CPCU 520 - Insurance Operations || with Right Answers.
Major Goals of Insurers correct answers 1. Earn a Profit
2. Meet customer needs
3. Comply with legal requirements
4. Diversify risk
5. Fulfill duty to society
Internal constraints on achieving insurer goals correct answers -Inefficiency
-Lack of expertise
-Size
-Financial resources
External constraints on achieving insurer goals correct answers -Regulation
-Rating agencies
-Public opinion
-Competition
-Economic conditions
Proprietary insurer correct answers An insurer formed for the purpose of earning a profit for its
owners.
Cooperative insurer correct answers An insurer owned by its policyholders and usually formed to
provide insurance protection to policyholders at minimum cost. Mutual insurance companies,
reciprocal exchanges, and fraternal organizations are examples of cooperative insurers.
4 ways Property-casualty insurers are generally classified: correct answers -by legal form of
ownership
-place of incorporation
-licensing status
-insurance distribution systems and channels.
Which type of proprietary insurer is the most prevalent in the United States? correct answers
Stock insurers are the most prevalent type of proprietary insurer in the United States.
insurtech correct answers coupling of insurance and technology
Microinsurance correct answers Firms offering insurance to economically disadvantaged and
other traditionally underserved segments of the population that are united in risk pools whose
members are connected to the insurer through web-enabled platforms on cell phones and other
devices
Firms that facilitate the use of sensors, Internet of Things (IoT) correct answers Enabled devices,
and other data-capture technology to help insurers and brokers more accurately assess and price
individual risks
,Peer-to-peer insurance correct answers Firms that use web-enabled platforms to facilitate the
formation of self-selected risk pools whose members (usually friends, relatives, or like-minded
individuals) pool premiums and collectively pay for members' insured losses
On-demand insurance (also known as need-based insurance) correct answers Firms that use web-
enabled customer interfaces and sensor technology to offer coverage that allows near-total
customization for customers
Foreign insurer correct answers licensed to do business in states other than the one in which it's
incorporated.
alien insurer correct answers incorporated in a country other than the one in which it's seeking to
do business.
Mutual insurer correct answers An insurer that is owned by its policyholders and formed as a
corporation for the purpose of providing insurance to them.
Reciprocal insurance exchange (interinsurance exchange) correct answers An insurer owned by
its policyholders, formed as an unincorporated association for the purpose of providing insurance
coverage to its members (called subscribers), and managed by an attorney-in-fact. Members
agree to mutually insure each other, and they share profits and losses in the same proportion as
the amount of insurance purchased from the exchange by that member.
Captive insurer correct answers An insurance company formed primarily to cover the loss
exposures of its owner(s) or members.
Fair Access to Insurance Requirements (FAIR) Plans correct answers An insurance pool through
which private insurers collectively address an unmet need for property insurance on urban
properties, especially those susceptible to loss by riot or civil commotion.
Residual market correct answers The term referring collectively to insurers and other
organizations that make insurance available through a shared risk mechanism to those who
cannot obtain coverage in the admitted market.
Independent agency and brokerage marketing system correct answers An insurance marketing
system under which producers (agents or brokers), who are independent contractors, sell
insurance, usually as representatives of several unrelated insurers.
Direct writer marketing system correct answers An insurance marketing system that uses sales
agents (or sales representatives) who are direct employees of the insurer.
Exclusive agency marketing system correct answers An insurance marketing system under which
agents contract to sell insurance exclusively for one insurer (or for an associated group of
insurers).
