Principles of Risk Management and Insurance, 11e(Rejda)Chapter 7 Financial Operations of Insurers1) LMNMutual Insurance Companyhas total liabilities of $300 million. The has totalassets of $380 million. What is LMNs policyholders surplusA) $680 millionB) $340 millionC) $80 millionD) -$80 millionAnswer: CQuestion Status: Previous Edition2) All of the following would appear in the asset section of an insurance balancesheet EXCEPTA) loss reserves.B) bonds.C) common stock.D) real estate.Answer: AQuestion Status: Previous Edition3) Under one method of estimating a loss reserve, the reserve is based on lifeexpectancy, duration of disability, and similar factors. This method of estimatingloss reserves is called theA) judgment method.B) tabular value method.C) loss ratio panycompanysD) average value method.Answer: BQuestion Status: Revised4) Reasons for the unearned premium reserve include which of the following I. To pay lossesthat occur during the policy period.II.To pay premium refunds to policyholders in the event of cancellation.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CQuestion Status: Previous Edition5) A property and casualty insurers loss reserve includes estimates for all ofthe following EXCEPTA) claims anticipated but not yet incurred.B) claims reported and adjusted but not yet paid.C) claims reported and filed but not yet adjusted.D) claims incurred but not yet reported to the company.Answer: AQuestion Status: Previous Edition6) Which of the following statements about methods for estimating loss reservesfor property and casualty insurers is (are) trueI. The judgment method involves the use of a statutory formula to estimate the loss reserve.II.The average value method is used when the number of claims is large and theclaims are settled quickly.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: BQuestion Status: Previous Edition7) One item that appears on an insurance companys financial statements is a liability thatrepresents an estimate of the claims reported and adjusted but not yet paid, claims reportedand filed but not yet adjusted, and claims incurred butnot yet reported to the company. This liability is called the insurersA) net income.B) loss reserve.C) admitted assets.D) unearned premium reserve.Answer: BQuestion Status: Previous Edition8) A loss reserve established for each individual claim when it is reported to a property andcasualty insurance company is call a(n)A) admitted asset.B) incurred-but-not-reported (IBNR) reserve.C) unearned premium reserve.D) case reserve.Answer: DQuestion Status: Previous EditionPremiums Written$90,000,0009) All of the following items would appear in the income section of an insurance companysincome and expense statement EXCEPTA) gain on sale of securities.B) common stock dividends.C) commissions.D) premiums.Answer: CQuestion Status: Previous Edition10) JKL Insurance Company reported the following information on its accounting statements lastyear:Premiums Written$90,000,000Loss Adjustment Expenses $5,000,000Underwriting Expenses$30,000,000Premiums Earned$100,000,000Incurred Losses$70,000,000What was JKLs loss ratio last yearA) percentB) percentC) percentD) percentAnswer: BQuestion Status: Previous Edition11) JKL Insurance Company reported the following information on its accounting statements lastyear:Loss Adjustment Expenses $5,000,000What was JKLs expense ratio last yearA) percentB) percentC) percentD) percentAnswer: CQuestion Status: Previous EditionUnderwriting Expenses$30,000,000Premiums Earned$100,000,000Incurred Losses$70,000,00012) JKL Insurance Company reported the following information on its accounting statements lastyear:Premiums Written$90,000,000Loss Adjustment Expenses $5,000,000Underwriting Expenses $30,000,000Premiums Earned$100,000,000Incurred Losses$70,000,000What was JKLs combined ratio last yearA)B)C)D)Answer: DQuestion Status: Previous Edition13) Which of the following statements about property and casualty insurance company operatingresults is (are) trueI. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still berequired to pay income taxes.II. By all measures, the property and casualty insurance industry is highly profitable whencompared to other industries.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: AQuestion Status: Previous Edition14) Life insurance policyowners mayborrow the cash value from their life insurance policies.Where are life insurance policy loans shown on a life insurance companys financial statementsA) as an assetB) as a liabilityC) as incomeD) as an expenseAnswer: A Question Status: Previous Edition15) MedProf Insurance markets medical malpractice insurance. The companys combined ratioin 2009 was . Its expense ratio was . What was the companys loss ratioA)B)C)D)Answer: B Question Status: Previous Edition16) To protect policyholders, state laws place limitations on a life insurance companysinvestments. The assets backing interest-sensitive products, such as variable life insurance andvariable annuities, are not subject to these restrictions. Assets backing interest-sensitiveproducts are placed in a special account called the life insurersA) policy reserve account.B) policy loan account.C) separate account.D) policyholders surplus.Answer: C Question Status: Previous Edition17) Which of the following statements