Chapter 7 Flashcards
A balance sheet:
Summarizes what a company owns (assets) and what is owes (liabilities)
What is the balance sheet equation?
Total Assets = Total liabilities + Owner’s equity
The primary assets for an insurance company are:
Financial assets
A loss reserve is an estimated amount for:
- Claims reported and adjusted but not yet paid
- Claims reported and filed, but not yet adjusted
- Claims incurred but not yet reported to the company
Case reserves are:
loss reserves that are established for each individual claim
The loss ratio method establishes:
Aggregate loss reserves for a specific coverage line
What formula aids in helping determine the loss reserve?
Expected loss ratio
Policyholders’ surplus is the difference between:
An insurance company’s assets and liabilities
The stronger a company’s surplus position, the ___________________
greater is the security for its policyholders
How do you calculate policyholder’s surplus?
Assets – Liabilities = Surplus
The income and expense statement:
summarizes revenues and expenses paid over a specified period of time
The two principal sources of revenue for insurance companies are:
Premiums
Investment income
Earned premiums are those premiums
for which the service for which the premiums were paid (insurance protection) has been rendered
Expenses include:
- The cost of adjusting claims
- Paying the insured losses that occurred
Commissions to agents
-Premium taxes - General insurance expenses
The loss ratio is the ratio of :
Incurred losses and loss adjustment expenses to premiums earned
What is the loss ratio formula?
Loss ratio = (Incurred Losses + Loss adjustment expenses) / Premiums earned
The expense ratio is:
Is equal to the company’s underwriting expenses divided by written premiums
What is the expense ratio formula?
Expense ratio = Underwriting expenses / Premium written
The combined ratio:
is the sum of the loss ratio and the expense ratio
What does a positive combined ratio indicate?
An underwriting loss
The investment income ratio compares:
Net investment income to earned premiums.
What is the investment income ratio formula?
Investment income ratio = Net investment income / Earned premiums
The overall operating ratio is equal to the:
Combined ratio minus the investment income ratio
What does the overall ratio measure?
This ratio measures the company’s total performance (underwriting and investments)
The assets of a life insurer have a _________________.
Longer duration, on average, than those of property and casualty insurers
Because many life insurance policies have a savings element:
Life insurers keep an interest-bearing asset called “contract loans” or “policy loans”
A life insurance company may have separate accounts for:
Assets backing interest-sensitive products, such as variable annuities
Policy reserves are a ________ on the balance sheet that must be _______ equal to that amount
Liability item , Offset by assets
What specifies the minimum basis for calculating policy reserves?
State laws
The reserve for amounts held on deposit is:
A liability representing funds that are owed to policyholders and to beneficiaries
The asset valuation reserve is:
A statutory accounting account designed to absorb asset value fluctuations not caused by changing interest rates
Policyholders’ surplus is _____________ industry than in the property and casualty insurance industry
less volatile in the life insurance
A life insurer’s major expenses are:
- Benefit payments , including death benefits paid to beneficiaries
- Annuity benefits paid to annuitants
A life insurer’s net gain from operations equals:
Life insurers net gain from operations = Total revenues - Total expenses - policyowner dividends - federal income taxes
What measures can be used to gauge the performance of life insurers?
- Pre-tax or after-tax net income vs. total assets
- Rate of return on policyowners’ surplus
How were insurers most affected by the 2008 sub-prime lending crisis?
- Insurers did not securitize the bad mortgage loans and mortgage debt was not a significant share of insurers’ investment portfolios
- Insurers were most affected by the sharp decline in the value of their investment portfolios
