Insurance Companies Overview
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Questions and Answers

What are the two roles that insurance providers can act in?

Insurance underwriter and insurance broker

Which of the following are the two broad groups that insurance is broadly classified into?

  • Life insurance and health insurance
  • Commercial insurance and personal insurance
  • Property insurance and health insurance
  • Life insurance and property-casualty insurance (correct)

    • Insurance companies only sell insurance policies.

    False

    What is the basis for premiums charged by insurance companies?

    <p>Probability of providing payment to insured</p> Signup and view all the answers

    Insurance companies invest premiums and fees until they are needed to pay out insurance claims.

    <p>True</p> Signup and view all the answers

    What was the aggregate industry asset value of life insurance companies in 2021?

    <p>$8.7 trillion</p> Signup and view all the answers

    What percentage of the industry's assets in 2021 were represented by the ten largest life insurers?

    <p>43.7%</p> Signup and view all the answers

    Why do life insurers pool the risks of individuals?

    <p>To diversify away some of the customer-specific risk</p> Signup and view all the answers

    Life insurers transfer income-related uncertainties, such as those due to retirement, from the individual to the group.

    <p>True</p> Signup and view all the answers

    What are three other activities of life insurance companies, besides providing life insurance?

    <p>Sell annuity contracts, manage pension plans, and provide accident and health insurance</p> Signup and view all the answers

    What is the difference between stock-owned insurers and mutual life insurance companies?

    <p>Stock-owned insurers are owned by their shareholders, while mutual companies are owned by their policyholders.</p> Signup and view all the answers

    Over 80% of life insurance companies are classified as having stock ownership.

    <p>True</p> Signup and view all the answers

    How do stock-owned insurers raise money?

    <p>By issuing stock</p> Signup and view all the answers

    What is the key aspect of the underwriting process in insurance?

    <p>Determining which risks should be accepted and which should be rejected</p> Signup and view all the answers

    What is the main factor that underwriters use to determine how much to charge for accepted risks?

    <p>The form of premiums</p> Signup and view all the answers

    A smoker would likely be charged a higher premium than a non-smoker for a life insurance policy.

    <p>True</p> Signup and view all the answers

    What is the adverse selection problem in insurance?

    <p>Customers who apply for insurance are more likely to be those in need of coverage, which can lead to higher claims for the insurance company.</p> Signup and view all the answers

    Actuaries work to increase the risks of underwriting and selling life insurance.

    <p>False</p> Signup and view all the answers

    What is a key component of the actuarial analysis for traditional life insurance?

    <p>Analyzing mortality rates and producing life tables</p> Signup and view all the answers

    Actuaries analyze different factors for health insurance compared to traditional life insurance.

    <p>True</p> Signup and view all the answers

    What is the main characteristic of ordinary life policies?

    <p>Policyholders make periodic premium payments in exchange for coverage</p> Signup and view all the answers

    Term life insurance is considered to be pure in the sense that it has no savings element attached.

    <p>True</p> Signup and view all the answers

    When does the beneficiary of a term life insurance policy receive the payout?

    <p>At the time of the individual's death during the coverage period</p> Signup and view all the answers

    Whole life insurance provides coverage for a specific period, after which the coverage ends.

    <p>False</p> Signup and view all the answers

    What is the key feature of whole life insurance that distinguishes it from term life?

    <p>Accumulates cash value that can be borrowed against throughout life</p> Signup and view all the answers

    What are the two main components of endowment life insurance?

    <p>A pure (term) insurance element and a savings element</p> Signup and view all the answers

    If the insured person dies during the endowment period, the beneficiary will receive the face value of the policy.

    <p>True</p> Signup and view all the answers

    If the insured person survives the endowment expiration, the policyholder receives a lump sum payout.

    <p>True</p> Signup and view all the answers

    What are the investments that fixed premium payments for variable life insurance are directed towards?

    <p>Mutual funds of stocks, bonds, and money market instruments</p> Signup and view all the answers

    The beneficiary of a variable life policy receives fixed returns upon the death of the insured.

    <p>False</p> Signup and view all the answers

    What is the key feature of universal life insurance?

    <p>It provides policy holder flexibility on premium amounts and contract maturity</p> Signup and view all the answers

    What is the main difference between variable universal life insurance and standard universal life?

    <p>Variable universal life includes an investment component in the policy</p> Signup and view all the answers

    What is the distinguishing feature of group life insurance?

    <p>It covers a large number of insured persons under a single policy</p> Signup and view all the answers

    What are the two types of group life insurance policies?

    <p>Contributory and non-contributory</p> Signup and view all the answers

    Credit life insurance protects lenders against a borrower's death prior to the repayment of a debt contract, such as a mortgage or car loan.

