Chapter 6

Question 1

what protects everything else (including injury) besides human life

Answer 1

property and casualty insurance

Question 2

what protects only human life

Answer 2

Life insurance

Question 3

what is frequency?

Answer 3

how often it happens (happens often but smaller claims)

Question 4

what is severity?

Answer 4

how bad the damages are (doesnt happen often but huge claims)

Question 5

what is the primary function of an insurance company

Answer 5

to protect policyholders from unexpected harmful events

Question 6

what are premiums (expense or revenue?)

Answer 6

payments from policyholders which is a revenue for the insurance comp

Question 7

what are benefits (expense or revenue?)

Answer 7

compensation given to policyholder which is an expense

Question 8

what is a mutual corporation

Answer 8

the company was owned by their policyholders (would get dividend)

Question 9

what is demutualization

Answer 9

switched to public, insurance company owned by policyholders switched to a stockholder controlled insurance firm

Question 10

what is the difference in terms of financing abilities between national bank and desjardins? (how do they raise capital)

Answer 10

national bank (public): issue more stocks, issue bonds
desjardins (mutual): have to ask members to deposit checks, not publicly traded cannot raise money by issuing stocks (equity)

Question 11

why demutualize?

Answer 11

-policyholder benefits: paid a benefit to the mutual companies policyholder
-regulatory: more transparency, government auditing

Question 12

What are issues in insurance?

Answer 12

-Moral hazard
-Adverse Selection
-Actuarially priced insurance premiums

Question 13

what is moral hazard

Answer 13

since you know you are covered, you engage in more risk activities

Question 14

what is adverse selection

Answer 14

the ones who are most expensive will take the most insurance; ex: someone with terminal cancer will take life insurance opposed to someone who does not

Question 15

what is actuarially priced insurance premiums

Answer 15

premiums based on risk of insured (men under 30 trying to get insurance)

Question 16

What is the difference between term life and whole life insurance

Answer 16

term life: covered until term is done
whole life: you contribute all the time but grows with interest and ends when you die

Question 17

what is an annuity

Answer 17

policyholder gives money to the company and asks the company to pay them income with interest

Question 18

How can you tell the difference between life insurance and property casualty balance sheet

Answer 18

Through the duration (decades), life insurance premiums (assets) sit longest on balance sheet

Question 19

what are actuarial liabilities on balance sheet

Answer 19

% of premiums we have to keep aside to pay out benefits, how much benefit we have to pay out

Question 20

what is surrender value

Answer 20

insurance company will buy back the policy from you, this is for whole life policy ONLY.
ex: all the money accumulating, they will pay it out

Question 21

if you had 3 balance sheets and all had their durations how would you place them (longest to shortest)

Answer 21

1) life insurance
2) universal banks
3) property and casaulty

Question 22

what is property and casaulty

Answer 22

property: cover loss of personal property and injury
casualty: your liability, damages caused to third parties

Question 23

what are unearned premiums with property casualty

Answer 23

deferrals, they have to give protection even if not paid for the whole year. (ex: paid 2 months of your 12 month contract)

Question 24

what is the difference between primary insurers and reinsurance

Answer 24

primary insurers: originators of insurance policies
reinsurance: transfers part of the claim to another insurer, which is initiated by the primary insurer (they do this when the risk is really big)

Question 25

what is the loss ratio

Answer 25

not necessarily a loss, its how much youve collected in benefits to how much youve paid out in benefits

Question 26

what is the expense ratio

Answer 26

related to operations and cost of running the business

Question 27

what happens if combined ratio is greater than 100

Answer 27

premiums are insufficient to cover losses and expenses

Question 28

what is pure loss

Answer 28

premiums minus benefits (EXPRESSED IN $)

Question 29

what is the combined ratio

Answer 29

= (loss ratio+loss adjustment expense ratio)/ premiums earner

Question 30

what is the investment yield

Answer 30

amount of money they have made from your premiums on investments

Question 31

How can an insurance company make a loss

Answer 31

1) increase in the loss rates (more claims)
2) increase in expenses (new company decides to increase broker commission)
3) decrease in investment returns

Question 32

when it comes to probability is property or liability more predictable

Answer 32

property is more predictable than liability

Question 33

what is the difference between severity vs frequency

Answer 33

frequency: how often a benefit is paid
severity: size of loss

Question 34

what is the difference between fat tails and middle of curve

Answer 34

fat tails = severity (happens less often)
middle of curve = frequency

Question 35

what is a long tail loss

Answer 35

claim that is made after the policy came into effect

Question 36

when it comes to severity loss vs frequency loss which is more predictable

Answer 36

low severity, high frequency ( car theft ) is ore predictable than high severity, low frequency (earthquake)