CPCU 520 END OF COURSE EXAM QUESTIONS AND
ANSWERS GUARANTEE A+
✔✔Internal constraints of insurers - ✔✔Several internal constraints might prevent an
insurer from meeting all of its goals. Some of these constraints are imposed only in
certain circumstances:
1) Efficiency
2) Expertise
3) Size
4) Financial Resources
5) Other internal constraints
✔✔Efficiency - ✔✔May be caused by poor management, insufficient capital, lack of
technology, inability to adapt to change. In extreme cases it can lead to insolvency if
there is a failure to meet legal and regulatory goals.
✔✔Expertise - ✔✔Lack of expertise could prevent an insurer from making a profit or
meeting customers' needs. The insurer should make sure that the current staff has the
skills needed to perform their jobs well.
✔✔Size - ✔✔A small insurer has more challenges than a large insurer in terms of
available resources. Large insurers can take advantage of economies of scale and may
have more financial resources to update technology, etc. Small insurers may also be
more nimble in adapting to change.
✔✔Other internal constraints - ✔✔A newly established insurer may not have the name
recognition to achieve its profit goals. Also, a damaged reputation can continue to affect
profits.
✔✔External Constraints - ✔✔1) Regulation
2) Rating agencies
3) Public opinion
4) Competition
5) Economic conditions
6) Insurance marketing and distribution
7) Other external constraints
✔✔Regulation - ✔✔Insurance regulators monitor insurers' solvency to protect
policyholders and members of the public but imposes a large constrain on insurers due
to personnel and financial expenditures to comply.
✔✔Rating agencies - ✔✔Rate insurers based on financial strength and require insurers
to boost capital to handle higher catastrophe risk. A financial rating can cause
customers to leave, making the decline worse.
,✔✔Public opinion - ✔✔Matters of ethics are major components in managing an
insurer's reputation, and when ethics are violated it goes against the public's best
interests.
✔✔Competition - ✔✔Soft cycles are when prices are moderate or decline as
competition increases and profitability diminishes. Hard cycles are characterized by
periods of decreased competition and rising rates leading to increased profitability and
high rates of return.
✔✔Economic conditions - ✔✔Investment operations can be affected severely by
economic downturns, and inflation can impact costs.
✔✔Other external constraints - ✔✔Some of these constraints are natural or man-made
catastrophe losses; decreased law and order, particularly in large cities; legal changes
that affect liability claims.
✔✔Net underwriting gain or loss = - ✔✔Earned premium - (Incurred losses +
underwriting expenses)
✔✔Overall gain or loss from operations = - ✔✔Net underwriting gain or loss +
investment gain or loss
✔✔Retention ratio - ✔✔Percentage of expiring insurance policies than an insurer
renews, and it can be measured by policy county, premium volume, or both
✔✔Lapse ratio - ✔✔Calculated by dividing the number of policies that lapse during a
period by the total policies written at the beginning of that period.
✔✔The insurance industry is regulated for three primary reasons - ✔✔1) Protect
Consumers
2) Maintain Insurer Solvency
3) Prevent Destructive Competition
✔✔Protect Consumers - ✔✔Legislatures can set coverage standards and specify policy
language. They also help protect against criminal acts committed by producers.
✔✔Maintain Insurer Solvency - ✔✔Regulation is needed to protect the public interest - if
insurers are insolvent then the the community at large is adversely affected. Insurers
have a responsibility to insureds. The goal of regulation is to minimize insolvencies.
✔✔Prevent Destructive Competition - ✔✔Some insurers underprice products to
increase market share, but this practice drives down price levels in the whole market. If
rate levels are inadequate and insurers become insolvent, an insurance shortage can
occur. Certain types of insurance can become unavailable at any price.
, ✔✔State Insurance Departments - ✔✔Fall within the executive branch of each state
government. Enforce insurance laws enacted by legislature. Engaged in: licensing
insurers, licensing producers and other personnel, approving policy forms, performing
market conduct examinations, investigating policyholder complaints, fining insurers who
violate state law, preventing fraud. Partly funded by state premium taxes, audit fees,
filing fees and licensing fees, but premium taxes are the major source of funding.
