Chapter 1

Question 1

Define: Cash Flow

Answer 1

any movement of cash into or out of an organization

Question 2

Define: Cash Inflow (source of funds)

Answer 2

movement of cash into an organization.

Question 3

From an insurance perspective, operating cash inflow comes from what two primary sources?

Answer 3

1) premiums and annuities

2) earnings from the insurere’s investment

Question 4

Define: cash outflow (use of funds)

Answer 4

movement of cash out from an organization.

ie: benefit payout

Question 5

Define: Profit

Answer 5

excess of money flowing in- known as revenue- over money flowing out known as expense.

Question 6

Define: Revenue

Answer 6

an amount that a company earns from its business operations.
for insurance: premium income, annuity considerations, earning on investments and fee income

Question 7

Define: Expense

Answer 7

an amount that a company spends in the course of conducting business

for insurance: payment to customers, sales commissions, training, salary and benefit costs.

Question 8

compare net income (profit) vs net loss (loss)

Answer 8

if revenues are greater than expenses its profit.

if revenue is less than expenses its a loss.

Question 9

What are two important financial statements seen in a company?

Answer 9

1) income statement

2) balance sheet

Question 10

Define: Income statement

Answer 10

a financial document that lists a company’s revenues and expenses over a specific period, such as a year, and shows the resulting profit or less realized for that period.

Question 11

Define: Balance sheet

Answer 11

a financial document that lists the values of a company’s assets, liabilities, and capital and surplus as of a specific date.
it uses a basic accounting equation.

Question 12

basic accounting equation states what?

Answer 12

a company’s assets equal the sum of the company’s liabilities and capital and surplus

Question 13

define: assets

Answer 13

all the things of value owned by a company. includes: investments, cash, buildings, furniture and land.

Question 14

Define: Liabilities

Answer 14

company’s debts and future obligations.

Question 15

Define Capital and surplus

Answer 15

the amount remaining after liabilities are subtracted from assets. Also known as owner’s equity.

Question 16

For insurers, the majority liability item on the balance sheet is what?

Answer 16

contractual reserves.: which is a liability account that identifies the amount that, together with future premiums and investment income, an insuere estimates it will need in order to pay policy benefits as they come due.

Question 17

How is the income statement linked to the balance sheet?

Answer 17

through Capital and surplus,

^ in a company’s value is one indication of profitability.

Question 18

Define: profitability

Answer 18

reflects a company’s overall degree of success in generating returns for its owners.
it refers to both a company’s ability to generate profit and its ability to increase the wealth or value or the business.

Question 19

what is stock?

Answer 19

type of financial security representing a share of ownership in a comapny.

Question 20

compare profit with profitability.

Answer 20

profit measures a company’s short-term financial success, whereas profitability measures a company’s long-term financial success.

Question 21

what are 3 important accounting standards for insurance companies in the states?

Answer 21

1) GAAP - stock companies follow. Mitial and freaternal insurers comply. profitability-basis accounting.
2) Statutory accounting practices: life insureres must follow. solvency basis accounting
3) internal (modified GAAP) accounting. financial reporting to management. internal.

Question 22

Define Risk

Answer 22

as the possibility of an unexpected outcome.

Note: GReater the risk, the greater the potential return on the investment,

Question 23

Define investment

Answer 23

any use of a company;s resources that is intended to generate a profit or positive return of some time.

Question 24

Define Return

Answer 24

any rewards, profit or compensation an investor hopes to earn for taking a risk.

Question 25

What is the term given to the interplay between risk and return?

Answer 25

risk-return trade-off.

Question 26

What is a required rate of return?

Answer 26

expressed as the sum of the risk-free rate of return and the risk premium.

RROF = risk-free rate of return + Risk premium

Question 27

What is the risk-free rate of return?

Answer 27

return on a risk-free investment.

* this return is the market yield on a short-term highly rated issue of the goverment ieL treasury bill.

Question 28

What is risk premium?

Answer 28

the compensation that investors demand for taking on the risk associated with a specific investment.

Question 29

Define Solvency:

Answer 29

a business organization’s ability to meet its financial obligations on time.

for insurance: refers to having assets at least equal to the sum of its required policy reserves plus min std of capital.

Question 30

Define Insolvency

Answer 30

condition of being unable to meet its financial obligations on time.

Question 31

What is required capital?

Answer 31

the amount of capital an insurere must hold to back the liabilities for in-force covered business.

Question 32

For insurance company capital requirements, which two types of required capital are relevant?

Answer 32

1) Regulatory capital: legal min std capital that must be maintained to be considered solvent by regulatory auth,
2) rating agency capital: min std of capital an insurere must maintain in order to receive favourable quality rating from a specific rating agency.

Question 33

what is a quality rating?

Answer 33

alphabetical grade or rating assigned to an insurance company by a rating agency to indicate the level of insurance company;s financial strength, its ability to pay its obligations to customers, or meet obligations to creditors.

Question 34

What is a rating agency?

Answer 34

independently owned, private organization that evaluates the financial condition of insueres and provides information to potential customers of an investors in insurance companies.

Question 35

What is Economic capital?

Answer 35

estimate of the amount of capital that a financial institution calculates to internally manage its own risks.

Question 36

What do you call any capital held in excess of the minimum capital requirement?

Answer 36

uncommitted capital.

Question 37

Who are typical stakeholders in an insurance company?

Answer 37

policy holders, bondholders, regulators, ating agencies, shareholders, home office employees and insurance producers.

Question 38

Solvency regulation, AKA financial regulation, includes what 3 general areas?

Answer 38

1) balance sheet risk exposure
2) financial statement review
3) regulatory examinations

Question 39

What are the two main threats to an insuere’s solvency?

Answer 39

1) inadequate capital

2) indequate liquidity

Question 40

Define liquidity

Answer 40

having enough cash- ora assets that can be easily converted into casah- available as needed to meet obligations as they come due.

Question 41

Contingency risks are generally separated into what 4 categories?

Answer 41

1) asset risk (C-1 risk) - risk that insuere will lose money on its investments.
2) Pricing risk (C-2 rick) risk experienced with product expenses or benefits will differ significantly from teh assumptions used in the products financial deisgn.
3) interest-rate risk (c-3 risk) risk that market interest rates might shift causing the insurer’s assets to lose value or its liabilities to gain value.
4) General management risk (C-4 risk) risk of losses resulting from an insurer’s ineffective general business practice or from the need to pay a special assessment to cover another insurer’s unsound business practices.