Deck 3: The Financial Services Industry: Other Financial Institutions

Question 1

Which of the following statements is true?

A)A whole of life insurance has no savings element attached to it.
B)Unlike term insurance, in the case of whole of life insurance there is uncertainty regarding a payout by the insurer.
C)A whole of life insurance protects the holder over their entire life.
D)All of the listed options are correct.

Answer 1

C

Question 2

Which of the following statements is true?

A)Ordinary life insurance involves policies marketed on an individual basis, on which policyholders make periodic premium payments.
B)Ordinary life insurance involves policies marketed on an individual basis, on which policyholders make a lump sum payment at maturity of the policy.
C)Ordinary life insurance involves policies marketed on an individual basis, on which policyholders receive periodic premium payments.
D)Ordinary life insurance involves policies marketed on an individual basis, on which policyholders receive a lump sum payment at maturity of the policy.

Answer 2

A

Question 3

To support risk assessment in insurance firms APRA introduced PAIRS.PAIRS stands for:

A)Policy and Insurance Ratification System.
B)Policy and Insurance Rating System.
C)Probability and Impact Ratification System.
D)Probability and Impact Rating System.

Answer 3

D

Question 4

Which of the following statements is true?

A)Unbundled life insurance is also called investment-free insurance.
B)Bundled life insurance is also called investment-free insurance.
C)Unbundled life insurance is also called investment-linked insurance.
D)Bundled life insurance is also called investment-linked insurance.

Question 5

Which of the following statements is true?

A)The cash surrender value of a policy is normally only a portion of the contract's face value.
B)The cash surrender value of a policy is normally equal to the contract's face value.
C)The cash surrender value of a policy is normally more than the contract's face value.
D)A generalisation of the cash surrender value of a policy in relation to its face value is not possible.

Question 6

Which of the following statements is true?

A)Net asset value refers to the book value of assets in a managed fund portfolio divided by the number of shares outstanding.
B)Net asset value refers to the book value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
C)Net asset value refers to the market value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
D)None of the listed options are correct.

Question 7

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.

Question 8

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.

Question 9

Which of the following are basic life insurance contract types?

A)terminating insurance
B)whole of life
C)bundled life insurance
D)terminating insurance and whole of life

Question 10

Which of the following statements is true?

A)Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death.
B)Life insurance allows individuals and their beneficiaries to protect against loss in income through premature retirement.
C)Life insurance allows individuals and their beneficiaries to protect against loss in income through unforeseen accidents.
D)Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death and life insurance allows individuals and their beneficiaries to protect against loss in income through premature retirement.

Question 11

Which of the following are key features of the regulatory and supervisory environment of the insurance industry?

A)Life insurance companies are now freed of capital adequacy regulations.
B)Life insurance companies have additional reporting requirements.
C)Overall, life insurance companies are less regulated than before to enhance innovation in the industry.
D)All of the listed options are correct.

Question 12

Insurance risk refers to the risk that:

A)a lot of policyholders make claims.
B)the insurance market is saturated and thus the insurance companies cannot write additional policies.
C)individuals and companies are over-insured leading to high liability values in insurance companies.
D)actual policy liabilities turn out to be higher than provisions or reserves for policy liabilities.

Question 13

Private placement refers to a securities issue placed:

A)with one or a few large institutional investors.
B)in private, that is, without announcing it to the public.
C)by a private person.
D)with one of the stock exchanges.

Question 14

Which of the following statements is true?

A)The proceeds of life insurance policies are tax free after they have been in force for at least 5 years.
B)The proceeds of life insurance policies are tax free after they have been in force for at least 10 years.
C)The proceeds of life insurance policies are tax free after they have been in force for at least 15 years.
D)The proceeds of life insurance policies are always taxed.

Question 15

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.

Question 16

Which of the following statements is true?

A)Long-tail loss refers to a series of claims made after an initial claim has been made.
B)Long-tail loss refers to a claim that is made some time after a policy was written.
C)Short-tail loss refers to a series of claims made after an initial claim has been made.
D)Short-tail loss refers to a claim that is made some time after a policy was written.

Question 17

Which of the following statements is true?

