C16 Business of Insurance ACTUAL UPDATED Questions and
CORRECT Answers
1. 5 Ways Insur- -Share risk with other insurance companies (for very large risk, several insurers
ance companies subscribe to percentage of risk)
spread 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)
2. Two principles of 1. Premiums of the many are used to pay the losses of the few
insurance (risk transferred to insurer, deductible, company shares and spreads risk, geo-
graphic 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)
3. Short tail and Tail refers to the amount of time between the incident and the determination of
Long tail com- claim
pared -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
4. Negative con- -prices go up/down as capacity tightening
sumer percep- -left customers with poor opinion
tions of industry -media portrays negative image (politicatians promise to do something about
and how to im- rates)
prove -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
, C16 Business of Insurance ACTUAL UPDATED Questions and
CORRECT Answers
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
-
5. 10 ways insur- -banks willing to issue mortgages on buildings that are insured
ance affects soci- -developers willing to advance funds to building contractors on projects guaran-
ety and economy teed 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
6. Goal of reinsur- -gives peace of mind to insurers
ance -confidence instilled that financial ruin will not occur is a major unplanned event
were to occur
7. Four basic func- Financing - offers a unique method of financing to insurance companies, frees up
tions of Insur- capital that would be otherwise tied up, meet solvency regulations, expansion of
ance operations
Stabilization - keep insurer's growth and development, used to keep operational
results reasonable without fluctuations, can help maintain confidence from stake-
holders, attract new capital
, C16 Business of Insurance ACTUAL UPDATED Questions and
CORRECT Answers
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
8. Five areas of Globalization
challenge facing Rapid advances in technology
insurance indus- Public image issues
try Volatile investment markets
Increasingly severe weather
growing competition
mounting shareholder and regulatory scrutiny
downloading and offloading by government
9. Long-tail cata- - severe injuries
strophic auto in- -long-tail trends for prior accident years
jury exposures af- -inadequate reserving
fect reinsurers -
and insurers
10. Law of Large mathematical premise which states that the degree of certainty in probabilities
numbers: increases as the number of events increases - insurance companies rely on loss
forecasts built on using data from large groups of similar risks
11. 5. Adverse Selec- Process by which potential policyholders use private knowledge of their own high
tion 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)
, 12. 7. Two concerns -Increasingly larger claims (increase in number of claims exceeding threshold-
of Ontario Auto ers)
excess reinsur- -Inherent challenges in long-tail pricing because it's diflcult to accurately predict
ers that relate the outcome of claims that have not yet occurred and will remain open for years
to long-tail liabili- -Late reporting to insurers
ties: -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
13. 9. Residual mar- mechanisms have been established by automobile insurance industry to provide
ket 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.
14. Advantages at- • Professional advice with no commission costs or fees paid to independent
tributed to the brokers
direct response • Technology-enables sales and services (1-800 telephone services, Internet)
method: • Extended hours of access for consumers
15. Seven potential 1. Deployed capital: Many more choices for placement of capital when interna-
effects of foreign tional
ownership: 2. Divesting certain lines
3. Cost of retrocession covers and reinsurance
4. Emerging risks
5. Setting underwriting philosophies and procedures
6. Technology
7. Investment markets
16. Three effects of • Reduce capacity from what is currently an already tight market
Mergers • Give Insurance companies a slight smaller reinsurance universe from which to
glean capacity
• Give other insurers the opportunity to grow-albeit to a fairly small degree
CORRECT Answers
1. 5 Ways Insur- -Share risk with other insurance companies (for very large risk, several insurers
ance companies subscribe to percentage of risk)
spread 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)
2. Two principles of 1. Premiums of the many are used to pay the losses of the few
insurance (risk transferred to insurer, deductible, company shares and spreads risk, geo-
graphic 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)
3. Short tail and Tail refers to the amount of time between the incident and the determination of
Long tail com- claim
pared -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
4. Negative con- -prices go up/down as capacity tightening
sumer percep- -left customers with poor opinion
tions of industry -media portrays negative image (politicatians promise to do something about
and how to im- rates)
prove -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
, C16 Business of Insurance ACTUAL UPDATED Questions and
CORRECT Answers
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
-
5. 10 ways insur- -banks willing to issue mortgages on buildings that are insured
ance affects soci- -developers willing to advance funds to building contractors on projects guaran-
ety and economy teed 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
6. Goal of reinsur- -gives peace of mind to insurers
ance -confidence instilled that financial ruin will not occur is a major unplanned event
were to occur
7. Four basic func- Financing - offers a unique method of financing to insurance companies, frees up
tions of Insur- capital that would be otherwise tied up, meet solvency regulations, expansion of
ance operations
Stabilization - keep insurer's growth and development, used to keep operational
results reasonable without fluctuations, can help maintain confidence from stake-
holders, attract new capital
, C16 Business of Insurance ACTUAL UPDATED Questions and
CORRECT Answers
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
8. Five areas of Globalization
challenge facing Rapid advances in technology
insurance indus- Public image issues
try Volatile investment markets
Increasingly severe weather
growing competition
mounting shareholder and regulatory scrutiny
downloading and offloading by government
9. Long-tail cata- - severe injuries
strophic auto in- -long-tail trends for prior accident years
jury exposures af- -inadequate reserving
fect reinsurers -
and insurers
10. Law of Large mathematical premise which states that the degree of certainty in probabilities
numbers: increases as the number of events increases - insurance companies rely on loss
forecasts built on using data from large groups of similar risks
11. 5. Adverse Selec- Process by which potential policyholders use private knowledge of their own high
tion 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)
, 12. 7. Two concerns -Increasingly larger claims (increase in number of claims exceeding threshold-
of Ontario Auto ers)
excess reinsur- -Inherent challenges in long-tail pricing because it's diflcult to accurately predict
ers that relate the outcome of claims that have not yet occurred and will remain open for years
to long-tail liabili- -Late reporting to insurers
ties: -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
13. 9. Residual mar- mechanisms have been established by automobile insurance industry to provide
ket 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.
14. Advantages at- • Professional advice with no commission costs or fees paid to independent
tributed to the brokers
direct response • Technology-enables sales and services (1-800 telephone services, Internet)
method: • Extended hours of access for consumers
15. Seven potential 1. Deployed capital: Many more choices for placement of capital when interna-
effects of foreign tional
ownership: 2. Divesting certain lines
3. Cost of retrocession covers and reinsurance
4. Emerging risks
5. Setting underwriting philosophies and procedures
6. Technology
7. Investment markets
16. Three effects of • Reduce capacity from what is currently an already tight market
Mergers • Give Insurance companies a slight smaller reinsurance universe from which to
glean capacity
• Give other insurers the opportunity to grow-albeit to a fairly small degree
