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Questions and Answers
Questions and Answers
Which of the following best describes the role of insurance companies as financial institutions?
Which of the following best describes the role of insurance companies as financial institutions?
- They act as financial intermediaries and institutional investors. (correct)
- They are mainly involved in real estate development.
- They primarily focus on providing banking services.
- They primarily regulate the stock market.
What is the fundamental principle behind insurance that allows insurers to offer services at a lower cost than individuals could achieve on their own?
What is the fundamental principle behind insurance that allows insurers to offer services at a lower cost than individuals could achieve on their own?
- Ignoring the risks associated with underwriting.
- Investing in high-risk assets.
- Avoiding regulatory oversight.
- Pooling the risks of numerous individuals. (correct)
How can insurance companies mitigate the problem of moral hazard?
How can insurance companies mitigate the problem of moral hazard?
- By implementing deductibles or co-insurance/excess. (correct)
- By using reinsurance.
- By ignoring the possibility of fraudulent applications.
- By investing in riskier assets to increase profits.
Which of the following is a defining characteristic of term life insurance?
Which of the following is a defining characteristic of term life insurance?
Which of the following is true regarding group life insurance?
Which of the following is true regarding group life insurance?
What does 'contributory' mean in the context of group life insurance policies?
What does 'contributory' mean in the context of group life insurance policies?
Which of the following is the main purpose of credit life insurance?
Which of the following is the main purpose of credit life insurance?
How do annuities relate to life insurance principles?
How do annuities relate to life insurance principles?
What is a key vulnerability of health insurance policies that can affect their pricing and coverage?
What is a key vulnerability of health insurance policies that can affect their pricing and coverage?
How is 'Total Equity' calculated on a life insurance company's simplified balance sheet?
How is 'Total Equity' calculated on a life insurance company's simplified balance sheet?
Which of the following items would be classified under 'Technical Insurance reserves' on a life insurance company's balance sheet?
Which of the following items would be classified under 'Technical Insurance reserves' on a life insurance company's balance sheet?
What is the formula for Revenues for Simplified Income Statement for Life Insurance Company?
What is the formula for Revenues for Simplified Income Statement for Life Insurance Company?
Which statement accurately defines profits for the Simplified Income Statement fo Life Insurance?
Which statement accurately defines profits for the Simplified Income Statement fo Life Insurance?
In regards to Property Insurance, what does a 'named-peril' policy cover?
In regards to Property Insurance, what does a 'named-peril' policy cover?
What is the key difference between Property and Casualty insurance?
What is the key difference between Property and Casualty insurance?
What is reinsurance and what purpose does it serve for insurance companies?
What is reinsurance and what purpose does it serve for insurance companies?
Which of the following best describes the nature of financial protection offered by automobile liability and physical damage (PD) insurance?
Which of the following best describes the nature of financial protection offered by automobile liability and physical damage (PD) insurance?
How is Total Assets calculated in Simplified Balance sheet for Non-life Insurance Company?
How is Total Assets calculated in Simplified Balance sheet for Non-life Insurance Company?
Which of the following best describes a risk factor that goes into Underwriting Risk?
Which of the following best describes a risk factor that goes into Underwriting Risk?
What does the Loss Ratio indicate for an insurance company, and how is it interpreted?
What does the Loss Ratio indicate for an insurance company, and how is it interpreted?
Which of the following choices accurately describes the meaning of Expense Ratio, and its formula?
Which of the following choices accurately describes the meaning of Expense Ratio, and its formula?
What is the significance of the combined ratio in assessing the profitability of a P&C insurance company?
What is the significance of the combined ratio in assessing the profitability of a P&C insurance company?
How do Regulations differ from Directives in the context of the European Union's legal framework for the insurance sector?
How do Regulations differ from Directives in the context of the European Union's legal framework for the insurance sector?
According to the fundamentals of insurance, what is the required relationship between beneficiary and insured?
According to the fundamentals of insurance, what is the required relationship between beneficiary and insured?
What does the insurance principle that the 'insured is not to profit' from insurance coverage aim to avoid?
What does the insurance principle that the 'insured is not to profit' from insurance coverage aim to avoid?
What is the fundamental characteristic regarding the number of insured in an insurance company?
What is the fundamental characteristic regarding the number of insured in an insurance company?
