C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
5 Ways Insurance companies spread risk - (answer) -Share risk with other insurance companies (for
very large risk, several insurers subscribe to percentage of risk)
-Reinsure the risk
-deductible
-spread risk over diverse geographical region (soften risk of localized disasters)
-form risk pools (syndicates of insurance and reinsurance companies, organized to underwrite particular
risk)
Two principles of insurance - (answer) 1. Premiums of the many are used to pay the losses of the few
(risk transferred to insurer, deductible, company shares and spreads risk, geographic spread of risk,
forming risk pools)
Premium shall be commensurate with the risk
(Capital meets probabilities of loss, premiums must be adequate to pay future claims, fierce competition,
adverse selection, long and short tail lines, time gaps in pricing)
Short tail and Long tail compared - (answer) Tail refers to the amount of time between the incident and
the determination of claim
-Short tail-lines are those where the injury or other harm becomes known quickly (relatively short period
of time between event and resolution)
-Long tail-lines feature claims separated from the circumstances that caused it by 10, 15, 20 yrs or more
-to price risks time gaps must be considered for long-tail lines
-to pay claims from many years ago
-to pay for claims in the future with today's premium
Negative consumer perceptions of industry and how to improve - (answer) -prices go up/down as
capacity tightening
-left customers with poor opinion
-media portrays negative image (politicatians promise to do something about rates)
-insurers want to educate insurance people about how insurance industry works
-can provide more information on questions like (good risk vs bad, how is a risk priced, why rates go up,
why a profitable industry benefits everyone0
,C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
-feel if a claim not made, premium should be returned/reduced
-present services in postitive light
-insurance protection intangible
-
10 ways insurance affects society and economy - (answer) -banks willing to issue mortgages on
buildings that are insured
-developers willing to advance funds to building contractors on projects guaranteed by surety bonds
-retailers more willing to accept commercial risks with liability insurance
-professionals more willing to provide services when insured against risk of malpractice
-manufacturers more willing to accept risks associated with shipping goods (when insured)
-members of society more willing to use automobiles
-peace of mind
-provides employment
-contributes to economy
-investments help finance governments
-claim payments boost local economies and create jobs
Goal of reinsurance - (answer) -gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned event were to occur
Four basic functions of Insurance - (answer) Financing - offers a unique method of financing to
insurance companies, frees up capital that would be otherwise tied up, meet solvency regulations,
expansion of operations
Stabilization - keep insurer's growth and development, used to keep operational results reasonable
without fluctuations, can help maintain confidence from stakeholders, attract new capital
Capacity - require ability to insure businesses beyond their resources, take on risks higher than they
would normally write, may not want to be limited to small lines, cater to needs of big producers
,C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
Reinsurance used to protect against catastrophic loss - look to protect resources such as their capital and
surplus,their loss ratio and their investment position
Five areas of challenge facing insurance industry - (answer) Globalization
Rapid advances in technology
Public image issues
Volatile investment markets
Increasingly severe weather
growing competition
mounting shareholder and regulatory scrutiny
downloading and offloading by government
Long-tail catastrophic auto injury exposures affect reinsurers and insurers - (answer) - severe injuries
-long-tail trends for prior accident years
-inadequate reserving
-
Law of Large numbers: - (answer) mathematical premise which states that the degree of certainty in
probabilities increases as the number of events increases - insurance companies rely on loss forecasts
built on using data from large groups of similar risks
5. Adverse Selection - (answer) Process by which potential policyholders use private knowledge of their
own high level of risk when deciding whether or not to buy insurance (high risk individuals will buy lots
of insurance and pay high rates where low risk clients might not buy any insurance because the price is
too high)
(Also occurs when a broker places its poorer risks with one insurer and its better risks with another - low
risk client will seek best rates where poorer risk will stay with existing company because they won't be
able to find rates elsewhere)
, C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
7. Two concerns of Ontario Auto excess reinsurers that relate to long-tail liabilities: - (answer) -
Increasingly larger claims (increase in number of claims exceeding thresholders)
-Inherent challenges in long-tail pricing because it's difficult to accurately predict the outcome of claims
that have not yet occurred and will remain open for years
-Late reporting to insurers
-Caps on soft tissue injury but not on catastrophic injures
-Adequate claims reserving at the primary company level
-re-pricing in certain excess layers
-impact of medical and health care inflation on claims
9. Residual market - (answer) mechanisms have been established by automobile insurance industry to
provide a last resort insurance facility for consumers. This ensures that insurance coverage is available
even to those who are considered a high risk. Facility Association.
