C16 BUSINESS OF INSURANCE EXAM (II) QUESTIONS WITH
COMPLETE SOLUTIONS GUARANTEED PASS BRAND NEW 2025
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
-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
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)
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
COMPLETE SOLUTIONS GUARANTEED PASS BRAND NEW 2025
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
-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
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)
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