What is the purpose of insurance companies requiring insured to provide full and accurate information?
What is the purpose of insurance companies requiring insured to provide full and accurate information?
In the Fundamentals of Insurance, what does the term quantify mean?
In the Fundamentals of Insurance, what does the term quantify mean?
When considering the insurance Fundamentals, why is computing probability useful?
When considering the insurance Fundamentals, why is computing probability useful?
In an insurance contract, what role does the 'insured' play?
In an insurance contract, what role does the 'insured' play?
In an insurance setting, what is asymmetric information?
In an insurance setting, what is asymmetric information?
What is the role of Insurance Companies?
What is the role of Insurance Companies?
In example A, GIANNI is the policyholder, the insured. Who is the beneficiary?
In example A, GIANNI is the policyholder, the insured. Who is the beneficiary?
In example B, ENRICO is the policyholder. Who is insured party?
In example B, ENRICO is the policyholder. Who is insured party?
The presence of adverse selection and moral hazard...
The presence of adverse selection and moral hazard...
From the options below, what is true about health insurance policies and physical exam?
From the options below, what is true about health insurance policies and physical exam?
What does EIOPA stand for?
What does EIOPA stand for?
What does one need in order to offer 'cobertura' to insured companies?
What does one need in order to offer 'cobertura' to insured companies?
Questions and Answers
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Flashcards
Flashcards
Insurance Companies Role
Insurance Companies Role
Insurance companies function as financial intermediaries and institutional investors.
Insurance Definition
Insurance Definition
Insurance is a financial instrument; contracts protect against specific risks in exchange for premiums.
Life Insurance
Life Insurance
Life insurance provides compensation for death, illness, or retirement.
Property-Casualty Insurance
Property-Casualty Insurance
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Insurance Contract
Insurance Contract
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Insurer
Insurer
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Policyholder
Policyholder
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Insured
Insured
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Beneficiary
Beneficiary
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Asymmetric Information
Asymmetric Information
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Adverse Selection
Adverse Selection
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Moral Hazard
Moral Hazard
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Life Insurance Policies
Life Insurance Policies
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Property-Casualty Insurance Policies
Property-Casualty Insurance Policies
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Risk Pooling
Risk Pooling
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Actuaries Role
Actuaries Role
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Annuity Contracts
Annuity Contracts
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Basis Classes of Life Insurance
Basis Classes of Life Insurance
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Ordinary Life Policies
Ordinary Life Policies
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Term Life
Term Life
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Whole Life
Whole Life
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Endowment Life
Endowment Life
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Variable Life
Variable Life
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Group Life Insurance
Group Life Insurance
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Credit Life Insurance
Credit Life Insurance
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Health Insurance
Health Insurance
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Property Insurance
Property Insurance
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Named-Peril Policies
Named-Peril Policies
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Open-Peril Policies
Open-Peril Policies
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Casualty Insurance
Casualty Insurance
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Reinsurance
Reinsurance
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Fire Insurance and Allied Lines
Fire Insurance and Allied Lines
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Automobile Liability and Physical Damage
Automobile Liability and Physical Damage
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Liability Insurance
Liability Insurance
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Underwriting Risk
Underwriting Risk
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Loss Risk
Loss Risk
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Expense Risk
Expense Risk
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Investment Yield Risk
Investment Yield Risk
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Loss Ratio
Loss Ratio
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Expense Ratio
Expense Ratio
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Flashcards
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Study Notes
Study Notes
Course Overview: Financial Institutions - Insurance Companies
- This course studies the business of Insurance Companies (ICs) as financial intermediaries and institutional investors.
- The main types and characteristics of insurance products will be explored, positioning "Insurance" as a financial instrument.
- The course focuses on insurance companies as non-bank institutions.
- Topics include pure risk management, insurance company characteristics, and what makes ICs different.
- Insurance instruments covered are life and non-life insurance, adverse selection, moral hazard, balance sheets, underwriting risk, regulation, and the fundamentals of insurance.
Insurance Instruments
- Insurance is classified broadly into life insurance and property-casualty insurance.
- Life insurance provides protection against untimely death, illness, and retirement.
- Property-casualty insurance protects against personal injury and liability due to accidents, theft, fire, and other catastrophes.
- Insurance companies also sell a variety of investment products.