✔✔Insurance Commissioner - ✔✔Appointed by the governor or elected by voting public
(dispute about this). Duties to delegate: state insurance dept. operations, determining to
issue business licenses to new insurers, producers or other entities, reviewing
insurance pricing and coverage, holding hearings on insurance issues, issuing an
annual report on state insurance market, maintaining records of insurance dept.
activities.
✔✔NAIC - National Association of Insurance Commissioners - ✔✔Meet three times a
year to discuss important problems and issues in insurance regulation. They develop
uniform financial statement forms for insurers to file and "model laws" for uniformity
among states.
✔✔Accreditation of state insurance departments - ✔✔1) State's insurance laws and
regulations must meet basic standards of NAIC models
2) State's regulatory methods must be acceptable to the NAIC
3) State's insurance dept practices must be adequate as defined by the NAIC
✔✔Insurance Fraud Protection Act - ✔✔Protects consumers and insurers against
insolvencies resulting from insurance fraud. The act prohibits anyone with a felony
conviction for violations of business from working in the insurance business. Identifies
crimes involving the business of insurance as:
1) Making false statements or reports to regulators
2) Marking false entries in books, reports or statements about financial conditions
3) Embezzling from anyone who is engage in the business of insurance
4) Using threats or force to influence or obstruct insurance regulatory proceedings
✔✔McCarran Act - ✔✔Reverses the usual state-federal allocation of regulatory powers
for the business of insurance. So it allows insurers to be regulated at the state level.
✔✔UCAA - Uniform Certificate of Authority Application - ✔✔Streamlines the process of
licensing new insurers.
✔✔Domestic Insurer License - ✔✔A license for a domestic insurer has no expiration
date, but licenses for foreign and alien insurers must renew annually. The applicant
must apply for a charter and provide names and addresses of proposed corporation,
territories and types of insurance and the total authorized capital stock.
ANSWERS GUARANTEE A+
✔✔Internal constraints of insurers - ✔✔Several internal constraints might prevent an
insurer from meeting all of its goals. Some of these constraints are imposed only in
certain circumstances:
1) Efficiency
2) Expertise
3) Size
4) Financial Resources
5) Other internal constraints
✔✔Efficiency - ✔✔May be caused by poor management, insufficient capital, lack of
technology, inability to adapt to change. In extreme cases it can lead to insolvency if
there is a failure to meet legal and regulatory goals.
✔✔Expertise - ✔✔Lack of expertise could prevent an insurer from making a profit or
meeting customers' needs. The insurer should make sure that the current staff has the
skills needed to perform their jobs well.
✔✔Size - ✔✔A small insurer has more challenges than a large insurer in terms of
available resources. Large insurers can take advantage of economies of scale and may
have more financial resources to update technology, etc. Small insurers may also be
more nimble in adapting to change.
✔✔Other internal constraints - ✔✔A newly established insurer may not have the name
recognition to achieve its profit goals. Also, a damaged reputation can continue to affect
profits.
✔✔External Constraints - ✔✔1) Regulation
2) Rating agencies
3) Public opinion
4) Competition
5) Economic conditions
6) Insurance marketing and distribution
7) Other external constraints
✔✔Regulation - ✔✔Insurance regulators monitor insurers' solvency to protect
policyholders and members of the public but imposes a large constrain on insurers due
to personnel and financial expenditures to comply.
✔✔Rating agencies - ✔✔Rate insurers based on financial strength and require insurers
to boost capital to handle higher catastrophe risk. A financial rating can cause
customers to leave, making the decline worse.
,✔✔Public opinion - ✔✔Matters of ethics are major components in managing an
insurer's reputation, and when ethics are violated it goes against the public's best
interests.
✔✔Competition - ✔✔Soft cycles are when prices are moderate or decline as
competition increases and profitability diminishes. Hard cycles are characterized by
periods of decreased competition and rising rates leading to increased profitability and
high rates of return.