    <p>True</p> Signup and view all the answers

    What are three other activities of life insurers, besides offering life insurance?

    <p>Sell annuities, private pension plans, and accident and health insurance</p> Signup and view all the answers

    Annuities represent different methods of liquidating a fund over a long period of time.

    <p>True</p> Signup and view all the answers

    Where do life insurers typically concentrate their asset investments?

    <p>At the longer end of the maturity spectrum, such as corporate bonds, equities, and government securities</p> Signup and view all the answers

    In 2021, life insurers invested a significant portion of their assets in mortgages, representing 8.0% of the total.

    <p>True</p> Signup and view all the answers

    What is the largest component of life insurance companies' liabilities?

    <p>Net policy reserves, which represent the expected payment on existing contracts</p> Signup and view all the answers

    Life insurers maintain capital and surplus reserve funds to meet unexpected future losses.

    <p>True</p> Signup and view all the answers

    How do insurers earn profits?

    <p>By generating more premium and interest income than they pay out in policy payments</p> Signup and view all the answers

    What are two ways that insurance companies can increase the spread between premium income and policy payouts?

    <p>Decrease future required payouts for a given level of premium payments and increase the profitability of investment income on net policy reserves</p> Signup and view all the answers

    The 2008-2009 financial crisis had no significant impact on the insurance industry.

    <p>False</p> Signup and view all the answers

    The Treasury Department extended bailout funds to struggling life insurers in the late 2000s.

    <p>True</p> Signup and view all the answers

    What was the net income of life insurance companies in 2020?

    <p>$39.6 billion</p> Signup and view all the answers

    Life insurers paid out a record $90.4 billion in death benefit payments in 2020.

    <p>True</p> Signup and view all the answers

    What is the role of the National Association of Insurance Commissioners (NAIC)?

    <p>Facilitates cooperation among the various state agencies whenever an insurance issue is a national concern</p> Signup and view all the answers

    States do not promote life insurance guarantee funds.

    <p>False</p> Signup and view all the answers

    What is the purpose of contributions from insurance companies?

    <p>To compensate policyholders if the insurance company fails</p> Signup and view all the answers

    The Wall Street Reform and Consumer Protection Act of 2010 resulted in the Fed becoming a major supervisor of insurance firms.

    <p>True</p> Signup and view all the answers

    What are four key areas of the FIO's authority regarding the insurance industry?

    <p>Monitor insurance industry, identify regulatory gaps or systemic risks, deal with international insurance matters, and monitor the extent to which underserved communities have access to affordable insurance products</p> Signup and view all the answers

    There are over 2,600 companies that sell property-casualty (P&C) insurance in the U.S.

    <p>True</p> Signup and view all the answers

    The top ten firms in the U.S. P&C insurance market hold a majority share of the market, with a 51.4% share.

    <p>True</p> Signup and view all the answers

    Which company was the top firm in the P&C insurance market in 2018, writing 9.7% of all premiums?

    <p>State Farm</p> Signup and view all the answers

    Property insurance covers both real and personal property losses.

    <p>True</p> Signup and view all the answers

    What is the main purpose of casualty or liability insurance?

    <p>It offers protection against legal liability exposures</p> Signup and view all the answers

    Fire insurance and allied lines only cover damages from fire.

    <p>False</p> Signup and view all the answers

    What does homeowners multiple-peril insurance protect against?

    <p>Multiple perils of damage to a personal dwelling, personal property, and legal liability</p> Signup and view all the answers

    Commercial multiple-peril insurance protects commercial firms against perils that are different from those covered by homeowners MP insurance.

    <p>False</p> Signup and view all the answers

    What are the two main types of coverage provided by automobile insurance?

    <p>Liability and physical damage (PD)</p> Signup and view all the answers

    Liability insurance (other than auto) protects individuals and businesses against legal liability due to accidents involving motor vehicles.

    <p>False</p> Signup and view all the answers

    What are the main types of assets that P&C insurers invest in?

    <p>Long-term securities, including bonds, preferred stock, and common stock</p> Signup and view all the answers

    P&C insurers invest a larger proportion of their assets in common stock compared to life insurance companies.

    <p>False</p> Signup and view all the answers

    What are two major components of P&C insurers' liabilities?

    <p>Loss reserves and loss adjustment expenses</p> Signup and view all the answers

    Loss reserves are funds set aside to meet expected losses from underwriting the P&C lines.

    <p>True</p> Signup and view all the answers

    What are the expected administrative and related costs of adjusting (settling) claims known as?

    <p>Loss adjustment expenses</p> Signup and view all the answers

    What is underwriting risk in insurance?