- Insurance is contract where the insurer promises to compensate the insured against payment of a premium for damage within agreed limits, or to pay a capital sum/annuity on the occurrence of an event relating to human life.
- Parties to the contract include the insurer, insured, and beneficiary.
- The insurer's performance is typically characterized by uncertainty
- The "policyholder" is the one who enters the insurance policy
- The "insured" is the person assured.
- The "beneficiary" is the person or entity who will receive payment or indemnity if the insured event occurs.
Adverse Selection and Moral Hazard
- Asymmetric information plays a large role in insurance product design, where the insured has more information than the IC.
- Adverse selection and moral hazard impacts the insurance industry
- The "adverse selection" problem is the issue of which policies an insurance company should accept.
- Those most likely to suffer a loss are more likely to apply for insurance.
- Health insurance policies may require a physical exam as a solution.
- Preexisting conditions may be excluded from the policy.
- "Moral hazard" arises when the insured fails to take proper precautions or takes on more risk because losses are covered.
- Insurance companies use deductibles or co-insurance/excess to help control moral hazard.
Types of Insurance
- Life Insurance, Health Insurance, and Property and Casualty Insurance, are classified by the type of undesirable event covered.
- Actuaries reduce the risks of underwriting and selling life insurance by analyzing mortality, producing life tables, and applying time value of money concepts.
- Actuaries analyze disability, morbidity, mortality, fertility, and other contingencies for health insurance.
- There are four basis classes of life insurance contracts, ordinary life policies, Group life, Credit life insurance and Other activites
- Life insurers pool the risks of individuals, diversifying some of customer-specific risk and offer insurance services at a lower cost than individuals could achieve alone.
- Life insurers transfer income-related uncertainties from the individual to the group.
- Life insurance involves building up a fund and eventually paying out a lump sum, while annuities involve different methods of liquidating a fund over a long period of time.
- Ordinary life policies are marketed on an individual basis.
- Term life provides no savings element and pays out at the time of death within the coverage period.
- Whole life protects the individual over an entire lifetime, not a specified term.
- Endowment life combines insurance with a savings element.
- Variable life invests fixed premium payments in mutual funds.
- Universal life allows policyholders to adjust premium amounts.
- Group life insurance covers a large number of insured persons under a single policy and are issued to corporate employers.
- These policies can be contributory or noncontributory
- Credit life insurance protects lenders against a borrower's death prior to the repayment of a debt contract
- The policy's face amount reflects outstanding principal and interest on the loan.
- Annuities transform capital into life-long income
- Annuities are a popular mechanism for retirement savings because annual annuity contributions are not capped
Health Insurance
- Health insurance policies are vulnerable to adverse selection
- Individual policies must be priced assuming adverse selection
- Most health insurance is offered through group policies.
- Health Maintenance Organizations, shift costs to the employers.
Insurance Company Balance Sheets and Financials
- Assets include real estate, equity investments, bonds and fixed income securities, and shares and mutual funds.
- Liabilities include share capital, reserves, and net profit for the year.
- Revenues include gross written premiums, investment income, and other income.
- Expenses include claims paid, changes in technical reserves, operating expenses, and other expenses.
Property and Casualty (P&C) Insurance
- Property Insurance protects businesses and owners from the risk associated with ownership.
- Casualty Insurance (liability insurance) protects against financial losses because of a claim of negligence.
- Named-peril policies only insures against losses from perils specifically named in the policy.
- Open-peril policies insures against any losses except from perils specifically named in the policy
- Reinsurance: allocates a portion of the risk to another company in exchange for a portion of the premium.
- Fire insurance and allied lines protects against the perils of fire, lightning, and removal of property damaged in a fire
- There are homeowners multiple peril (MP) insurance protects against multiple perils
Underwriting Risk and Financial Ratios
- Underwriting risk results when premiums generated on a given insurance line are insufficient to cover incurred claims.
- Underwriting risk can result from unexpected increases in loss or expense rates, or decreases in investment yields or returns.
- Loss ratio measures actual losses incurred on a specific policy line.
- It is calculated as a ratio of losses incurred to premiums earned.
- A loss ratio of less than 100 percent means premiums were sufficient to cover losses.
- Expense ratio is calculated as expenses incurred (before income taxes) and divided by premiums written.
- Combined ratio is a measure of overall profitability of a line, taking into account profitability and accounting
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