A)A closed-end investment company is a specialised firm that invests in securities and assets of other firms.
B)A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a fixed supply of shares outstanding itself.
C)A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a variable supply of shares outstanding itself.
D)A closed-end investment company has a variable supply of shares outstanding itself.

Question 18

Which of the following statements is true?

A)The surrender value of a policy is the cash value received from the insurer if a policyholder surrenders the policy prior to maturity.
B)The surrender value of a policy is the cash value received from the insurer if a policyholder surrenders the policy at maturity.
C)The surrender value of a policy is the cash value received from the policyholder if the insurance company surrenders the policy prior to maturity.
D)The surrender value of a policy is the cash value received from the policyholder if the insurance company surrenders the policy at maturity.

Question 19

Which of the following statements is true?

A)Policy reserves are a liability item for insurers that reflects their worst-case payment commitments on existing policy contracts.
B)Policy reserves are an asset item for insurers that reflects their best-case payment inflows on existing policy contracts.
C)Policy reserves are an asset item for insurers that reflects their expected payment inflows on existing policy contracts.
D)Policy reserves are a liability item for insurers that reflects their expected payment commitments on existing policy contracts.

Question 20

Which of the following statements is true?

A)A term insurance policy has no savings element attached to it.
B)The maximum term of a term life insurance is 20 years.
C)The minimum term of a term life insurance is 5 years.
D)A term insurance policy has no savings element attached to it and the maximum term of a term life insurance is 20 years.

Question 21

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.

Question 22

Which of the following statements is true with regard to the regulation of money market corporations?

A)Money market corporations are unregulated.
B)APRA is the primary regulator for money market corporations.
C)ASIC is the primary regulator for money market corporations.
D)The ACCC is the primary regulator for money market corporations.

Question 23

Which of the following statements is true?

A)Australian governments have encouraged national savings through superannuation.
B)The government has provided taxation incentives aimed at increasing voluntary contributions to superannuation by both employers and employees.
C)The government has introduced legislative requirements forcing employers to contribute to superannuation on behalf of their employees.
D)All of the listed options are correct.

Question 24

Which of the following statements is true?

A)Finance companies are financial institutions that raise funds through the issue of debentures and unsecured notes from retail investors.
B)Finance companies are financial institutions that raise funds through the issue of debentures and unsecured notes from wholesale investors.
C)Finance companies are financial institutions that raise funds through the issue of T-bonds and secured notes from retail investors.
D)Finance companies are financial institutions that raise funds through the issue of T-bonds and secured notes from wholesale investors.

Question 25

Which of the following statements is true?

A)PAIRS is the basis of APRA's risk-based approach to supervision.
B)PAIRS is an internal rating system for scoring each entity in the regulated population of insurance and superannuation entities.
C)Due to PAIRS, APRA's supervision can be tailored to the risk profile of an individual entity.
D)All of the listed options are correct.

Question 26

Which of the following statements are true in the context of general insurance?

A)Loss rates on all general property policies are adversely affected by unexpected increases in inflation.
B)Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later.
C)Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later and loss rates are more predictable on low-severity high-frequency lines than on high-severity low-frequency lines.
D)Loss rates on all general property policies are adversely affected by unexpected increases in inflation, long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later and loss rates are more predictable on low-severity high-frequency lines than on high-severity low-frequency lines.

Question 27

Which of the following statements is true in the context of SOARS?

A)Oversight entities are subject to routine information gathering from statistical returns and onsite visits.
B)Mandated improvement entities are not at material risk of failure.
C)Normal entities lie outside APRA's tolerable risk range, but are unlikely to fail.
D)Restructure entities have lost APRA's confidence.

Question 28

Which of the following statements is true?

A)Measuring and managing credit and interest rate risk are key concerns of general insurance managers.
B)If pure losses, underwriting losses and other costs are higher and investment yields lower than expected, general insurers suffer a significant amount of deficit reserves.
C)On average, underwriting cycles measured from peak to peak can last anywhere from 12 to 20 years.
D)Measuring and managing credit and interest rate risk are key concerns of general insurance managers and if pure losses, underwriting losses and other costs are higher and investment yields lower than expected, general insurers suffer a significant amount of deficit reserves.

Question 29

Which of the following are reasons for underwriting risk to result?

