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Finance
Q:
An example of a national full-line investment banker that specializes in corporate finance is Goldman Sachs.
Q:
Diversified full-line investment banks act as both broker dealers and securities underwriters.
Q:
For securities firms, income from investment management is more stable than income from underwriting or trading activities.
Q:
Liability losses are more subject to social inflation than property losses.
Q:
Liability lawsuits related to asbestos claims are an example of long tail losses.
Q:
Property loss risk is generally easier to estimate than liability loss risk.
Q:
The primary asset for P&C insurers are bonds.
Q:
The top ten property and casualty firms underwrite just under half of all the P&C premiums written.
Q:
Most states maintain a permanent reserve fund to resolve insurance company failures.
Q:
The National Association of Insurance Commissions (NAIC) examines and regulates insurance companies.
Q:
The McFadden Act grants states the primary right to regulate insurance companies.
Q:
The cash surrender value of a life insurance policy is the present value of expected future payouts on the policy.
Q:
Life insurance policy reserves are the estimated current worth of expected future payouts.
Q:
Life insurers write over 50% of all health insurance premiums.
Q:
Policy reserves are the primary asset of the typical life insurer.
Q:
Premiums on standard annual renewable term life will generally increase as the policyholder ages.
Q:
A 65-year-old person has saved $1,250,000 and wishes to receive 10 annual annuity payments, beginning in one year. If the annuity rate is 5.75%, he can expect to receive $167,829 per year.
Q:
In a universal life policy the cash value of the contract grows at a fixed-rate set by the life insurer.
Q:
In a typical variable life policy the policyholder may vary the premium payments and the maturity date of the policy.
Q:
A man has what he believes is a mild heart attack but he doesn't go to the hospital. Instead he calls his insurance agent and doubles the amount of his life insurance. This is an example of the moral hazard problem in insurance.
Q:
Why do P&C insurers place a large percentage of their investments in bonds and maintain large surpluses?
Q:
Halliburton was allowed to bankrupt one of its subsidiaries in settlements of lawsuits on asbestos cases. What are the pros and cons of allowing a firm to limit its liability by shifting the liability to only one subsidiary rather than placing all of the corporation's assets at risk?
Q:
Everything else constant, what is the maximum expected loss ratio that would yield a profitable line after including investment income?
Q:
What are the main lines of P&C insurance?
Q:
What is separate account business? How important is it to life insurers?
Q:
Why are P&C insurers dependent on investment yields? Is this an argument for changing how this industry operates and/or how we regulate the industry? Explain.
Q:
What three main sources of underwriter risk exist for insurers?
Q:
A 65-year-old wishes to convert the cash value of his insurance policy into an annuity. He can select an annuity that will last 15 years or one that lasts 20 years. If the cash value is $450,000 and interest rates are 5.25%, how much less per year will he receive if he chooses the 20-year annuity?
Q:
What additional flexibilities are provided by variable and universal life as compared to a standard whole life or endowment policy?
Q:
How do insurance guarantee funds differ from bank deposit insurance funds?
Q:
State Farm and other P&C insurers came into conflict with policyholders over claims filed as a result of Hurricane Katrina that resulted in lawsuits. The conflict resulted from
A. insurer's refusal to pay until reinsurance funds were collected.
B. policyholder's fraudulent claims.
C. insurers' insistence that the Katrina storm surge resulted in flood damage which was not covered.
D. insurers overcharged for hurricane insurance.
Q:
The best underwriting performance since 1936 in terms of the combined ratio occurred during ____________ for property and casualty insurers.
A. 1999 and 2000
B. 2001 and 2002
C. 2002 and 2003
D. 2004 and 2005
E. 2006 and 2007
Q:
The P&C loss ratio on an insurance line contains
I. payouts on claims.
II. brokerage commissions incurred to market the claims.
III. costs associated with settling claims.
IV. dividend payouts to policyholders.
A. I and II only
B. I, III, and IV only
C. I and III only
D. II and IV only
E. III and IV only
Q:
Which one of the following would provide an example of social inflation?
A. Large malpractice awards beyond the level of damages incurred.
B. Increase in costs on auto physical damage claims.
C. Increase in prescription drug cost claims.
D. Losses to repair damages caused by hurricanes in Florida.
E. Rising cost of funeral expenses due to inflation.
Q:
Premiums received before the coverage period are termed
A. unearned premiums
B. lagged premiums
C. loss adjustment expenses
D. loss reserves
E. policyholder's surplus
Q:
In terms of dollar costs, the worst U.S. catastrophe since 2000 was caused by
A. the terrorist attacks on the World Trade Center and the Pentagon.
B. Hurricane Katrina.
C. the California fires of 2007.
D. the Florida hurricanes of 2004.
E. Hurricane Rita of 2005.
Q:
An insurance line has a pure loss ratio of 65%, LAE of 16%, an expense ratio of 26%, the firm pays 3% of premiums to policyholders as dividends, and has an investment yield to premium ratio of 6%. Which one of the following statements is true?
