Exam 4- Chapter 15 Flashcards

1
Q

Policy reserves are a

A

balance sheet liability

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2
Q

In property and casualty insurance the combined ratio is equal to ______________________ divided by total premiums written.

A

the sum of the loss ratio plus general expenses and broker’s commissions

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3
Q

The primary regulator of insurance firms is the

A

state insurance regulator

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4
Q

The term “variable” in a variable life policy refers to the

A

variable growth rate of the cash value of the policy.

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5
Q

Catastrophe bonds may be used as a form of _____

When issued, catastrophe bonds will have promised yields above the ________.

A

reinsurance; risk-free rate

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6
Q

In 2010 the average combined ratio after dividends for the P&C industry was ___________

A

102.4

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7
Q

Property and casualty insurers hold _____________ short-term assets than life insurers because property and casualty loss rates are _____________ predictable than life insurance loss rates.

A

more; less

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8
Q

Hurricane damage in a given area is an example of a ____________________ for which it is difficult to predict loss exposure.

A

high-severity, low-frequency event

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9
Q

The operating ratio is calculated as

A

the combined ratio after dividends minus the investment yield

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10
Q

The two major components of expense risk for P&C insurers are

A

loss adjustment expenses and variations in commission and other expenses

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11
Q

At P&C insurers, if the combined ratio is less than 100 percent, the premiums charged were sufficient to cover

A

both losses and expenses.

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12
Q

For P&C insurers, if the combined ratio is more than 100 percent, that firm

A

may have been profitable if investment returns were high enough

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13
Q

The P&C loss ratio on an insurance line contains: (2)

A
  • payouts on claims
  • costs associated with settling claims
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14
Q

what is insured? (4)

A
  • Life
  • Retirement
  • Disability
  • Accidents
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15
Q
  • Fixed payment at death
  • Fixed period of time
A

Term life

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16
Q
  • Fixed payment at death
  • Valid for entire life span
A

Whole life

17
Q
  • Fixed payment
  • At death or end of term
A

Endowment life

18
Q
  • Variable payment at death
  • Valid for entire life span
A

Variable life

19
Q
  • Hybrid of whole and term
  • Vary premiums and maturity
A

Universal life

20
Q

Variable earnings on accumulated premiums

A

Variable universal life

21
Q
  • “Entirety” of a group covered at the same time
  • Contributary vs. Noncontributary
A

Group policies

22
Q
  • Regular payments over life of contract
  • Often used for retirement
23
Q

Manage ~$2.8 trillion in Pension Fund assets

A

Custodian Services

24
Q

The underwriting process:
Who takes the risk?

A

Insurer accepts the risk an event will happen
- Sets predetermined payout
- “Rates” the probability of payout
- Charges premium to all insured to cover expected payouts

25
underwriting: ___ are invested ___ used to help cover payouts
premiums; returns
26
actuarial tables (2)
- based upon known characteristics - gender, race, weight, age, occupation, marital status
27
actuaries estimate probabilities
probability of injury or death
28
Adverse Selection (3)
- Customers buy insurance when they know they will need it (Insurer doesn’t know) - Messes up estimation of expected payouts - Solution: preexisting conditions, physicals
29
Moral Hazard
Being insured alters the insured’s risk taking
30
____: Pool the risk of legal liability across many individuals ___: Pool the risk of loss of real/personal property across many individuals
Casualty; Property
31
Loss ratio
Payouts / Premiums = Loss Ratio The lower the loss ratio, the higher the profit
32
- Collected premiums are invested Returns to investments: - Help cover payouts - Profit to the insurer Warren Buffett: “A negative interest loan”
Investment returns
33
What do life insurer liabilities look like? (2)
- Net policy reserves - Separate account business
34
loss reserves (LAE)
- reserve for losses from underwriting - anticipated loss adjustment expenses associated with setting claims