Chapter 2

Question 1

Business are structured in one of 3 basic ways. What are the 3 types of business organizations?

Answer 1

1. sole proprietorship
2. partnership
3. coorporation

Question 2

Define A sole proprietorship?

Answer 2

when its owned and operated by one person. The owner receives all profits and is personally responsible for all the debt of the business.

Question 3

Define a partnership

Answer 3

when the business is owned by two or more people, who are known as partners. They divide profits, and generally each of them is personally responsible for all the debt of the business.

Question 4

Define a corporation?

Answer 4

a legal entity that is created by authority of a governmental unit and is separated and distinct from the people who own it.
the assets and liabilities belong to the corporation its self- not to the owners

Question 5

What two characteristics separate a corporation from the other 2 types of businesses?

Answer 5

1. Its a legal entitiy that is separate from its owners.

2. it continues beyond the death of any or all its owner.s.

Question 6

what is an asset and a liability?

Answer 6

1. asset- item of value that a company owns

2. liability- companies debt or future obligations.

Question 7

Typically, insurers are organized into what 3 business categories?

Answer 7

1. stock insurance companies
2. mutual insurance companies
3. fraternal benefit societies.

Question 8

what is a stock corporation?

Answer 8

a corporation who’s ownership is divided into units known as shares or shares of stock.
> ie. stock insurance companies

Question 9

do stockholders own and operatre the corporation they own stock in?

Answer 9

No. The stockholders elect a group of individuals known as board of directors who are responsible for overseeing the company’s management.

Question 10

what is stockholder dividend?

Answer 10

this is received by the stock holders, If the business is profitable. Its a portion of the corporations earnings paid to the owner of its stock.
> may be paid on annual or quartly basis.

Question 11

What is a mutual insurance company?

Answer 11

it owned by its policyowners, who elect the company’s board of directors.
it does not have pay stockholder dividens, instead a portion of the companies operating profits may be distributed to its policyowners in the form of policy dividends.

Question 12

which has been around longer stock or mutual companies?

Answer 12

1. mutual, [they account for less of the companies out there] but since they are older and larger (historically) they provide a significant amount of hte life insurance in force.

Question 13

what is a fraternal benefit societies

Answer 13

nonprofit organization that is operated solely for the benfit of its members and provides social, as well as insurance, benefits to its members.
> this is usually where the members of the society belong to local chapters or branches- they hold regular meetings and applicants for the insurances become lodge members.

Question 14

What is a financial institution?

Answer 14

A business that owns primarily financial assets [stocks/bonds] rather than fixed assets [equipment/ raw material]
the financial products that they provide help eople manage income, debt, accumulate resources from unexpected occurances such as death, and natural diseasters.

Question 15

Besides insurance companies, what other 4 types of companies are included in the financial institutions? [business wise]

Answer 15

> depository institutions [helpd deposits from and makes loans]
Finance companies [short and medium term loans]
security firms [purchase and sale of securities (represents ownership interrest in a business)]
Mutual fund companies [an investment vehicle that pools the funds of investors and uses the funds to buy variety of stock, bonds, and securities]

Question 16

Financial institutions, serve as a financial intermediaries.
What is a financial intermediary?

Answer 16

organization that collects fund from one group of people, businesses and governments and channels them to another group.
- insurance companies take a substantial portion of money paid for insurance and invest that money in other businesses and industries.

Question 17

Much of the financial services industry’s importance in today’s global economy is the result of 3 major industry trends over the last several decades. What are they?

Answer 17

1. convergence
2. consolidation
3. globalization

Question 18

Define convergence. How is it implicated in the insurance industry?

Answer 18

the movement toward a single financial institution being able to serve a customer’s banking, insurance, and securities needs.
> comapnies have entered into each others traditional businesses, thus company distinctions are blurred amongst financial institutions (based on products they offer

Question 19

What does affiliation allow for in a financial holding company system?

Answer 19

allows companies to sell eachothers products. This increased the ability of insurance companies to offer a wider variety of non-insurance products, such as mutual funds.

Question 20

define consolidation

Answer 20

the combination of financial services institutions within or across sectors. - occurs primarily through mergers and acquisitions.

Question 21

What is a merger?