is (are) true concerning investments of property andcasualty insurers and life insurersI. Property and casualty insurance companies place greater emphasis on liquidity than do lifeinsurers.II. Life insurance companyinvestments are, on average, of longer duration property andcasualty insurance company investments.A) I onlyB) II onlyC) both I and IID) neither I nor II Answer: C Question Status: Previous Edition18) All of the following are expenses of life insurance companies EXCEPTA) matured endowments.B) surrender benefits.C) disability income payments.D) realized capital gains.Answer: DthanQuestion Status: Previous Edition19) All of the following statements about business objectives in designing a rating system aretrue EXCEPTA) The rating system should encourage loss control activities.B) The rating system should be independent of long-run changes in economic conditions.C) The rating system should be simple to understand.D) The rating system should be stable over short periods so that consumer satisfaction can bemaintained.Answer: BQuestion Status: Previous Edition20) All of the following statements about regulatory objectives of insurance rate making are trueEXCEPTA) One purpose of rate adequacy is to maintain the solvency of insurers.B) Rates unfairly discriminate if loss exposures that are similar with respect to losses andexpenses are charged substantially different rates.C) Insurers know in advance if the coverages marketed will be profitable, so rate regulation isnot needed.D) Rates are excessive if policyholders are paying substantially more than the actual value oftheir protection.Answer: CQuestion Status: Previous Edition21) The unit of measurement used in property and casualty insurance pricing is called theA) unit rate.B) premium.C) exposure unit.D) experience unit.Answer: CQuestion Status: Previous Edition22) The portion of an insurance premium allocated to expenses, profit, and a margin forcontingencies is called theA) loading.B) pure premium.C) gross premium.D) experience rate.Answer: AQuestion Status: Previous Edition23) Which of the following statements about judgment rating is trueA) It involves the manual rating of exposures.B) It is used when the loss exposures are so diverse that a class rate cannot be calculated.C) It is a form of experience rating.D) It is only used when credible loss statistics are available.Answer: BQuestion Status: Previous Edition24) Under one type of merit rating, the class or manual rate is adjusted upward or downwardbased on past loss history. This type of merit rating is calledA) schedule rating.B) judgment rating.C) experience rating.D) retrospective rating.Answer: C Question Status: Previous Edition25) All of the following statements about class rating are true EXCEPTA) Exposures with similar characteristics are placed in the same underwriting class.B) The rate charged for each class reflects the average loss experience for that class.C) The complexity of class rating makes it inappropriate for personal lines coverages.D) It is based on the assumption that future losses to insureds will be determined by the sameclassification factors currently in use.Answer: CQuestion Status: Previous Edition26) Under the pure premium method of determining class rates, the gross rate is determined bywhich of the following formulasA) pure premium/(1 + expense ratio)B) pure premium/(1 - expense ratio)C) (1 + pure premium)/expense ratioD) expense ratio/(1 - pure premium)Answer: BQuestion Status: Previous Edition27) The expected loss ratio for a class of business is 60 percent. What change would beindicated in the level of rates under the loss ratio method if the actual loss ratio turned out to be68 percentA) percent increaseB) percent increaseC) percent increaseD) percent increaseAnswer: BQuestion Status: Previous Edition28) Which of the following statements about schedule rating is (are) trueI. It involves the determination of a basis rate for each exposure, which is then modified by creditsor debits.II.It is based on the assumption that certain physical characteristics of theinsureds operations will influence the insureds future loss experience.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CQuestion Status: Previous Edition29) Which of the following statements about experience rating is (are) trueI. The insureds past loss experience is used to determine the premium for the next policy period.II.Its use is generally limited to small firms whose actual experience lackscredibility.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: AQuestion Status: Previous Edition30) Which of the following statements about retrospective rating is trueA) The premium for the current period is determined by the loss experience for prior periods.B) The premium for the current period is determined by the loss experience during the currentperiod.C) The premium for future periods is determined by the average loss experience for the currentand previous periods.D) The premium for future periods is determined by the loss experience for the current period.Answer: BQuestion Status: Previous Edition31) Monopoly Insurance is the only company marketing a certain line of insurancein a state. After complaints from several consumers, the State Insurance Departmentinvestigated Monopolys rates. The regulators