C16 BUSINESS OF INSURANCE – PRACTICE EXAM WITH CORRECT
ACTUAL QUESTIONS AND CORRECTLY WELL DEFINED ANSWERS
LATEST ALREADY GRADED A+
Explain the economic laws of Supply and Demand, and explain why these laws do not strictly apply to
automobile insurance. - (answer)pages 3-3 and 3-13. the economic theory of supply and demand
proposes that more resources will be allocated to a product that increases revenue. The law of supply
provides that the higher the price, then more will be supplied. the law of demand provides that, with all
other factors equal, less will be demanded as the price rises.
For the insurance market, supply is represented by the capacity of the market, or the willingness of
insurers to insure risks. The demand is represented by consumers' need for insurance coverage. In most
cases consumers have some flexibility about the level of insurance they purchase, but they generally do
not have the freedom to choose not to purchase it. this is the case for automobile insurance, which is
mandated by law, and as a result demand remains fairly constant.
In addition, since auto insurance rate and availability are regulated, supply tends to fluctuate less, even
when prices are low. Insurers do not have the flexibility to increase prices to where they want, nor do
they have the freedom to choose not to provide insurance.
In these ways, both the supply and demand of auto insurance is significantly influenced by regulation,
and less by market forces.
Rate peaks and valleys are mostly caused by problems with supply rather than a change in demand. This
is not so evident with automobile insurance, given that its supply and price is regulated in most
jurisdictions.
Your employer, Reliable Insurance Brokers, has asked you to prepare a Marketing Plan. Identify and
describe two of the key components you will include in your plan. - (answer)1.Product or service
overview: what will be the features, pricing structure, distribution strategy, positioning, promotions and
advertising that will be used to attract customers. the products need to be responsive to consumer
needs. Perhaps the insurer will offer complementary services and products.
2. A marketing plan must include tracking and evaluating results. this can be done in various ways,
including a tracking number or code, a promotion code, a survey to evaluate customer satisfaction,
evaluation of complaints.
3. Budget and resources description. All marketing budgets are limited, and need someone to be held
accountable for it.
Discuss the impact of the stock market on the insurance industry. - (answer)The investment markets
have a significant impact on insurance companies because they hold a significant amount of capital
investments, and rely on investment returns to augment underwriting profits. The investment markets
generally are in a bull market when there is a soft insurance market. this is because an insurer can afford
, C16 BUSINESS OF INSURANCE – PRACTICE EXAM WITH CORRECT
ACTUAL QUESTIONS AND CORRECTLY WELL DEFINED ANSWERS
LATEST ALREADY GRADED A+
to compete more on premiums because they know they will make it up on strong investment returns,
and when investment returns wane, an insurer takes steps to increase its underwriting profit by
increasing prices and tightening up policy terms and requirements, such as loss control.
Also, in economic downturns, insurance purchasers tend to be more cautious of their assets, and rely
more on insurance.
Identify and define the functions of the two board of director committees mandated by law for all
Canadian insurers. - (answer)The Insurance Acts of Canada and the provinces and territories require
insurer boards of directors to include two committees:
1. Audit committee, which is responsible to improve the companies financial reporting process.
2. Conduct Review committee, which is mainly responsible to handle conflict of interest issues, and
prevent self-dealing.
List the main factors that influence how an insurance company organizes itself. - (answer)Ultimately an
insurer organizes itself in the way that allows it to operate as efficiently as possible in producing profits,
and is dependent on a number of factors:
1. how power and control are distributed
2. how well systems are integrated between departments and others
3. how communication works
4. how well services are coordinated
5. the size of the company
List and explain the three elements an insurance company considers when evaluating its overall
outstanding claims reserve. - (answer)page 4-23. Outstanding claims reserve or claims liabilities, is an
entry on an insurer's balance sheet and represents the gross claims reserves necessary to settle all
claims due to claimants. It includes reserve estimates from:
1. case reserves--all reserves for loss and claims expenses as posted and estimated by the claims
department
2. Incurred but not reported--IBNR, which is calculated by actuaries, and represents an estimate of
claims that have occurred, but have not yet been reported. it also includes provisions for PfAD, which is
provision for adverse deviation, which is where case reserves are insufficient to settle the loss.