Answer 21

transaction in which the assets and liabilities of two companies are combined into one. One of the companies survies as legal entity, the other ceases to exist.

Question 22

what is an acquisition?

Answer 22

the transaction in which on corporation purchases controlling interest in another formerly independent company. Both companies survive as separate legal entities.

Question 23

What is the role of government in insurance?

Answer 23

regulate insurance companies to safeguard the public interest and act as regulators. They provide social insurance programs and influence spending and saving through taxation.
» This affects the supply and demand for insurance in the private sector.

Question 24

Which country has the most extensive insurance regulations in the world?

Answer 24

the US.

Question 25

In which country is the insurance regulation centralized, and under supervision of the national government?

Answer 25

India through the IRDA.

Question 26

What is a federal system of governemnt? [in place in CAN and US]

Answer 26

the federal government and a number of lower-level governments known, as state/ provincial governments share governmental powers, to regulate insurance.

Question 27

In order to operate as an insuere, a company must incorporate a particular jurisdiction. What is this specific jurisdiction called when it is specific to the company?

Answer 27

It becomes the company’s domicile. The company must then obtain a certificate fo authority from each jurisdiction in which it plans to do business.
? this allows the company to conduct and insurance business and sell insurance products in that jurisdiction.

Question 28

who is responsible for making sure that companies operating in the state comply with applicable regulatory requirements?

Answer 28

the state insurance department. They are under the direction of an insurance commissioner, [ AKA superintendent/director of insurance]

Question 29

Most laws are the same through out states [or are very similar] This is becuase they are based on models developed by the _____.

Answer 29

NAIC- the nongovernmental association of the insurance commissioners of all the states. >it promotes uniformity of state insurance by developing model laws and regulations as guidelines.

Question 30

What are the two primary Focuses of the insurance regulations?

Answer 30

1. ensure that insurers remain solvent- able to meet their debts
2. ensure that insurance companies conduct their businesses fairly and ethically.

Question 31

How do you evaluate a companies solvency?

Answer 31

By applying the basic accounting equation,

Assets = liabilities + owners equity .

Question 32

What is owners equity? And what are the 2 components?

Answer 32

the owners financial interrest in the company.

1. capital- amount of money that the company owners invested in the isurer
2. Surplus- remainder of the equity

Question 33

Do mutual insurers have capital? why?

Answer 33

No, it doesn’t own stock. The owners equity for a mutual insurer consist entirely of surplus.

Question 34

Define Annual Statement. What is its purpose.

Answer 34

the accounting report. The states oversee the financial condition of insurance companies by reviewing these.
> a state can file the same form in all states in which it operated.

Question 35

Besides annual statements, how else do governments oversee the financial condition of insurance?

Answer 35

Conduct on-site financial condition examination of each company every 3-5 years. They physically check the insuere’s business records.
> the frequency of these checks could increase if a company is having financial difficulties.

Question 36

What is the purpose of market conduct laws?

Answer 36

they regular how insurance compenies conduct business. they ensure that customers are presented with fair and accurate information BEFORE they buy insurance.

Question 37

All states and many countries have an “unfair trade practice laws”. What is this?

Answer 37

this prohibits insurers from engaging in actions that are considered unfair or deceptive.
>ie. companies cannot misrepresent their financial condition, or use a misleading name to describe their polciies.

Question 38

How dose the country make sure that insurance companies are practicing fair laws?

Answer 38

they preform periodic market conduct examinations.
> companies who are found to be misrepresented, or violate the conduct laws, they can be fined or suspending, or revoked of their insurance certificate or authority.

Question 39

What is the purpose of regulating insrance producers/insurance agents? {advisors]

Answer 39

this ensures that insurance producers are reputable and knowledgable about the insurance products that they cell.

Question 40

What is the social insurance program?

Answer 40

a welfare plan that is establish by government that provides the population with income security.
> in most countries insurance companies cannot provide products that duplicate the coverage of social insurance programs.

Question 41

What is the purpose of taxations implicated by many governments?

Answer 41

its a mechanism for accomplishing social, and economic goals.
> this can influence how a population behaves [heavier taxations on some products, taxation credits ]
- governments sometimes use tax policies to encourage people to invest, insurer, and save.