A. The line is profitable because the operating ratio is greater than 100.
B. The line is profitable because the operating ratio is less than 100.
C. The line is not profitable because the operating ratio is greater than 100.
D. The line is profitable because the combined ratio after dividends is greater than 100.
E. The line is profitable because the combined ratio after dividends is less than 100.
Q:
An insurance line has a loss ratio of 62%, an expense ratio of 35%, the firm pays 2% of premiums to policyholders as dividends, and has an investment yield to premium ratio of 9%. The operating ratio for this line is
A. 86
B. 90
C. 95
D. 106
E. 109
Q:
A policyholder wishes to annuitize the cash value of her insurance policy at retirement. The cash value is $725,000. What payment (to the nearest dollar) can he expect if he wishes to receive 15 years of payments (starting next year) and interest rates are 5.25%?
A. $43,333
B. $55,555
C. $71,033
D. $60,524
E. $29,250
Q:
Estimates of the cost of the September 11, 2001 terrorist attacks on the World Trade Center indicate that the cost to insurance companies was as high as
A. $20 billion
B. $30 billion
C. $40 billion
D. $50 billion
E. $60 billion
Q:
For P&C insurers, if the combined ratio is more than 100%, that firm
A. could not have been profitable.
B. must have been profitable.
C. may have been profitable if investment returns were high enough.
D. was profitable if the LAE was low enough.
Q:
At P&C insurers, if the combined ratio is less than 100%, the premiums charged were sufficient to cover
A. losses only.
B. expenses only.
C. both losses and expenses.
D. losses, expenses, and investment returns on premiums.
Q:
The two major components of expense risk for P&C insurers are
A. the combined ratio and the premium ratio.
B. loss adjustment expenses and variations in commission and other expenses.
C. investment yield and premiums earned.
D. dividend ratio and investment yield.
E. none of the above
Q:
The operating ratio is calculated as
A. the loss ratio minus the underwriting cycle lag.
B. the loss ratio plus the loss adjustment expense ratio plus the commission to premium ratio.
C. the combined ratio after dividends minus the investment yield.
D. the combined ratio minus the loss ratio.
E. none of the above
Q:
Property and casualty insurers hold _____________ short-term assets than life insurers because property and casualty loss rates are _____________ predictable than life insurance loss rates.
A. more; more
B. more; less
C. less; less
D. less; more
Q:
Hurricane damage in a given area is an example of a ____________________ for which it is difficult to predict loss exposure.
A. low severity, low frequency event
B. high severity, high frequency event
C. low severity, high frequency event
D. high severity, low frequency event
Q:
In 2010 the average combined ratio after dividends for the P&C industry was ___________.
A. 102.3
B. 105.6
C. 107.2
D. 97.6
E. 93.5
Q:
Which of the following statements are true?
I. Catastrophe bonds may be used as a form of reinsurance.
II. Catastrophe bonds are structured so that if an insured event results in large losses for an insurer, the bond's required payments increase.
III. Buyers of catastrophe bonds benefit if the adverse event occurs.
IV. When issued, catastrophe bonds will have promised yields above the risk-free rate.
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only
Q:
The most important federal legislation affecting the regulation of life insurance companies prior to 1999 was the
A. McCarran-Ferguson Act
B. McFadden Act
C. Investment Company Act
D. SEC Act
E. Insurance Freedom Act
Q:
The largest asset category of life insurers is _______________ and the largest liability category is ___________.
A. bonds; separate account items
B. separate account items; current policy claims
C. bonds; policy reserves
D. policy reserves; mortgage loans
E. common stock; dividend reserve
Q:
An investor has $25,000 that he can invest today. In addition to this amount, he can also invest $12,000 per year for 30 years (beginning one year from now) at which time he will retire. He plans on living for 25 years after he retires. If interest rates are 8%, what size annual annuity payment can he obtain for his retirement years? (All annuity payments are at year-end. Round your answer to the nearest dollar.)
A. $64,439
B. $192,501
C. $150,913
D. $161,096
E. $173,488
Q:
Which one of the following statements concerning annuities offered by insurers is not true?
A. Interest on annuities is not taxed until the investor receives the payments.
B. Annuity payments may be fixed or variable.
C. Annuity contributions are not capped by the IRS.
D. Annuities can be deferred or immediate.
E. Annuity payments must cease upon the policyholder's death.
Q:
The primary regulator of insurance firms is the
A. NAIC
B. McCarran-Ferguson Commission
C. FDIC
D. state insurance regulator
E. SEC
Q:
The term "variable" in a variable life policy refers to the
A. policyholder's ability to vary the premiums.
B. insurer's ability to vary the rate of return on the policy.
C. variable growth rate of the cash value of the policy.
D. insurer's ability to vary the premiums.
E. the policyholder's ability to cancel the plan.
Q:
In property and casualty insurance the combined ratio is equal to the ______________________ divided by total premiums written.
