Exam 4- Chapter 15 Flashcards
Policy reserves are a
balance sheet liability
In property and casualty insurance the combined ratio is equal to ______________________ divided by total premiums written.
the sum of the loss ratio plus general expenses and broker’s commissions
The primary regulator of insurance firms is the
state insurance regulator
The term “variable” in a variable life policy refers to the
variable growth rate of the cash value of the policy.
Catastrophe bonds may be used as a form of _____
When issued, catastrophe bonds will have promised yields above the ________.
reinsurance; risk-free rate
In 2010 the average combined ratio after dividends for the P&C industry was ___________
102.4
Property and casualty insurers hold _____________ short-term assets than life insurers because property and casualty loss rates are _____________ predictable than life insurance loss rates.
more; less
Hurricane damage in a given area is an example of a ____________________ for which it is difficult to predict loss exposure.
high-severity, low-frequency event
The operating ratio is calculated as
the combined ratio after dividends minus the investment yield
The two major components of expense risk for P&C insurers are
loss adjustment expenses and variations in commission and other expenses
At P&C insurers, if the combined ratio is less than 100 percent, the premiums charged were sufficient to cover
both losses and expenses.
For P&C insurers, if the combined ratio is more than 100 percent, that firm
may have been profitable if investment returns were high enough
The P&C loss ratio on an insurance line contains: (2)
- payouts on claims
- costs associated with settling claims
what is insured? (4)
- Life
- Retirement
- Disability
- Accidents
- Fixed payment at death
- Fixed period of time
Term life
- Fixed payment at death
- Valid for entire life span
Whole life
- Fixed payment
- At death or end of term
Endowment life
- Variable payment at death
- Valid for entire life span
Variable life
- Hybrid of whole and term
- Vary premiums and maturity
Universal life
Variable earnings on accumulated premiums
Variable universal life
- “Entirety” of a group covered at the same time
- Contributary vs. Noncontributary
Group policies
- Regular payments over life of contract
- Often used for retirement
Annuities
Manage ~$2.8 trillion in Pension Fund assets
Custodian Services
The underwriting process:
Who takes the risk?
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
underwriting:
___ are invested
___ used to help cover payouts
premiums; returns
actuarial tables (2)
- based upon known characteristics
- gender, race, weight, age, occupation, marital status
actuaries estimate probabilities
probability of injury or death
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
Moral Hazard
Being insured alters the insured’s risk taking
____: Pool the risk of legal liability across many individuals
___: Pool the risk of loss of real/personal property across many individuals
Casualty; Property
Loss ratio
Payouts / Premiums = Loss Ratio
The lower the loss ratio, the higher the profit
- Collected premiums are invested
Returns to investments:
- Help cover payouts
- Profit to the insurer
Warren Buffett: “A negative interest loan”
Investment returns
What do life insurer liabilities look like? (2)
- Net policy reserves
- Separate account business
loss reserves (LAE)
- reserve for losses from underwriting
- anticipated loss adjustment expenses associated with setting claims
