Principles of Risk Management and Insurance, 11e (Rejda)Chapter 7 Financial Operations of Insurers1) LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's 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 company's balance sheet 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 life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called theA) judgment method.B) tabular value method.C) loss ratio method.D) average value method.Answer: BQuestion Status: Revised4) Reasons for the unearned premium reserve include which of the followingI. To pay losses that 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 insurer's loss reserve includes estimates for all of the 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 reserves for 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 the claims 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 company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer'sA) 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 and casualty 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 Edition9) All of the following items would appear in the income section of an insurance company's income 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 last year:Premiums Written $90,000,000Loss Adjustment Expenses $5,000,000Underwriting Expenses $30,000,000Premiums Earned $100,000,000Incurred Losses $70,000,000What was JKL's loss ratio last yearA) percentB) percentC) percentD) percentAnswer: BQuestion Status: Previous Edition11) JKL Insurance Company reported the following information on its accounting statements last year:Premiums Written $90,000,000Loss Adjustment Expenses $5,000,000Underwriting Expenses $30,000,000Premiums Earned $100,000,000Incurred Losses $70,000,000What was JKL's expense ratio last yearA) percentB) percentC) percentD) percentAnswer: CQuestion Status: Previous Edition12) JKL Insurance Company reported the following information on its accounting statements last year:Premiums Written $90,000,000Loss Adjustment Expenses $5,000,000Underwriting Expenses $30,000,000Premiums Earned $100,000,000Incurred Losses $70,000,000What was JKL's combined ratio last yearA)B)C)D)Answer: DQuestion Status: Previous Edition13) Which of the following statements about property and casualty insurance company operating results is (are) trueI. An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes.II. By all measures, the property and casualty insurance industry is highly profitable when compared to other industries.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: AQuestion Status: Previous Edition14) Life insurance policyowners may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statementsA) as an assetB) as a liabilityC) as incomeD) as an expenseAnswer: AQuestion Status: Previous Edition15) MedProf Insurance markets medical malpractice insurance. The company's combined ratio in 2009 was . Its expense ratio was . What was the company's loss ratioA)B)C)D)Answer: BQuestion Status: Previous Edition16) To protect policyholders, state laws place limitations on a life insurance company's investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets backing interest-sensitive products are placed in a special account called the life insurer'sA) policy reserve account.B) policy loan account.C) separate account.D) policyholders surplus.Answer: CQuestion Status: Previous Edition17) Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurersI. Property and casualty insurance companies place greater emphasis on liquidity than do life insurers.II. Life insurance company investments are, on average, of longer duration than property and casualty insurance company investments.A) I onlyB) II onlyC) both I and IID) neither I nor IIAnswer: CQuestion 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: DQuestion Status: Previous Edition19) All of the following statements about business objectives in designing a rating system are true 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 be maintained.Answer: BQuestion Status: Previous Edition20) All of the following statements about regulatory objectives of insurance rate making are true EXCEPTA) 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 and expenses are charged substantially different rates.C) Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed.D) Rates are excessive if policyholders are paying substantially more than the actual value of their 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 for contingencies 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 downward based on past loss history. This type of merit rating is calledA) schedule rating.B) judgment rating.C) experience rating.D) retrospective rating.Answer: CQuestion 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 same classification factors currently in use.Answer: CQuestion Status: Previous Edition26) Under the pure premium method of determining class rates, the gross rate is determined by which 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 be indicated in the level of rates under the loss ratio method if the actual loss ratio turned out to be 68 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 credits or debits.II. It is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's 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 insured's 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 lacks credibility.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 current period.C) The premium for future periods is determined by the average loss experience for the current and 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 insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopoly's rates. The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. 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 Town used to be just that–a small town 6 miles from Large City. Over the years, the area between Small Town and Large City has developed, and now Small Town is part of the suburbs surrounding Large City. An auto insurer that operated in the area had a large increase in auto claims from Small Town insureds. The insurer did not adjust its rates, and this year will lose money because of claimsattributable to higher population density. Which business rating objective did this insurer fail to meetA) simplicityB) stabilityC) responsivenessD) encouragement of loss controlAnswer: CQuestion Status: Previous Edition33) Nathan was hired as an actuary with ABC Insurance. Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking. Nathan calculated the pure premium and presented this value as the final premium. After Nathan's presentation, the director of ratemaking said, "You left out something very important. If we sell coverage at the pure premium rate, we'll be out of business soon." What did Nathan overlook in his calculationsA) loadingsB) the underwriting cycleC) seasonality of claimsD) investment incomeAnswer: AQuestion Status: Previous Edition34) XYZ Insurance Company expects $500,000 in claims and loss adjustment expenses for each 1,000 properties that it insures in a certain category of business insurance. What pure premium should 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 XYZ's expense 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 several employee safety programs. She has persuaded the insurer writing the company's workers compensation insurance to base the premium on the company's actual loss experience during the current period rather than on the company's historical performance. This type of plan is called a(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 expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value 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. XYZ Insurance Company markets coverages in Metro City. Any applicant who lists one particular zip code is automatically quoted a premium that is twenty percent more than the average premium for applicants from the other five zip codes, even if the loss exposure is identical. Which regulatory objective is not being met given XYZ's premium structureA) 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) means an 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 has occurred.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 that starts 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 the same time 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 three units are all insured by the same insurance company, but the property insurance premiums vary significantly. 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 and the insurance industryI. The insurance industry is to blame for causing the financial crisis by originating sub-prime mortgage 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。