyholder payments immediately in the event of an insurance company failure.
E)are regulated by the Federal Reserve Bank.

Question 71

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 72

The largest asset category on the balance sheet of U.S. life insurance companies as of 2012 was

A)government securities.
B)corporate bonds.
C)corporate stock.
D)cash.
E)mortgages.

Question 73

Annuities are an important product sold by life insurance companies. Which of the following statements is correct as of 2012?

A)Life insurance contracts continue to dominate premiums written while annuities are of less importance.
B)The value of annuity sales are more than double those of traditional life insurance lines.
C)Retirement accounts and private pension plans are not allowed access to the annuities of life insurance companies.
D)The funds in an annuity can only be invested in guaranteed investment contracts (GICs).
E)All annuities are listed as separate accounts business on the life insurer's balance sheet.

Question 74

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 75

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

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

Question 76

The two policy categories offered by property-casualty insurers that are most likely to be subject to rate regulation 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 77

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

A)Low equity values reduced asset-based fees on separate account assets.
B)Losses were incurred on holdings of commercial mortgage-backed securities and commercial loans.
C)Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns.
D)Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies.
E)Historically low interest rates caused increased demand for whole life policies.

Question 78

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 79

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 80

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.