✔✔Economic conditions - ✔✔Investment operations can be affected severely by
economic downturns, and inflation can impact costs.
✔✔Other external constraints - ✔✔Some of these constraints are natural or man-made
catastrophe losses; decreased law and order, particularly in large cities; legal changes
that affect liability claims.
✔✔Net underwriting gain or loss = - ✔✔Earned premium - (Incurred losses +
underwriting expenses)
✔✔Overall gain or loss from operations = - ✔✔Net underwriting gain or loss +
investment gain or loss
✔✔Retention ratio - ✔✔Percentage of expiring insurance policies than an insurer
renews, and it can be measured by policy county, premium volume, or both
✔✔Lapse ratio - ✔✔Calculated by dividing the number of policies that lapse during a
period by the total policies written at the beginning of that period.
✔✔The insurance industry is regulated for three primary reasons - ✔✔1) Protect
Consumers
2) Maintain Insurer Solvency
3) Prevent Destructive Competition
✔✔Protect Consumers - ✔✔Legislatures can set coverage standards and specify policy
language. They also help protect against criminal acts committed by producers.
✔✔Maintain Insurer Solvency - ✔✔Regulation is needed to protect the public interest - if
insurers are insolvent then the the community at large is adversely affected. Insurers
have a responsibility to insureds. The goal of regulation is to minimize insolvencies.
✔✔Prevent Destructive Competition - ✔✔Some insurers underprice products to
increase market share, but this practice drives down price levels in the whole market. If
rate levels are inadequate and insurers become insolvent, an insurance shortage can
occur. Certain types of insurance can become unavailable at any price.
, ✔✔State Insurance Departments - ✔✔Fall within the executive branch of each state
government. Enforce insurance laws enacted by legislature. Engaged in: licensing
insurers, licensing producers and other personnel, approving policy forms, performing
market conduct examinations, investigating policyholder complaints, fining insurers who
violate state law, preventing fraud. Partly funded by state premium taxes, audit fees,
filing fees and licensing fees, but premium taxes are the major source of funding.
✔✔Insurance Commissioner - ✔✔Appointed by the governor or elected by voting public
(dispute about this). Duties to delegate: state insurance dept. operations, determining to
issue business licenses to new insurers, producers or other entities, reviewing
insurance pricing and coverage, holding hearings on insurance issues, issuing an
annual report on state insurance market, maintaining records of insurance dept.
activities.
✔✔NAIC - National Association of Insurance Commissioners - ✔✔Meet three times a
year to discuss important problems and issues in insurance regulation. They develop
uniform financial statement forms for insurers to file and "model laws" for uniformity
among states.
✔✔Accreditation of state insurance departments - ✔✔1) State's insurance laws and
regulations must meet basic standards of NAIC models
2) State's regulatory methods must be acceptable to the NAIC
3) State's insurance dept practices must be adequate as defined by the NAIC
✔✔Insurance Fraud Protection Act - ✔✔Protects consumers and insurers against
insolvencies resulting from insurance fraud. The act prohibits anyone with a felony
conviction for violations of business from working in the insurance business. Identifies
crimes involving the business of insurance as:
1) Making false statements or reports to regulators
2) Marking false entries in books, reports or statements about financial conditions
3) Embezzling from anyone who is engage in the business of insurance
4) Using threats or force to influence or obstruct insurance regulatory proceedings
✔✔McCarran Act - ✔✔Reverses the usual state-federal allocation of regulatory powers
for the business of insurance. So it allows insurers to be regulated at the state level.
✔✔UCAA - Uniform Certificate of Authority Application - ✔✔Streamlines the process of
licensing new insurers.
✔✔Domestic Insurer License - ✔✔A license for a domestic insurer has no expiration
date, but licenses for foreign and alien insurers must renew annually. The applicant
must apply for a charter and provide names and addresses of proposed corporation,
territories and types of insurance and the total authorized capital stock.
