C16 Business of Insurance Practice Exam

C16 Business of Insurance Practice Exam Questions Latest Update - 250 Questions and 100% Verified Correct Answers Guaranteed A+

10 ways insurance affects society and economy - CORRECT 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

• What are some of the reasons that cause an insurance company to underestimate

to its reserves - CORRECT ANSWER: • Company's actuarial department or

management overly optimistic in setting up estimates (to show profit) • Technical issue - court case may have expanded company's liability for a specific type of claim, invoking social inflation • More general economic inflation that caused the price of consumer goods and services to rise • Inexperienced staff or lack of appropriate training

14. Combined ratio measures - CORRECT ANSWER: overall underwriting performance

• shows the profitability of the insurance operations and is also considered an indicator

of management efficiency (combined ratio of less than 100% means that the company is making an underwriting profit, over 100% means that it is losing money by paying out more in claims than it earns from premiums)

14) What does the Minimum Capital Test (MCT) measure for OSFI? - CORRECT

ANSWER: MCT is used to measure solvency.

A single harmonized asset test applies to all Canadian insurers.Test is intended to give regulators early warning of an insurer's potential solvency problems.MCT requires that insurers have assets worth at least a certain multiple of the amount of their liabilities as well as a margin of additional assets.

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17. Three risks that insurers will face in mature or merging market: - CORRECT

ANSWER: • Exposures to asbestos

• Large natural catastrophes • Products liability • Political risk • Corporate scandales • Environmental liability • Terrorism • Litigiousness

5 Ways Insurance companies spread risk - CORRECT 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)

5. Adverse Selection - CORRECT 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)

5. Statement of operations show - CORRECT ANSWER: how a company has

performed during a specific accounting period. In other words, its shows how much money the company has made or lost over a period

6. Earned premium is calculated by - CORRECT ANSWER: add unearned premium

reserve at beginning of period and subtract unearned premium reserve at end of the period - equals earned premium earned for the year

• Two concerns of Ontario Auto excess reinsurers that relate to long-tail liabilities: -

CORRECT 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

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• Multiple companies within a single corporate structure - CORRECT ANSWER: will be

required to provide flexibility in areas such as distribution channels, products offered, underwriting eligibility, underwriting criteria, rating plans

8) List FIVE (5) questions an underwriter should ask when assessing a

producer? - CORRECT ANSWER: 1) Is the producer aggressive and looking to expand

its business? (growth plans) 2) Can the producer grow with the insurer, or has it reached its maximum capacity? (capacity for growth) 3) Can the producer sell the range of the insurer's products? (ability to sell) 4) What is the producer's mix of business? (mix of business) 5) Will the producer support and work with the insurer? (renewal retention/increase in prices) 6) How well does (or will) the producer work with the insurer? (compatibility with insurer / loyalty/attitude) 7) What about the producer's staff? (quality, reputation, training) 8) What makes the producer's customers loyal to the producer? (customer loyalty) 9) Will the producer allow the insurer to have contact with the client? (client contact) 10) Could the insurer delegate to the producer certain insurance functions? (flexibility, receptiveness to other functions)

• Main components of a balance sheet: - CORRECT ANSWER: - Financial position at

a specific date which includes the assets it owns, its liabilities to others and its net worth or equity

• Assets - things a company owns
• Liabilities - debts owed to creditors (unearned premium, employee payroll deduction,

income taxes, amount due to reinsurers)

• Equity - companys net assests - difference between assets/liabilities (sold every asset

and paid off liabilities)

9. Residual market - CORRECT 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.

Accrual basis of accounting - CORRECT ANSWER: every business transaction is

recorded in the accounting period (or periods) to which it belongs. Revenue and expenses are matched to the appropriate accounting period.

Advantages attributed to the direct response method: - CORRECT 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

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Asset liability management - CORRECT ANSWER: management of assets in relation to liabilities in order to optimize the balnce between risk and return. Measures to assess risks assumed and constraints or boundaries on such measures form part of the management process

Audit Committee - CORRECT ANSWER: -improves financial reporting process

-responsible for reviewing performances of investment portfolios -ensure that capital is managed effectively -review financial statements before submitted to board for approval -supervise internal control procedures

Being prepared for a pandemic - CORRECT ANSWER: - Business continuity plans -

most prepared in asia

• Certain industries have greater exposure - depend on heavy foot traffic, or people

congregating in closed spaces

• Operational risk (day-to-day operations) and insurance coverage risk (claims paid out

in both commercial and personal policies)

Commissions - CORRECT ANSWER: - Regular commission - paid to the broker - in the form of percentage of the gross premiums recorded - lower rate for auto/home

• Contingent profit commission - paid in addition to regular commission -

Common share vs. preferred share - CORRECT ANSWER: Common: security that represents part ownership of a company. Common shareholders have voting rights that give them a voice in running the company and receive a proportion of its profits after dividends are paid to preferred shareholders

Preferred: Also a security that presents part ownership of a company. Preferred

shareholders have no voting rights (unless their dividends are in arrears) but normally have priority over common shareholders concerning payment of dividends and repayment of principal

Compromises the combined ratio: - CORRECT ANSWER: • Incurred claims to premiums earned • Commissions and other acquisition costs to premium earned • Operating expenses to premium earned

Conduct review committee - CORRECT ANSWER: -concerned with conflict of interest

-vigilance against board members or others who take advantage of their corporate positions to influence others to gain personally

Corporate governance - CORRECT ANSWER: signifies how a corporation directs itself

• and how control of this process is managed

-encompasses the process, structure and information used to manage a company

cyber risks - CORRECT ANSWER: • Denial of service attacks - machine/network

unavailable to users

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