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Questions and Answers
What are the two roles that insurance providers can act in?
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?
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.
Insurance companies only sell insurance policies.
False (B)
What is the basis for premiums charged by insurance companies?
What is the basis for premiums charged by insurance companies?
Insurance companies invest premiums and fees until they are needed to pay out insurance claims.
Insurance companies invest premiums and fees until they are needed to pay out insurance claims.
What was the aggregate industry asset value of life insurance companies in 2021?
What was the aggregate industry asset value of life insurance companies in 2021?
What percentage of the industry's assets in 2021 were represented by the ten largest life insurers?
What percentage of the industry's assets in 2021 were represented by the ten largest life insurers?
Why do life insurers pool the risks of individuals?
Why do life insurers pool the risks of individuals?
Life insurers transfer income-related uncertainties, such as those due to retirement, from the individual to the group.
Life insurers transfer income-related uncertainties, such as those due to retirement, from the individual to the group.
What are three other activities of life insurance companies, besides providing life insurance?
What are three other activities of life insurance companies, besides providing life insurance?
What is the difference between stock-owned insurers and mutual life insurance companies?
What is the difference between stock-owned insurers and mutual life insurance companies?
Over 80% of life insurance companies are classified as having stock ownership.
Over 80% of life insurance companies are classified as having stock ownership.
How do stock-owned insurers raise money?
How do stock-owned insurers raise money?
What is the key aspect of the underwriting process in insurance?
What is the key aspect of the underwriting process in insurance?
What is the main factor that underwriters use to determine how much to charge for accepted risks?
What is the main factor that underwriters use to determine how much to charge for accepted risks?
A smoker would likely be charged a higher premium than a non-smoker for a life insurance policy.
A smoker would likely be charged a higher premium than a non-smoker for a life insurance policy.
What is the adverse selection problem in insurance?
What is the adverse selection problem in insurance?
Actuaries work to increase the risks of underwriting and selling life insurance.
Actuaries work to increase the risks of underwriting and selling life insurance.
What is a key component of the actuarial analysis for traditional life insurance?
What is a key component of the actuarial analysis for traditional life insurance?
Actuaries analyze different factors for health insurance compared to traditional life insurance.
Actuaries analyze different factors for health insurance compared to traditional life insurance.
What is the main characteristic of ordinary life policies?
What is the main characteristic of ordinary life policies?
Term life insurance is considered to be pure in the sense that it has no savings element attached.
Term life insurance is considered to be pure in the sense that it has no savings element attached.
When does the beneficiary of a term life insurance policy receive the payout?
When does the beneficiary of a term life insurance policy receive the payout?
Whole life insurance provides coverage for a specific period, after which the coverage ends.
Whole life insurance provides coverage for a specific period, after which the coverage ends.
What is the key feature of whole life insurance that distinguishes it from term life?
What is the key feature of whole life insurance that distinguishes it from term life?
What are the two main components of endowment life insurance?
What are the two main components of endowment life insurance?
If the insured person dies during the endowment period, the beneficiary will receive the face value of the policy.
If the insured person dies during the endowment period, the beneficiary will receive the face value of the policy.
If the insured person survives the endowment expiration, the policyholder receives a lump sum payout.
If the insured person survives the endowment expiration, the policyholder receives a lump sum payout.
What are the investments that fixed premium payments for variable life insurance are directed towards?
What are the investments that fixed premium payments for variable life insurance are directed towards?
The beneficiary of a variable life policy receives fixed returns upon the death of the insured.
The beneficiary of a variable life policy receives fixed returns upon the death of the insured.
What is the key feature of universal life insurance?
What is the key feature of universal life insurance?
What is the main difference between variable universal life insurance and standard universal life?
What is the main difference between variable universal life insurance and standard universal life?
What is the distinguishing feature of group life insurance?
What is the distinguishing feature of group life insurance?
What are the two types of group life insurance policies?
What are the two types of group life insurance policies?
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.
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.
What are three other activities of life insurers, besides offering life insurance?
What are three other activities of life insurers, besides offering life insurance?
Annuities represent different methods of liquidating a fund over a long period of time.
Annuities represent different methods of liquidating a fund over a long period of time.
Where do life insurers typically concentrate their asset investments?
Where do life insurers typically concentrate their asset investments?
In 2021, life insurers invested a significant portion of their assets in mortgages, representing 8.0% of the total.
In 2021, life insurers invested a significant portion of their assets in mortgages, representing 8.0% of the total.