,What do insurers do with the premium dollars they collect before paying for losses or providing
dividends to owners? correct answers Insurers make investments with the premium dollars they
collect with the goal of receiving investment income. Investment income is then used to pay for
unexpected losses, fund operations, and/or provide dividends to owners.
formula for calculating net underwriting gain or loss correct answers Net underwriting gain or
loss = Earned premiums - (Incurred losses + Underwriting expenses)
three specific ratios to measure underwriting performance correct answers -loss ratio
-expense ratio
-combined ratio (more comprehensive measure)
Loss Ratio correct answers (incurred losses + loss adjustment expenses) / premiums earned
Expense Ratio correct answers incurred underwriting expenses/written premiums
Combined Ratio correct answers (incurred losses included LAE/Earned Premiums) + (Incurred
underwriting expenses/written premiums)
Loss Ratio/Expense Ratio
Calculate the loss ratio, expense ratio, and combined ratio for an insurer that has incurred
underwriting expenses of $5,000,000, incurred losses of $14,000,000, loss adjustment expenses
of $230,000, net written premiums of $22,500,000, and earned premiums of $21,500,000. Next,
explain whether its underwriting operations are profitable. correct answers The insurer's loss
ratio ($14,230,000 ÷ $21,500,000 = 0.66) is 66 percent, its expense ratio ($5,000,000 ÷
$22,500,000 = 0.22) is 22 percent, and its combined ratio (0.66 + 0.22 = 0.88) is 88 percent. The
insurer has earned a 12 percent profit from its underwriting operations.
Formula for overall gain or loss from operations correct answers Net underwriting gain or loss +
Investment gain or loss
What happens when the combined ratio is more than 100%? correct answers insurers may lose
money, but still may generate a profit due to investments
Investment income ratio correct answers net investment income (investment income - Investment
expenses) / earned premiums
Overall operating ratio correct answers Combined Ratio - Investment Income Ratio
Used to measure overall financial performance for a specific period
This is the most complete measure of financial performance
Return on equity correct answers Net income / Owners' equity (policyholders' surplus)
, biggest problems in measuring insurer profitability correct answers errors in estimating loss
reserves
What are the core functions of an insurer? Name as many as you can. correct answers An
insurer's core functions are typically marketing and distribution, underwriting, and claims.
Insurers perform additional functions that are designed to support these three core functions. An
insurer carries out these additional functions to facilitate risk transfer, promote efficiency, and
meet its financial and nonfinancial goals.
Which function of an insurer determines whether and under what conditions the insurer is willing
to provide insurance products and services to potential customers? correct answers The
underwriting function makes these determinations. It's one of the three core functions of an
insurer, along with claims and marketing and distribution.
Underwriting correct answers The process of selecting insureds, pricing coverage, determining
insurance policy terms and conditions, and then monitoring the underwriting decisions made.
Adverse selection correct answers In general, the tendency for people with the greatest
probability of loss to be the ones most likely to purchase insurance.
How is the IoT different from the internet? correct answers The internet facilitates the use of
centralized websites by humans to connect with information created by other people or connect
with other people themselves. That's still the case, but increasingly inexpensive bandwidth,
cheap and widely available data-transmission technology, and nearly universal connectivity
allow devices to create and transmit data to other devices without human interaction. This
network of devices that create, share, and process information is referred to as the IoT. Examples
of IoT devices include a sensor that detects slow leaks in water heaters, a video doorbell system
that repels intruders, and a jet engine that transmits diagnostic data to the cockpit.
How can auto insurers use telematics to better segment drivers into rating classifications and
develop more accurate rates? correct answers After monitoring a vehicle for a certain period
through telematics, the insurer could reclassify drivers based on a personalized driving score that
takes actual driving experience into account and present the insured with a new rate. This does
not mean that the primary factors for auto rates are ignored, but rather that the telematics data
helps provide the insured with a more precise rate that accurately reflects the loss exposure.
Internet of Things (IoT) correct answers A network of objects that transmit data to each other
and to central hubs through the internet.
