FIN 326 EXAM QUESTIONS WITH
100% CORRECT ANSWERS
Hurricane damage in a given area is an example of a ____________________ for
which it is difficult to predict loss exposure. - Answer- High severity, low frequency event
Property and casualty insurers hold _____ short term assets than life insurers because
property and casualty loss rates are _____ predictable than life insurance loss rates. -
Answer- More, less
The operating ratio is calculated as - Answer- The combined ratio after dividends minus
the investment yield
An insurance line has a loss ratio of 72%, an expense ratio of 35%, and the firm pays
2% of premiums to policyholders as dividends. What level of investment yield is needed
to make the P&C firm breakeven? - Answer- 9%
The two major components of expense risk for P&C insurers are - Answer- Loss
adjustment expenses and variations in commission and other expenses
At P&C insurers, if the combined ratio is less than 100%, the premiums charged were
sufficient to cover - Answer- Both losses and expenses
For P&C insurers if the combined ratio is more than 100%, that firm - Answer- May have
been profitable if investment returns were high enough.
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 - Answer- I and III only
I. Payouts on claims
III. Costs associated with settling claims
About _____ of all insurance contracts worldwide are reinsured. - Answer- 10%
The best underwriting performance since 1936 in terms of the combined ratio occurred
during ____________ for property and casualty insurers. - Answer- 2006 and 2007
, 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 -
Answer- insurers' insistence that the Katrina storm surge resulted in flood damage
which was not covered
An investor has $25,000 which he can invest today. In addition to this amount, he can
also invest $12,000 per year for thirty years (beginning one year from now) at which
time he will retire. He plans on living for twenty-five 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) -
Answer- B. $192,501
A policy holder wishes to annuitize the cash value of her insurance policy at retirement.
She desires an annual payment of $95,000 per year and the cash value is expected to
be $1,100,000 at retirement. Approximately how many payments can she expect to
receive if annuity interest rates are 5.122%? - Answer- 18
The largest asset category of life insurers is _____ and the largest liability category is
_____. - Answer- Bonds, policy reserves
The most important federal legislation affecting regulation of life insurance companies
prior to 1999 was the - Answer- McCarran-Ferguson Act
Insurance companies, commercial banks and investment banks may now affiliate with
each other and engage in similar lines of business. These powers were granted by the -
Answer- E. Financial Services Modernization Act
Which of the following statements about is/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 -
Answer- I and IV only
I. Catastrophe bonds may be used as a form of reinsurance
IV. When issued catastrophe bonds will have promised yields above the risk free rate
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 - Answer- $40
billion
In terms of dollar costs the worst U.S. catastrophe since 2000 was caused by - Answer-
Hurricane Katrina
Premiums received before the coverage period are termed - Answer- Unearned
premiums
100% CORRECT ANSWERS
Hurricane damage in a given area is an example of a ____________________ for
which it is difficult to predict loss exposure. - Answer- High severity, low frequency event
Property and casualty insurers hold _____ short term assets than life insurers because
property and casualty loss rates are _____ predictable than life insurance loss rates. -
Answer- More, less
The operating ratio is calculated as - Answer- The combined ratio after dividends minus
the investment yield
An insurance line has a loss ratio of 72%, an expense ratio of 35%, and the firm pays
2% of premiums to policyholders as dividends. What level of investment yield is needed
to make the P&C firm breakeven? - Answer- 9%
The two major components of expense risk for P&C insurers are - Answer- Loss
adjustment expenses and variations in commission and other expenses
At P&C insurers, if the combined ratio is less than 100%, the premiums charged were
sufficient to cover - Answer- Both losses and expenses
For P&C insurers if the combined ratio is more than 100%, that firm - Answer- May have
been profitable if investment returns were high enough.
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 - Answer- I and III only
I. Payouts on claims
III. Costs associated with settling claims
About _____ of all insurance contracts worldwide are reinsured. - Answer- 10%
The best underwriting performance since 1936 in terms of the combined ratio occurred
during ____________ for property and casualty insurers. - Answer- 2006 and 2007
, 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 -
Answer- insurers' insistence that the Katrina storm surge resulted in flood damage
which was not covered
An investor has $25,000 which he can invest today. In addition to this amount, he can
also invest $12,000 per year for thirty years (beginning one year from now) at which
time he will retire. He plans on living for twenty-five 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) -
Answer- B. $192,501
A policy holder wishes to annuitize the cash value of her insurance policy at retirement.
She desires an annual payment of $95,000 per year and the cash value is expected to
be $1,100,000 at retirement. Approximately how many payments can she expect to
receive if annuity interest rates are 5.122%? - Answer- 18
The largest asset category of life insurers is _____ and the largest liability category is
_____. - Answer- Bonds, policy reserves
The most important federal legislation affecting regulation of life insurance companies
prior to 1999 was the - Answer- McCarran-Ferguson Act
Insurance companies, commercial banks and investment banks may now affiliate with
each other and engage in similar lines of business. These powers were granted by the -
Answer- E. Financial Services Modernization Act
Which of the following statements about is/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 -
Answer- I and IV only
I. Catastrophe bonds may be used as a form of reinsurance
IV. When issued catastrophe bonds will have promised yields above the risk free rate
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 - Answer- $40
billion
In terms of dollar costs the worst U.S. catastrophe since 2000 was caused by - Answer-
Hurricane Katrina
Premiums received before the coverage period are termed - Answer- Unearned
premiums