What is the largest component of life insurance companies' liabilities?
What is the largest component of life insurance companies' liabilities?
Life insurers maintain capital and surplus reserve funds to meet unexpected future losses.
Life insurers maintain capital and surplus reserve funds to meet unexpected future losses.
How do insurers earn profits?
How do insurers earn profits?
What are two ways that insurance companies can increase the spread between premium income and policy payouts?
What are two ways that insurance companies can increase the spread between premium income and policy payouts?
The 2008-2009 financial crisis had no significant impact on the insurance industry.
The 2008-2009 financial crisis had no significant impact on the insurance industry.
The Treasury Department extended bailout funds to struggling life insurers in the late 2000s.
The Treasury Department extended bailout funds to struggling life insurers in the late 2000s.
What was the net income of life insurance companies in 2020?
What was the net income of life insurance companies in 2020?
Life insurers paid out a record $90.4 billion in death benefit payments in 2020.
Life insurers paid out a record $90.4 billion in death benefit payments in 2020.
What is the role of the National Association of Insurance Commissioners (NAIC)?
What is the role of the National Association of Insurance Commissioners (NAIC)?
States do not promote life insurance guarantee funds.
States do not promote life insurance guarantee funds.
What is the purpose of contributions from insurance companies?
What is the purpose of contributions from insurance companies?
The Wall Street Reform and Consumer Protection Act of 2010 resulted in the Fed becoming a major supervisor of insurance firms.
The Wall Street Reform and Consumer Protection Act of 2010 resulted in the Fed becoming a major supervisor of insurance firms.
What are four key areas of the FIO's authority regarding the insurance industry?
What are four key areas of the FIO's authority regarding the insurance industry?
There are over 2,600 companies that sell property-casualty (P&C) insurance in the U.S.
There are over 2,600 companies that sell property-casualty (P&C) insurance in the U.S.
The top ten firms in the U.S. P&C insurance market hold a majority share of the market, with a 51.4% share.
The top ten firms in the U.S. P&C insurance market hold a majority share of the market, with a 51.4% share.
Which company was the top firm in the P&C insurance market in 2018, writing 9.7% of all premiums?
Which company was the top firm in the P&C insurance market in 2018, writing 9.7% of all premiums?
Property insurance covers both real and personal property losses.
Property insurance covers both real and personal property losses.
What is the main purpose of casualty or liability insurance?
What is the main purpose of casualty or liability insurance?
Fire insurance and allied lines only cover damages from fire.
Fire insurance and allied lines only cover damages from fire.
What does homeowners multiple-peril insurance protect against?
What does homeowners multiple-peril insurance protect against?
Commercial multiple-peril insurance protects commercial firms against perils that are different from those covered by homeowners MP insurance.
Commercial multiple-peril insurance protects commercial firms against perils that are different from those covered by homeowners MP insurance.
What are the two main types of coverage provided by automobile insurance?
What are the two main types of coverage provided by automobile insurance?
Liability insurance (other than auto) protects individuals and businesses against legal liability due to accidents involving motor vehicles.
Liability insurance (other than auto) protects individuals and businesses against legal liability due to accidents involving motor vehicles.
What are the main types of assets that P&C insurers invest in?
What are the main types of assets that P&C insurers invest in?
P&C insurers invest a larger proportion of their assets in common stock compared to life insurance companies.
P&C insurers invest a larger proportion of their assets in common stock compared to life insurance companies.
What are two major components of P&C insurers' liabilities?
What are two major components of P&C insurers' liabilities?
Loss reserves are funds set aside to meet expected losses from underwriting the P&C lines.
Loss reserves are funds set aside to meet expected losses from underwriting the P&C lines.
What are the expected administrative and related costs of adjusting (settling) claims known as?
What are the expected administrative and related costs of adjusting (settling) claims known as?
What is underwriting risk in insurance?
What is underwriting risk in insurance?
What are three key sources of underwriting risk?
What are three key sources of underwriting risk?
What is a key feature of claims loss risk?
What is a key feature of claims loss risk?
Loss rates are more predictable for high-severity, low-frequency lines than for low-severity, high-frequency lines.
Loss rates are more predictable for high-severity, low-frequency lines than for low-severity, high-frequency lines.
What is reinsurance, in the context of insurance?
What is reinsurance, in the context of insurance?
What does the loss ratio measure in insurance?
What does the loss ratio measure in insurance?
A loss ratio of less than 100 percent means premiums earned were sufficient to cover losses incurred on that line.