    <p>The potential for premiums generated on an insurance line to be insufficient to cover claims and administrative expenses</p> Signup and view all the answers

    What are three key sources of underwriting risk?

    <p>Loss risk, expense risk, and investment yield/return risk</p> Signup and view all the answers

    What is a key feature of claims loss risk?

    <p>The actuarial predictability of losses relative to premiums earned</p> Signup and view all the answers

    Loss rates are more predictable for high-severity, low-frequency lines than for low-severity, high-frequency lines.

    <p>False</p> Signup and view all the answers

    What is reinsurance, in the context of insurance?

    <p>Essentially insurance for insurance companies, acting as an alternative to managing risk on a P&amp;C insurer's balance sheet</p> Signup and view all the answers

    What does the loss ratio measure in insurance?

    <p>Actual losses incurred on a specific policy line, calculated as a ratio of losses incurred to premiums earned</p> Signup and view all the answers

    A loss ratio of less than 100 percent means premiums earned were sufficient to cover losses incurred on that line.

    <p>True</p> Signup and view all the answers

    How is the expense ratio calculated in insurance?

    <p>Expenses incurred (before federal income taxes) divided by premiums written</p> Signup and view all the answers

    What are two major sources of expense risk for P&C insurers?

    <p>Loss adjustment expenses and commissions and other expenses</p> Signup and view all the answers

    What is the combined ratio in insurance?

    <p>A measure of overall profitability of a line, calculated as the loss ratio plus the ratios of loss-adjusted expenses and acquisition costs to premiums earned</p> Signup and view all the answers

    If the combined ratio is less than 100 percent, premiums are sufficient to cover losses and expenses related to the line.

    <p>True</p> Signup and view all the answers

    How is the investment yield calculated in insurance?

    <p>Net investment income divided by premiums earned</p> Signup and view all the answers

    The operating ratio is a measure of overall profitability, calculated as the combined ratio minus the investment yield.

    <p>True</p> Signup and view all the answers

    The insurance sector is becoming increasingly global.

    <p>True</p> Signup and view all the answers

    2017 was the least costly year for the worldwide insurance industry.

    <p>False</p> Signup and view all the answers

    What was the record cost of natural disasters to insurers in 2017?

    <p>$138 billion</p> Signup and view all the answers

    Losses in North America accounted for 83% of the total losses from natural disasters in 2017.

    <p>True</p> Signup and view all the answers

    What were the three hurricanes that significantly impacted the USA and Caribbean in 2017?

    <p>Harvey, Irma, and Maria</p> Signup and view all the answers

    What is the primary role of underwriters in insurance companies?

    <p>Assess risks of applicants for coverage</p> Signup and view all the answers

    Which type of life insurance provides a death benefit only if the insured passes away within a specified term?

    <p>Term Life</p> Signup and view all the answers

    What percentage of insurance companies' liabilities were policy reserves in 2021?

    <p>73.7%</p> Signup and view all the answers

    Which type of insurance protects lenders against borrowers' death before debt repayment?

    <p>Credit Life</p> Signup and view all the answers

    What complicates the predictability of claims in insurance?

    <p>Long-tail risks like natural disasters</p> Signup and view all the answers

    What is the Loss Ratio in insurance companies?

    <p>Actual losses divided by premiums earned</p> Signup and view all the answers

    Which strategy do insurance companies use to manage large or unexpected claims?

    <p>Reinsurance</p> Signup and view all the answers

    Which of the following assets do insurance companies typically invest in to generate returns?

    <p>Corporate bonds and equities</p> Signup and view all the answers

    Study Notes

    Insurance Companies

    • Insurance companies provide contracts ensuring payment to policyholders under specific conditions, in exchange for periodic premiums.
    • Insurance companies can act as underwriters, assessing applicants' risk, or as brokers, selling insurance contracts.
    • Life insurance policies protect against death, illness, and retirement.
    • Property-casualty insurance protects against personal injury, liability, accidents, theft, fire, and catastrophes.
    • Insurance firms offer various investment products. These are similar to other financial services like mutual funds and annuities.

    Insurance Premiums

    • Premiums charged by insurance are based on the probability of making payments to the insured.
    • Premium calculations use the present value of expected payments.

    Life Insurance Companies and Investments

    • Insurance premiums and fees are invested until required to cover claims.
    • In 2021, there were 740 life insurance companies in the US. In 1988 there were over 2300.
    • Aggregate industry assets were 8.7trillionin2021;downfrom8.7 trillion in 2021; down from 8.7trillionin2021;downfrom1.12 trillion in 1988.
    • The top ten insurers represented 43.7% of the industry's assets in 2021.
    • Life insurance companies pool individual risks to diversify.
    • The companies transfer income-related uncertainties from individuals to the group, for example, retirement.