One of the most telling measurements of customer satisfaction is correct answers Retention ratio
Which one of the following core functions of an insurer can be transformed through the Internet
of Things' ability to facilitate instantaneous communication? correct answers claims
The abilities of devices connected to the Internet of Things lie at the heart of the ongoing shift in
the insurance industry from risk transfer to correct answers Risk prevention
Major Goals of Insurers correct answers 1. Earn a Profit
2. Meet customer needs
3. Comply with legal requirements
4. Diversify risk
5. Fulfill duty to society
Internal constraints on achieving insurer goals correct answers -Inefficiency
-Lack of expertise
-Size
-Financial resources
External constraints on achieving insurer goals correct answers -Regulation
-Rating agencies
-Public opinion
-Competition
-Economic conditions
Proprietary insurer correct answers An insurer formed for the purpose of earning a profit for its
owners.
Cooperative insurer correct answers An insurer owned by its policyholders and usually formed to
provide insurance protection to policyholders at minimum cost. Mutual insurance companies,
reciprocal exchanges, and fraternal organizations are examples of cooperative insurers.
4 ways Property-casualty insurers are generally classified: correct answers -by legal form of
ownership
-place of incorporation
-licensing status
-insurance distribution systems and channels.
Which type of proprietary insurer is the most prevalent in the United States? correct answers
Stock insurers are the most prevalent type of proprietary insurer in the United States.
insurtech correct answers coupling of insurance and technology
Microinsurance correct answers Firms offering insurance to economically disadvantaged and
other traditionally underserved segments of the population that are united in risk pools whose
members are connected to the insurer through web-enabled platforms on cell phones and other
devices
Firms that facilitate the use of sensors, Internet of Things (IoT) correct answers Enabled devices,
and other data-capture technology to help insurers and brokers more accurately assess and price
individual risks
,Peer-to-peer insurance correct answers Firms that use web-enabled platforms to facilitate the
formation of self-selected risk pools whose members (usually friends, relatives, or like-minded
individuals) pool premiums and collectively pay for members' insured losses
On-demand insurance (also known as need-based insurance) correct answers Firms that use web-
enabled customer interfaces and sensor technology to offer coverage that allows near-total
customization for customers
Foreign insurer correct answers licensed to do business in states other than the one in which it's
incorporated.
alien insurer correct answers incorporated in a country other than the one in which it's seeking to
do business.
Mutual insurer correct answers An insurer that is owned by its policyholders and formed as a
corporation for the purpose of providing insurance to them.
Reciprocal insurance exchange (interinsurance exchange) correct answers An insurer owned by
its policyholders, formed as an unincorporated association for the purpose of providing insurance
coverage to its members (called subscribers), and managed by an attorney-in-fact. Members
agree to mutually insure each other, and they share profits and losses in the same proportion as
the amount of insurance purchased from the exchange by that member.
Captive insurer correct answers An insurance company formed primarily to cover the loss
exposures of its owner(s) or members.
Fair Access to Insurance Requirements (FAIR) Plans correct answers An insurance pool through
which private insurers collectively address an unmet need for property insurance on urban
properties, especially those susceptible to loss by riot or civil commotion.
Residual market correct answers The term referring collectively to insurers and other
organizations that make insurance available through a shared risk mechanism to those who
cannot obtain coverage in the admitted market.
Independent agency and brokerage marketing system correct answers An insurance marketing
system under which producers (agents or brokers), who are independent contractors, sell
insurance, usually as representatives of several unrelated insurers.
Direct writer marketing system correct answers An insurance marketing system that uses sales
agents (or sales representatives) who are direct employees of the insurer.
Exclusive agency marketing system correct answers An insurance marketing system under which
agents contract to sell insurance exclusively for one insurer (or for an associated group of
insurers).
