Chapter 7

Question 1

A balance sheet:

Answer 1

Summarizes what a company owns (assets) and what is owes (liabilities)

Question 2

What is the balance sheet equation?

Answer 2

Total Assets = Total liabilities + Owner’s equity

Question 3

The primary assets for an insurance company are:

Answer 3

Financial assets

Question 4

A loss reserve is an estimated amount for:

Answer 4

• 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

Question 5

Case reserves are:

Answer 5

loss reserves that are established for each individual claim

Question 6

The loss ratio method establishes:

Answer 6

Aggregate loss reserves for a specific coverage line

Question 7

What formula aids in helping determine the loss reserve?

Answer 7

Expected loss ratio

Question 8

Policyholders’ surplus is the difference between:

Answer 8

An insurance company’s assets and liabilities

Question 9

The stronger a company’s surplus position, the ___________________

Answer 9

greater is the security for its policyholders

Question 10

How do you calculate policyholder’s surplus?

Answer 10

Assets – Liabilities = Surplus

Question 11

The income and expense statement:

Answer 11

summarizes revenues and expenses paid over a specified period of time

Question 12

The two principal sources of revenue for insurance companies are:

Answer 12

Premiums
Investment income

Question 13

Earned premiums are those premiums

Answer 13

for which the service for which the premiums were paid (insurance protection) has been rendered

Question 14

Expenses include:

Answer 14

• The cost of adjusting claims
• Paying the insured losses that occurred
  Commissions to agents
  -Premium taxes
• General insurance expenses

Question 15

The loss ratio is the ratio of :

Answer 15

Incurred losses and loss adjustment expenses to premiums earned

Question 16

What is the loss ratio formula?

Answer 16

Loss ratio = (Incurred Losses + Loss adjustment expenses) / Premiums earned

Question 17

The expense ratio is:

Answer 17

Is equal to the company’s underwriting expenses divided by written premiums

Question 18

What is the expense ratio formula?

Answer 18

Expense ratio = Underwriting expenses / Premium written

Question 19

The combined ratio:

Answer 19

is the sum of the loss ratio and the expense ratio

Question 20

What does a positive combined ratio indicate?

Answer 20

An underwriting loss

Question 21

The investment income ratio compares:

Answer 21

Net investment income to earned premiums.

Question 22

What is the investment income ratio formula?

Answer 22

Investment income ratio = Net investment income / Earned premiums

Question 23

The overall operating ratio is equal to the:

Answer 23

Combined ratio minus the investment income ratio

Question 24

What does the overall ratio measure?

Answer 24

This ratio measures the company’s total performance (underwriting and investments)

Question 25

The assets of a life insurer have a _________________.

Answer 25

Longer duration, on average, than those of property and casualty insurers

Question 26

Because many life insurance policies have a savings element:

Answer 26

Life insurers keep an interest-bearing asset called “contract loans” or “policy loans”

Question 27

A life insurance company may have separate accounts for:

Answer 27

Assets backing interest-sensitive products, such as variable annuities

Question 28

Policy reserves are a ________ on the balance sheet that must be _______ equal to that amount

Answer 28

Liability item , Offset by assets

Question 29

What specifies the minimum basis for calculating policy reserves?

Answer 29

State laws

Question 30

The reserve for amounts held on deposit is:

Answer 30

A liability representing funds that are owed to policyholders and to beneficiaries

Question 31

The asset valuation reserve is:

Answer 31

A statutory accounting account designed to absorb asset value fluctuations not caused by changing interest rates

Question 32

Policyholders’ surplus is _____________ industry than in the property and casualty insurance industry

Answer 32

less volatile in the life insurance

Question 33

A life insurer’s major expenses are:

Answer 33

- Benefit payments , including death benefits paid to beneficiaries - Annuity benefits paid to annuitants

Question 34

A life insurer’s net gain from operations equals:

Answer 34

Life insurers net gain from operations = Total revenues - Total expenses - policyowner dividends - federal income taxes

Question 35

What measures can be used to gauge the performance of life insurers?

Answer 35

- Pre-tax or after-tax net income vs. total assets - Rate of return on policyowners’ surplus

Question 36

How were insurers most affected by the 2008 sub-prime lending crisis?

Answer 36

- 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