    Insurance Company Activities

    • Other activities of life insurance companies include:
      • Selling annuity contracts, which liquidate funds over time.
      • Managing pension plans (tax-deferred savings plans).
      • Providing accident and health insurance.
    • Stock-owned insurers are owned by shareholders (e.g., Met Life, AIG, Prudential).
    • Mutual life insurance companies are owned by policyholders (e.g., Northwestern Mutual and New York Life).
    • Over 80% of life insurance companies are classified as stock-owned.
    • Stock-owned insurers fund by issuing stock.
    • Insurance companies underwrite risks. They accept risks of events occurring in return for premiums.

    Underwriting Process

    • A major part of the underwriting process involves identifying which risks should be accepted and which should be rejected.
    • Underwriters determine how much to charge in premiums for accepted risks.
    • For example, smokers typically pay higher premiums than non-smokers.
    • Adverse selection is a problem because customers needing coverage are more likely to apply. For example, someone with chronic health issues is more likely to purchase than someone healthy.
    • Actuaries have traditionally used life insurance to reduce the risks of underwriting and selling insurance by analyzing mortality, generating life tables and applying time value of money concepts to produce life insurance, annuities, and endowment policies.
    • Actuaries also analyze disability, morbidity, mortality, and fertility rates, and other contingencies, specifically with health insurance.

    Types of Life Insurance

    • Ordinary life policies are marketed individually, with periodic premium payments for lifetime coverage.
    • Term life insurance is similar to pure life insurance, providing benefits upon death during the policy period without a savings component.
    • Whole life insurance provides coverage for a lifetime, building cash value that can be borrowed against.
    • Endowment life insurance combines term insurance with savings components, and provides a payout if the insured survives the policy term.
    • Variable life insurance invests premiums in mutual market funds, resulting in fluctuating premium payments depending on investment performance.
    • Universal life insurance offers premium flexibility and contract maturity.

    Group Life Insurance and Other Activities

    • Group life insurance covers many people under one policy, usually issued by corporate employers, with contributory or non-contributory options. The employer might cover some/all cost.
    • Credit life insurance protects lenders against borrower death prior to debt repayment.
    • Other activities include selling annuities, private pension plans, and accident and health insurance.

    Insurance Company Assets

    • Life insurers typically invest assets at the longer end of the maturity spectrum, like corporate bonds, equities, and government securities.

    Insurance Company Liabilities

    • Net policy reserves, representing expected payouts on contracts, constitute a large part of liabilities.
    • They hold surplus capital to cover unexpected losses.
    • Insurers earn profits by collecting more premiums and interest income than policy payouts.
    • Premium income and policy payouts can be increased by decreasing future payouts for a given payment level. Risk of insured pool needs to be reduced to accomplish this goal.
    • There's an increase in the profitability of investment income from policy reserves.
    • The 2008-2009 financial crisis affected the insurance industry.

    Property-Casualty Insurance

    • Property insurance covers the loss of real or personal property, including fire insurance.
    • Casualty insurance, or liability insurance, protects against legal liability.
    • Homeowners multiple peril (MP) insurance covers damages to a dwelling and personal property, along with liability.
    • Commercial multiple peril (MP) insurance protects commercial firms from similar perils.
    • Automobile liability and physical damage (PD) insurance covers legal liability and damage from vehicle ownership.
    • Liability insurance covers legal liability for businesses and individuals, including product hazards.
    • Insurance companies invest P&C insurers' assets primarily in long-term securities.

    Claims Loss

    A critical feature of loss risk is the predictability of losses relative to premiums based on actuarial calculations. Premiums received are based on claims filed and settled. Historical data and actuarial calculations are key factors in predicting loss patterns in insurance.

    Profitability Metrics

    • Combined ratio: a measure of profitability for a specific insurance line. Calculated by adding the loss ratio to the loss-adjusted expenses ratio and acquisition costs ratio.
    • Investment yield: calculated as net investment income divided by premiums earned.
    • Operating ratio: Calculated as the combined ratio minus the investment yield.

    Global Insurance

    • The US, Japan and Western Europe dominate the global insurance market.
    • 2017 was a costly year for worldwide insurance due to natural disasters and hurricanes.

    Federal Oversight

    • The Wall Street Reform and Consumer Protection Act of 2010 established the Federal Insurance Office (FIO).
    • The FIO monitors the insurance industry, identifies regulatory gaps, handles international matters, and ensures underserved communities have access to affordable insurance.

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    Description

    This quiz covers the essential concepts of insurance companies, including the types of insurance they provide, the role of premiums, and their investment practices. It also touches upon life insurance and property-casualty insurance, explaining the benefits and risks involved. Test your knowledge on how insurance firms operate and the products they offer!

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