A)Generated premiums are insufficient to cover claims incurred insuring a particular peril.
B)Generated premiums are insufficient to cover the administrative expenses of providing that insurance after taking into account the investment income generated between the time premiums are received and the time claims are paid.
C)Generated premiums are insufficient to cover ordinary business expenses.
D)Generated premiums are insufficient to cover claims incurred insuring a particular peril and generated premiums are insufficient to cover the administrative expenses of providing that insurance after taking into account the investment income generated between the time premiums are received and the time claims are paid.

Question 30

Which of the following are typical products offered by general insurance companies?

A)superannuation funds
B)life insurance policies
C)professional indemnity insurance
D)superannuation funds and professional indemnity insurance

Question 31

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.

Question 32

Which of the following statements referring to the loss ratio are true?

A)The loss ratio measures the actual losses incurred on a line of insurance business.
B)A common measure of the overall underwriting profitability of a line of insurance business is the loss ratio.
C)The loss ratio measures the pure losses incurred on a line of insurance business relative to premiums earned.
D)The loss ratio measures the predicted losses incurred on a line of insurance business relative to premiums earned.

Question 33

Which of the following statements is true?

A)Pure arbitrage involves buying blocks of securities in anticipation of some information release.
B)Risk arbitrage involves buying an asset in one market at one price and selling it immediately in another market at a higher price.
C)Pure arbitrage involves buying blocks of securities in anticipation of some information release, risk arbitrage involves buying an asset in one market at one price and selling it immediately in another market at a higher price and program trading is associated with seeking a pure arbitrage between a cash market price and the futures market price of that instrument.
D)None of the listed options are correct.

Question 34

Which of the following statements is true?

A)Money market corporations are primarily concerned with wholesale deposit raising and lending.
B)Money market corporations are primarily concerned with retail deposit raising and lending.
C)Money market corporations are financial intermediaries that cover a large number of activities.
D)Money market corporations are financial intermediaries that cover a large number of activities and are primarily concerned with wholesale deposit raising and lending.

Question 35

Which of the following statements is true in relation to the balance sheet and balance sheet trends of general insurance companies?

A)They tend to have a high proportion of investments in equity assets.
B)They tend to have a low proportion of investments in bonds.
C)There has been little change in the structure of assets between 2002 and 2011, except for a decline in equity investments.
D)All of the listed options are correct.

Question 36

Which of the following is an adequate definition of liability insurance?

A)Liability insurance protects commercial firms against perils similar to home-owners' multiple peril insurance
B)Liability insurance protects against theft or damage of commercial vehicles.
C)Liability insurance protects against liabilities relating to business operations of firms.
D)Liability insurance protects commercial firms against perils similar to home-owners' multiple peril insurance and protects against liabilities relating to business operations of firms.

Question 37

What is a common rationale for a managed fund?

A)the need for more diversity in investment products
B)the opportunity for retail investors to achieve superior diversification
C)the potential for retail investors to achieve superior returns
D)the opportunity for retail investors to achieve superior diversification and the potential for retail investors to achieve superior returns

Question 38

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)Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns.
C)Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies.
D)Policy premium increased as more households and small businesses attempted to transfer risk to insurance companies.

Question 39

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.

Question 40

Which of the following statements is true with regard to the regulation of managed funds?

A)Managed funds are unregulated.
B)APRA is the primary regulator for managed funds.
C)ASIC is the primary regulator for managed funds.
D)The ACCC is the primary regulator for managed funds.

Question 41

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

Question 42

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.

Question 43

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

Question 44

Insurance companies are not subject to regulatory capital adequacy rules.

Question 45

Outline the role that securitisation vehicles play in the Australian financial system and explain how the global financial crisis (GFC) impacted this form of financing.What actions did the Australian government take as a response to such an impact?

Question 46

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

Question 47

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

Question 48

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

Question 49

Discuss the development of the general insurance industry over the period 1980 to 2012 and briefly explain the major risks of underwriting general insurance.

Question 50

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

Question 51

SOARS stands for Supervisory Oversight and Regulations System.

Question 52

Outline and briefly explain the different classes of life insurance as set out in the Life Insurance Act 1995.

Question 53

What were the major incentives provided by the government to increase savings contributions to superannuation funds? Why is the superannuation Industry an important and vibrant part of the Australian financial sector?

Question 54

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

Question 55

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

Question 56

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