,What do insurers do with the premium dollars they collect before paying for losses or providing
dividends to owners? correct answers Insurers make investments with the premium dollars they
collect with the goal of receiving investment income. Investment income is then used to pay for
unexpected losses, fund operations, and/or provide dividends to owners.
formula for calculating net underwriting gain or loss correct answers Net underwriting gain or
loss = Earned premiums - (Incurred losses + Underwriting expenses)
three specific ratios to measure underwriting performance correct answers -loss ratio
-expense ratio
-combined ratio (more comprehensive measure)
Loss Ratio correct answers (incurred losses + loss adjustment expenses) / premiums earned
Expense Ratio correct answers incurred underwriting expenses/written premiums
Combined Ratio correct answers (incurred losses included LAE/Earned Premiums) + (Incurred
underwriting expenses/written premiums)
Loss Ratio/Expense Ratio
Calculate the loss ratio, expense ratio, and combined ratio for an insurer that has incurred
underwriting expenses of $5,000,000, incurred losses of $14,000,000, loss adjustment expenses
of $230,000, net written premiums of $22,500,000, and earned premiums of $21,500,000. Next,
explain whether its underwriting operations are profitable. correct answers The insurer's loss
ratio ($14,230,000 ÷ $21,500,000 = 0.66) is 66 percent, its expense ratio ($5,000,000 ÷
$22,500,000 = 0.22) is 22 percent, and its combined ratio (0.66 + 0.22 = 0.88) is 88 percent. The
insurer has earned a 12 percent profit from its underwriting operations.
Formula for overall gain or loss from operations correct answers Net underwriting gain or loss +
Investment gain or loss
What happens when the combined ratio is more than 100%? correct answers insurers may lose
money, but still may generate a profit due to investments
Investment income ratio correct answers net investment income (investment income - Investment
expenses) / earned premiums
Overall operating ratio correct answers Combined Ratio - Investment Income Ratio
Used to measure overall financial performance for a specific period
This is the most complete measure of financial performance
Return on equity correct answers Net income / Owners' equity (policyholders' surplus)
, biggest problems in measuring insurer profitability correct answers errors in estimating loss
reserves
What are the core functions of an insurer? Name as many as you can. correct answers An
insurer's core functions are typically marketing and distribution, underwriting, and claims.
Insurers perform additional functions that are designed to support these three core functions. An
insurer carries out these additional functions to facilitate risk transfer, promote efficiency, and
meet its financial and nonfinancial goals.
Which function of an insurer determines whether and under what conditions the insurer is willing
to provide insurance products and services to potential customers? correct answers The
underwriting function makes these determinations. It's one of the three core functions of an
insurer, along with claims and marketing and distribution.
Underwriting correct answers The process of selecting insureds, pricing coverage, determining
insurance policy terms and conditions, and then monitoring the underwriting decisions made.
Adverse selection correct answers In general, the tendency for people with the greatest
probability of loss to be the ones most likely to purchase insurance.
How is the IoT different from the internet? correct answers The internet facilitates the use of
centralized websites by humans to connect with information created by other people or connect
with other people themselves. That's still the case, but increasingly inexpensive bandwidth,
cheap and widely available data-transmission technology, and nearly universal connectivity
allow devices to create and transmit data to other devices without human interaction. This
network of devices that create, share, and process information is referred to as the IoT. Examples
of IoT devices include a sensor that detects slow leaks in water heaters, a video doorbell system
that repels intruders, and a jet engine that transmits diagnostic data to the cockpit.
How can auto insurers use telematics to better segment drivers into rating classifications and
develop more accurate rates? correct answers After monitoring a vehicle for a certain period
through telematics, the insurer could reclassify drivers based on a personalized driving score that
takes actual driving experience into account and present the insured with a new rate. This does
not mean that the primary factors for auto rates are ignored, but rather that the telematics data
helps provide the insured with a more precise rate that accurately reflects the loss exposure.
Internet of Things (IoT) correct answers A network of objects that transmit data to each other
and to central hubs through the internet.
One of the most telling measurements of customer satisfaction is correct answers Retention ratio
Which one of the following core functions of an insurer can be transformed through the Internet
of Things' ability to facilitate instantaneous communication? correct answers claims
The abilities of devices connected to the Internet of Things lie at the heart of the ongoing shift in
the insurance industry from risk transfer to correct answers Risk prevention