A. sum of the loss ratio plus loss adjustment expenses
B. sum of the loss ratio plus general expenses and broker's commissions
C. operating ratio minus dividends paid to policyholders
D. nominal ratio plus real ratio
E. 1 minus Operating ratio
Q:
The following type(s) of life insurance policies do not have a savings feature:
A. Term life
B. Whole life
C. Variable life
D. Universal life
E. Both C and D do not
Q:
Policy reserves are a(n)
A. balance sheet liability.
B. balance sheet asset.
C. separate account item.
D. insurance guarantee fund payment.
E. income statement revenue item.
Q:
Why have postal savings institutions flourished in many foreign countries? What unique advantages do they have and what services do many offer?
Q:
Has the importance of foreign non-bank financial lending been increasing or decreasing in recent years? Provide some examples to back up your answer.
Q:
What are the advantages finance companies (FCs) have over banks in the area of business lending? What disadvantages do they have?
Q:
How do sales finance companies differ from personal credit and business credit institutions? List an example of each.
Q:
What are the advantages of a finance company or a bank leasing equipment to a small business customer rather than financing the customer's purchase of the equipment?
Q:
What are home equity loans? What has happened to the average balance of home equity loans in recent years? Why do finance companies prefer home equity loans to unsecured debt?
Q:
Why have larger credit unions experienced greater profitability than smaller credit unions? Do you expect this to continue? Why or why not?
Q:
The American Bankers Association and others are seeking to limit growth of credit unions. What is the basis for the bankers' concern? What does the credit union industry argue? What kind of limits on credit unions are the bankers seeking?
Q:
How do the primary risks of credit unions differ from banks? From savings institutions (SIs)? From finance companies?
Q:
What are the major disadvantages that credit unions face versus banks?
Q:
What are the major advantages that credit unions enjoy over banks?
Q:
A savings institution (SI) has funded $12 million of 30-year fixed-rate mortgages with an average interest rate of 5.75%. These assets are funded with time deposits with an average maturity of six months. The deposits are currently paying 3.5%. In six months' time, however, the Fed has raised interest rates twice and the depositors now must be paid 4.25%. What will happen to the SI's ROA and NIM? How would your answer change if the SI normally sells the mortgages every 6 months and originates additional new mortgage loans?
Q:
In dollars, how many subprime mortgages were originated in relation to the total mortgage market in 2006? How has the subprime crisis affected the profitability of finance companies? Are all finance companies equally affected? Explain.
Q:
Explain why low interest rates and strong mortgage markets help keep profitability high at savings institutions.
Q:
Which one of the following institutions is the least regulated?
A. Banks
B. Credit unions
C. Finance companies
D. Savings associations
E. Savings banks
Q:
Finance companies obtain a significant portion of their short-term financing from
A. time and savings deposits.
B. transaction accounts.
C. long-term bonds.
D. issuing commercial paper.
E. equity.
Q:
Which one of the following utilizes the least amount of deposits as a source of funds?
A. Banks
B. Credit unions
C. Finance companies
D. Savings associations
E. Savings banks
Q:
Aggregate finance company profitability was poor in the late 2000s primarily due to which segment of the finance company industry?
A. Business factoring
B. Equipment loans
C. Equipment leasing
D. Securitization of auto loans
E. Subprime lending
Q:
For the finance company industry as a whole, the largest single loan type is
A. business loans
B. consumer loans
C. real estate loans
D. high-risk consumer loans
E. credit card loans
Q:
Home equity loans are popular with finance companies. Which one of the following statements about home equity loans is not correct?
A. These loans allow customers to borrow on a line of credit secured with a second mortgage.
B. Interest payments on home equity loans are not tax deductible.
C. Bad debt expense on home equity loans are lower than on many other types of finance company loans.
D. The average outstanding balance on home equity loans was $85,472 in 2007.
E. If the borrower defaults on the home equity loan, the finance company can seize the house.
Q:
A loan agreement between Ford Motor Credit and a local Ford dealer is an example of
A. floor planning.
B. business equipment loan.
C. factoring of receivables.
D. depreciation loan.
E. none of the above
Q:
A captive finance company is one that
A. is owned by a retailer or manufacturer.
B. is owned by a bank holding company.
C. is owned by its depositors.
D. lends only to high-risk individuals that cannot obtain loans elsewhere (i.e., captives).
E. is regulated at the federal level.
Q:
Finance companies enjoy several advantages over banks. These include all but which one of the following?
A. Finance companies can offer various types of products and services without regulatory interference.
B. Many finance companies have considerable knowledge and expertise about specific industries and products.
C. Finance companies can accept riskier customers than banks.
D. Finance companies generally have lower overhead than banks.
E. Finance companies have lower funds costs than banks.