Advantages attributed to the direct response method: - (answer) • Professional advice with no
commission costs or fees paid to independent brokers
• Technology-enables sales and services (1-800 telephone services, Internet)
• Extended hours of access for consumers
Seven potential effects of foreign ownership: - (answer) 1. Deployed capital: Many more choices for
placement of capital when international
2. Divesting certain lines
3. Cost of retrocession covers and reinsurance
4. Emerging risks
5. Setting underwriting philosophies and procedures
6. Technology
7. Investment markets
Three effects of Mergers - (answer) • Reduce capacity from what is currently an already tight market
• Give Insurance companies a slight smaller reinsurance universe from which to glean capacity
DETAILED ANSWERS
5 Ways Insurance companies spread risk - (answer) -Share risk with other insurance companies (for
very large risk, several insurers subscribe to percentage of risk)
-Reinsure the risk
-deductible
-spread risk over diverse geographical region (soften risk of localized disasters)
-form risk pools (syndicates of insurance and reinsurance companies, organized to underwrite particular
risk)
Two principles of insurance - (answer) 1. Premiums of the many are used to pay the losses of the few
(risk transferred to insurer, deductible, company shares and spreads risk, geographic spread of risk,
forming risk pools)
Premium shall be commensurate with the risk
(Capital meets probabilities of loss, premiums must be adequate to pay future claims, fierce competition,
adverse selection, long and short tail lines, time gaps in pricing)
Short tail and Long tail compared - (answer) Tail refers to the amount of time between the incident and
the determination of claim
-Short tail-lines are those where the injury or other harm becomes known quickly (relatively short period
of time between event and resolution)
-Long tail-lines feature claims separated from the circumstances that caused it by 10, 15, 20 yrs or more
-to price risks time gaps must be considered for long-tail lines
-to pay claims from many years ago
-to pay for claims in the future with today's premium
Negative consumer perceptions of industry and how to improve - (answer) -prices go up/down as
capacity tightening
-left customers with poor opinion
-media portrays negative image (politicatians promise to do something about rates)
-insurers want to educate insurance people about how insurance industry works
-can provide more information on questions like (good risk vs bad, how is a risk priced, why rates go up,
why a profitable industry benefits everyone0
,C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
-feel if a claim not made, premium should be returned/reduced
-present services in postitive light
-insurance protection intangible
-
10 ways insurance affects society and economy - (answer) -banks willing to issue mortgages on
buildings that are insured
-developers willing to advance funds to building contractors on projects guaranteed by surety bonds
-retailers more willing to accept commercial risks with liability insurance
-professionals more willing to provide services when insured against risk of malpractice
-manufacturers more willing to accept risks associated with shipping goods (when insured)
-members of society more willing to use automobiles
-peace of mind
-provides employment
-contributes to economy
-investments help finance governments
-claim payments boost local economies and create jobs
Goal of reinsurance - (answer) -gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned event were to occur
Four basic functions of Insurance - (answer) Financing - offers a unique method of financing to
insurance companies, frees up capital that would be otherwise tied up, meet solvency regulations,
expansion of operations
Stabilization - keep insurer's growth and development, used to keep operational results reasonable
without fluctuations, can help maintain confidence from stakeholders, attract new capital
Capacity - require ability to insure businesses beyond their resources, take on risks higher than they
would normally write, may not want to be limited to small lines, cater to needs of big producers
,C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
Reinsurance used to protect against catastrophic loss - look to protect resources such as their capital and
surplus,their loss ratio and their investment position
Five areas of challenge facing insurance industry - (answer) Globalization
Rapid advances in technology
Public image issues
Volatile investment markets
Increasingly severe weather
growing competition
mounting shareholder and regulatory scrutiny
downloading and offloading by government
Long-tail catastrophic auto injury exposures affect reinsurers and insurers - (answer) - severe injuries
-long-tail trends for prior accident years
-inadequate reserving
-
Law of Large numbers: - (answer) mathematical premise which states that the degree of certainty in
probabilities increases as the number of events increases - insurance companies rely on loss forecasts
built on using data from large groups of similar risks
5. Adverse Selection - (answer) Process by which potential policyholders use private knowledge of their
own high level of risk when deciding whether or not to buy insurance (high risk individuals will buy lots
of insurance and pay high rates where low risk clients might not buy any insurance because the price is
too high)
(Also occurs when a broker places its poorer risks with one insurer and its better risks with another - low
risk client will seek best rates where poorer risk will stay with existing company because they won't be
able to find rates elsewhere)
, C16 BUSINESS INSURANCE EXAM NEWEST 2024-2025 COMPLETE 160 QUESTIONS AND CORRECT
DETAILED ANSWERS
7. Two concerns of Ontario Auto excess reinsurers that relate to long-tail liabilities: - (answer) -
Increasingly larger claims (increase in number of claims exceeding thresholders)
-Inherent challenges in long-tail pricing because it's difficult to accurately predict the outcome of claims
that have not yet occurred and will remain open for years
-Late reporting to insurers
-Caps on soft tissue injury but not on catastrophic injures
-Adequate claims reserving at the primary company level
-re-pricing in certain excess layers
-impact of medical and health care inflation on claims
9. Residual market - (answer) mechanisms have been established by automobile insurance industry to
provide a last resort insurance facility for consumers. This ensures that insurance coverage is available
even to those who are considered a high risk. Facility Association.
Advantages attributed to the direct response method: - (answer) • Professional advice with no
commission costs or fees paid to independent brokers
• Technology-enables sales and services (1-800 telephone services, Internet)
• Extended hours of access for consumers
Seven potential effects of foreign ownership: - (answer) 1. Deployed capital: Many more choices for
placement of capital when international
2. Divesting certain lines
3. Cost of retrocession covers and reinsurance
4. Emerging risks
5. Setting underwriting philosophies and procedures
6. Technology
7. Investment markets
Three effects of Mergers - (answer) • Reduce capacity from what is currently an already tight market
• Give Insurance companies a slight smaller reinsurance universe from which to glean capacity