ACTUAL QUESTIONS AND CORRECTLY WELL DEFINED ANSWERS
LATEST ALREADY GRADED A+
Explain the economic laws of Supply and Demand, and explain why these laws do not strictly apply to
automobile insurance. - (answer)pages 3-3 and 3-13. the economic theory of supply and demand
proposes that more resources will be allocated to a product that increases revenue. The law of supply
provides that the higher the price, then more will be supplied. the law of demand provides that, with all
other factors equal, less will be demanded as the price rises.
For the insurance market, supply is represented by the capacity of the market, or the willingness of
insurers to insure risks. The demand is represented by consumers' need for insurance coverage. In most
cases consumers have some flexibility about the level of insurance they purchase, but they generally do
not have the freedom to choose not to purchase it. this is the case for automobile insurance, which is
mandated by law, and as a result demand remains fairly constant.
In addition, since auto insurance rate and availability are regulated, supply tends to fluctuate less, even
when prices are low. Insurers do not have the flexibility to increase prices to where they want, nor do
they have the freedom to choose not to provide insurance.
In these ways, both the supply and demand of auto insurance is significantly influenced by regulation,
and less by market forces.
Rate peaks and valleys are mostly caused by problems with supply rather than a change in demand. This
is not so evident with automobile insurance, given that its supply and price is regulated in most
jurisdictions.
Your employer, Reliable Insurance Brokers, has asked you to prepare a Marketing Plan. Identify and
describe two of the key components you will include in your plan. - (answer)1.Product or service
overview: what will be the features, pricing structure, distribution strategy, positioning, promotions and
advertising that will be used to attract customers. the products need to be responsive to consumer
needs. Perhaps the insurer will offer complementary services and products.
2. A marketing plan must include tracking and evaluating results. this can be done in various ways,
including a tracking number or code, a promotion code, a survey to evaluate customer satisfaction,
evaluation of complaints.
3. Budget and resources description. All marketing budgets are limited, and need someone to be held
accountable for it.
Discuss the impact of the stock market on the insurance industry. - (answer)The investment markets
have a significant impact on insurance companies because they hold a significant amount of capital
investments, and rely on investment returns to augment underwriting profits. The investment markets
generally are in a bull market when there is a soft insurance market. this is because an insurer can afford
, C16 BUSINESS OF INSURANCE – PRACTICE EXAM WITH CORRECT
ACTUAL QUESTIONS AND CORRECTLY WELL DEFINED ANSWERS
LATEST ALREADY GRADED A+
to compete more on premiums because they know they will make it up on strong investment returns,
and when investment returns wane, an insurer takes steps to increase its underwriting profit by
increasing prices and tightening up policy terms and requirements, such as loss control.
Also, in economic downturns, insurance purchasers tend to be more cautious of their assets, and rely
more on insurance.
Identify and define the functions of the two board of director committees mandated by law for all
Canadian insurers. - (answer)The Insurance Acts of Canada and the provinces and territories require
insurer boards of directors to include two committees:
1. Audit committee, which is responsible to improve the companies financial reporting process.
2. Conduct Review committee, which is mainly responsible to handle conflict of interest issues, and
prevent self-dealing.
List the main factors that influence how an insurance company organizes itself. - (answer)Ultimately an
insurer organizes itself in the way that allows it to operate as efficiently as possible in producing profits,
and is dependent on a number of factors:
1. how power and control are distributed
2. how well systems are integrated between departments and others
3. how communication works
4. how well services are coordinated
5. the size of the company
List and explain the three elements an insurance company considers when evaluating its overall
outstanding claims reserve. - (answer)page 4-23. Outstanding claims reserve or claims liabilities, is an
entry on an insurer's balance sheet and represents the gross claims reserves necessary to settle all
claims due to claimants. It includes reserve estimates from:
1. case reserves--all reserves for loss and claims expenses as posted and estimated by the claims
department
2. Incurred but not reported--IBNR, which is calculated by actuaries, and represents an estimate of
claims that have occurred, but have not yet been reported. it also includes provisions for PfAD, which is
provision for adverse deviation, which is where case reserves are insufficient to settle the loss.