A loss ratio of less than 100 percent means premiums earned were sufficient to cover losses incurred on that line.
How is the expense ratio calculated in insurance?
How is the expense ratio calculated in insurance?
What are two major sources of expense risk for P&C insurers?
What are two major sources of expense risk for P&C insurers?
What is the combined ratio in insurance?
What is the combined ratio in insurance?
If the combined ratio is less than 100 percent, premiums are sufficient to cover losses and expenses related to the line.
If the combined ratio is less than 100 percent, premiums are sufficient to cover losses and expenses related to the line.
How is the investment yield calculated in insurance?
How is the investment yield calculated in insurance?
The operating ratio is a measure of overall profitability, calculated as the combined ratio minus the investment yield.
The operating ratio is a measure of overall profitability, calculated as the combined ratio minus the investment yield.
The insurance sector is becoming increasingly global.
The insurance sector is becoming increasingly global.
2017 was the least costly year for the worldwide insurance industry.
2017 was the least costly year for the worldwide insurance industry.
What was the record cost of natural disasters to insurers in 2017?
What was the record cost of natural disasters to insurers in 2017?
Losses in North America accounted for 83% of the total losses from natural disasters in 2017.
Losses in North America accounted for 83% of the total losses from natural disasters in 2017.
What were the three hurricanes that significantly impacted the USA and Caribbean in 2017?
What were the three hurricanes that significantly impacted the USA and Caribbean in 2017?
What is the primary role of underwriters in insurance companies?
What is the primary role of underwriters in insurance companies?
Which type of life insurance provides a death benefit only if the insured passes away within a specified term?
Which type of life insurance provides a death benefit only if the insured passes away within a specified term?
What percentage of insurance companies' liabilities were policy reserves in 2021?
What percentage of insurance companies' liabilities were policy reserves in 2021?
Which type of insurance protects lenders against borrowers' death before debt repayment?
Which type of insurance protects lenders against borrowers' death before debt repayment?
What complicates the predictability of claims in insurance?
What complicates the predictability of claims in insurance?
What is the Loss Ratio in insurance companies?
What is the Loss Ratio in insurance companies?
Which strategy do insurance companies use to manage large or unexpected claims?
Which strategy do insurance companies use to manage large or unexpected claims?
Which of the following assets do insurance companies typically invest in to generate returns?
Which of the following assets do insurance companies typically invest in to generate returns?
Flashcards
Insurance Policy
Insurance Policy
A contract guaranteeing payment to the insured under certain conditions, in exchange for a periodic fee.
Insurance Underwriter
Insurance Underwriter
Assesses the risk of an applicant for insurance coverage.
Insurance Broker
Insurance Broker
Sells insurance contracts.
Life Insurance
Life Insurance
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Property-Casualty Insurance
Property-Casualty Insurance
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Premium
Premium
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Adverse Selection
Adverse Selection
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Actuary
Actuary
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Ordinary Life Policy
Ordinary Life Policy
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Term Life Insurance
Term Life Insurance
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Whole Life Insurance
Whole Life Insurance
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Endowment Life Insurance
Endowment Life Insurance
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Variable Life Insurance
Variable Life Insurance
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Universal Life insurance
Universal Life insurance
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Group Life Insurance
Group Life Insurance
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Credit Life Insurance
Credit Life Insurance
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Annuity
Annuity
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Loss Ratio
Loss Ratio
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Expense Ratio
Expense Ratio
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Combined Ratio
Combined Ratio
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Insurance Company Function
Insurance Company Function
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Insurance Premium
Insurance Premium
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Life Insurance Types
Life Insurance Types
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Underwriting Process
Underwriting Process
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Investment Yield
Investment Yield
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Property Insurance
Property Insurance
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Casualty Insurance
Casualty Insurance
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What is the most important role of an insurance underwriter?
What is the most important role of an insurance underwriter?
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How do life insurance and property & causality insurance differ?
How do life insurance and property & causality insurance differ?
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What is the concept of 'adverse selection' in insurance?
What is the concept of 'adverse selection' in insurance?
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Why is predictability of claims important for insurance companies?
Why is predictability of claims important for insurance companies?
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What is 'reinsurance' and why is it used?
What is 'reinsurance' and why is it used?
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What does the 'loss ratio' tell us?
What does the 'loss ratio' tell us?
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What makes long-tail risks challenging for insurers?
What makes long-tail risks challenging for insurers?
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How do insurance companies make money?
How do insurance companies make money?
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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!