determined that Monopoly was taking advantageof being the only insurer offering the line by charging more than double the actuarial cost of thecoverage. Which regulatory rating objective was Monopoly violatingA) Rates must be adequate.B) Rates should encourage loss control.C) Rates must not be excessive.D) Rates must not unfairly discriminate.Answer: CQuestion Status: Previous Edition32) Small Tow n used to be just thata small tow n 6 miles from Large City. Over the years, thearea between Small Town and Large City has developed, and now Small Town is part of thesuburbs surrounding Large City. An auto insurer that operated in the area had a large increase inauto claims from Small Towninsureds. The insurer did not adjust its rates, and this year will losemoney because of claims attributable to higher population density. Which business ratingobjective did this insurer fail to meetA) simplicityB) stabilityC) responsivenessD) encouragement of loss controlAnswer: CQuestion Status: Previous Edition33) Nathan was hired as an actuary with ABCInsurance. Nathan was asked to calculate theannual premium for a new product and to explain his calculations to ABCs director of ratemaking.Nathan calculated the pure premium and presented this value as the final premium. AfterNathans presentation, the director of ratemaking said, You left out something very important. Ifwe sell coverage at the pure premium rate, well be out of business soon. What did Nathanoverlook in his calculationsA) loadingsB) the underwriting cycleC) seasonality of claimsD) investment incomeAnswer: AQuestion Status: Previous Edition34) XYZInsurance Companyexpects $500,000 in claims and loss adjustment expenses for each1,000 properties that it insures in a certain category of business insurance. What pure premiumshould XYZ charge for each property insuredA) $B) $C) $D) $Answer: DQuestion Status: Previous Edition35) XYZ Insurance Company uses class rating to determine the rate to charge for insurance.For one type of insurance, the pure premium XYZ actuaries calculated is $75 per unit. If XYZsexpense ratio is 25 percent, what is the gross rate for this coverageA) $B) $C) $D) $Answer: DQuestion Status: Previous Edition36) A manufacturing company just hired a new risk manager, and she has instituted severalemployee safety programs. She has persuaded the insurer writing the companys workerscompensation insurance to base the premium on the companys actual loss experience duringthe current period rather than on the companys historical performance. This type of plan is calleda(n)A) retrospectively rated plan.B) class rated plan.C) experience rated plan.D) judgment rated plan.Answer: AQuestion Status: Revised37) An Econodeath Insurance Company actuary calculated the present value of the expecteddeath claim the company will pay if it sells whole life insurance to a 30-year-old woman. Thisvalue is called theA) net level premium.B) gross premium.C) net single premium.D) life insurance policy reserve.Answer: CQuestion Status: Previous Edition38) Metro City has six different zip codes. XYZInsurance Companymarkets coverages in MetroCity. Any applicant who lists one particular zip code is automatically quoted a premium that istwenty percent more than the average premium for applicants from the other five zip codes, evenif the loss exposure is identical. Which regulatory objective is not being met given XYZs premiumstructureA) Rates must be adequate.B) Rates must not unfairly discriminate.C) Rates must be responsive.D) Rate must not be excessive.Answer: BQuestion Status: Previous Edition39) All of the following statements about the combined ratio are true EXCEPTA) It is equal to the loss ratio plus the expense ratio.B) A combined ratio greater than 1 (or 100 percent) meansan underwriting loss has occurred.C) The combined ratio does not consider investment income.D) A combined ratio less than 1 (or 100 percent) indicates that an underwriting loss hasoccurred.Answer: DQuestion Status: Previous Edition40) In schedule rating, each building is individually evaluated based on several rating factors.One factor refers to the possibility that the building will be damaged or destroyed by a fire thatstarts at an adjacent property and spreads to the building. This rating factor is known asA) occupancy.B) protection.C) maintenance.D) exposure.Answer: DQuestion Status: Previous Edition41) A strip-mall includes eight identical-sized retail units. All of the units were built at thesametime and each has an identical sprinkler system. Unit number two is a dry cleaning business.Unit number three is a bar and grill. Unit number four is a dress shop. The owners of these threeunits are all insured by the sameinsurance company, but the property insurance premiums varysignificantly. Which of the following rating factors best explains the difference in premiumsA) exposureB) protectionC) constructionD) occupancyAnswer: DQuestion Status: Previous Edition42) Which of the following statements is true regarding the financial crisis andthe insurance industryI. The insurance industry is to blame for causing the financial crisis by originating sub-primemortgage loans.II. Many insurance companies became insolvent as a result of the financial crisis.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: DQuestion Status: New。