C16 The Business of Insurance- chapter 1-6 UPDATED ACTUAL
Questions and CORRECT Answers
1 List the two fun- 1. The premiums of the many are used to pay the losses of the few.
damental princi- 2. The premiums shall be commensurate with the risk (must charge an appropri-
ples of insurance. ate premium for the risk.)
(there must be an appropriate balance of premiums and claims paid)
2. Why would an 1. Risks spread over a larger geographic area soften the burden of localized
insurer spread disasters on insurers.
risks over di-
verse geographic 2. For example, a severe windstorm in one part of the country would have a
areas? devastating effect on an insurer who had concentrated its risks in this one area.
3. What is a risk 1. A risk pool is a sharing and spreading of risk between insurers and re-insurers.
pool?
2. Formed risk pools are syndicates of insurance or reinsurance companies that
have organized to underwrite a particular risk or group of similar risks.
4. Explain the law of The Law of Large Numbers is a mathematical formula that states that the degree
large numbers. of uncertainty is reduced as the number of events increases. Insurers rely on loss
forecasts using data from large groups of similar risks. Risks must be appropriately
priced to make sure suflcient capital enters the pool of funds to accommodate
paying out claims.
5. Define adverse describes the process by which potential policyholders use their private knowl-
selection. edge of their own high level of risk when deciding whether or not to buy insur-
ance. High risk individuals will buy more insurance and pay a comparatively high
rate of premium if allowed while low risk clients might not buy any insurance
because the price is too high and might go to the competition.
6. In insurance, A tail refers to the amount of time between an incident and the determination of
what is a tail? a claim. A short tail line is where the injury or damage is known quite quickly. For
example property damage in a motor vehicle accident. A long tail is where a claim
may be separated from the circumstances that caused it by as many as 10-20+
years. many Product lines fall into this category.
, C16 The Business of Insurance- chapter 1-6 UPDATED ACTUAL
Questions and CORRECT Answers
7. Name three con- The three areas of concerns are severe injuries, long tail trends in prior accidents
cerns of Auto and inadequate servings at the primary insurance level.
Reinsurers as Primary insurance companies rely on reinsurers to back stop auto coverage
it relates to especially for CAT claims (1 mill+). Recently there have been light CAT claims which
Long-tail Liabili- have caused a minor rate increase in reinsurance. General increases in claims
ties. exceeding 2-5 million in the past 10 years. Predicting long-tail pricing increase is
diflcult because claims will be open many years before settlement. Also seen late
reporting of CAT claims after being recognized and reported.
8. List 9 ways that The 9 benefits are (BDR MM PP FL).
insurance bene- Banks offer mortgages on insured buildings
fits society. Developers more willing to advance funds to contractors on projects guaranteed
by surety bonds
Retailers are more willing to accept Risks of operating when insured
Manufacturers more willing to ship goods when they purchase liability insurance
Members of society sanction use of auto when insured
Provides peace of mind
provides financial security
Facilitates economic growth
Lawyers, doctors, architects, engineers more willing to provide services when they
are insured against liability and malpractice
9. Why is there a Residual Market is a last resort for consumers. it pertains to risks that are high
need for resid- level in which the consumer cannot find insurance in the mainstream market.
ual market mech- Every insurer licensed to write Automobile Insurance in the FA industries has to
anisms? follow the rules set out by the Board of Directors with regards to scope, terms and
standard of coverage. FA does not issue policies, but rather designates insurance
companies to offer specific services and claims handling.
10. In property and 1. Independent broker/agents:
casualty insur-
ance, what are -Most insurance business written in Canada has been placed through brokers
, C16 The Business of Insurance- chapter 1-6 UPDATED ACTUAL
Questions and CORRECT Answers
the two tradition- which has its roots in the British system
al methods of
distribution and -The size of the country and its sparse and dispersed population has made
how do they dif- broker-based business a more practical option. Economical and eflcient way for
fer? insurers to market their products
2. Direct response method:
-hybrid of direct right of distributing insurance directly to consumers by using
different types of media to encourage customers to respond to insurance mar-
keting campaigns. Consumers call toll free to a centralized call centre for advice
or to purchase insurance
-certain traditional insurers have chosen to adopt this approach for at least some
of the business they write
11. List FOUR per- 1. Consumers remain in control of the sales process.
ceived advan-
tages of the 2. Professional advice with no commission costs or fees paid.
direct response
3. Technology-enabled sales and service (telephone, internet, etc.)
method.
4. Extended hours of access for consumers
12. What are FOUR 1. Financing - frees up capital that would otherwise be tied to obligations.
basic functions of
reinsurance. 2. Stabilization - used to keep operational results within reasonable parameters
without fluctuating dramatically.
3. Capacity - insurers may require the ability to insure business that are beyond
their resources. For competitive reasons they may want to accept a large share of
a risk and cater to big producers.
Questions and CORRECT Answers
1 List the two fun- 1. The premiums of the many are used to pay the losses of the few.
damental princi- 2. The premiums shall be commensurate with the risk (must charge an appropri-
ples of insurance. ate premium for the risk.)
(there must be an appropriate balance of premiums and claims paid)
2. Why would an 1. Risks spread over a larger geographic area soften the burden of localized
insurer spread disasters on insurers.
risks over di-
verse geographic 2. For example, a severe windstorm in one part of the country would have a
areas? devastating effect on an insurer who had concentrated its risks in this one area.
3. What is a risk 1. A risk pool is a sharing and spreading of risk between insurers and re-insurers.
pool?
2. Formed risk pools are syndicates of insurance or reinsurance companies that
have organized to underwrite a particular risk or group of similar risks.
4. Explain the law of The Law of Large Numbers is a mathematical formula that states that the degree
large numbers. of uncertainty is reduced as the number of events increases. Insurers rely on loss
forecasts using data from large groups of similar risks. Risks must be appropriately
priced to make sure suflcient capital enters the pool of funds to accommodate
paying out claims.
5. Define adverse describes the process by which potential policyholders use their private knowl-
selection. edge of their own high level of risk when deciding whether or not to buy insur-
ance. High risk individuals will buy more insurance and pay a comparatively high
rate of premium if allowed while low risk clients might not buy any insurance
because the price is too high and might go to the competition.
6. In insurance, A tail refers to the amount of time between an incident and the determination of
what is a tail? a claim. A short tail line is where the injury or damage is known quite quickly. For
example property damage in a motor vehicle accident. A long tail is where a claim
may be separated from the circumstances that caused it by as many as 10-20+
years. many Product lines fall into this category.
, C16 The Business of Insurance- chapter 1-6 UPDATED ACTUAL
Questions and CORRECT Answers
7. Name three con- The three areas of concerns are severe injuries, long tail trends in prior accidents
cerns of Auto and inadequate servings at the primary insurance level.
Reinsurers as Primary insurance companies rely on reinsurers to back stop auto coverage
it relates to especially for CAT claims (1 mill+). Recently there have been light CAT claims which
Long-tail Liabili- have caused a minor rate increase in reinsurance. General increases in claims
ties. exceeding 2-5 million in the past 10 years. Predicting long-tail pricing increase is
diflcult because claims will be open many years before settlement. Also seen late
reporting of CAT claims after being recognized and reported.
8. List 9 ways that The 9 benefits are (BDR MM PP FL).
insurance bene- Banks offer mortgages on insured buildings
fits society. Developers more willing to advance funds to contractors on projects guaranteed
by surety bonds
Retailers are more willing to accept Risks of operating when insured
Manufacturers more willing to ship goods when they purchase liability insurance
Members of society sanction use of auto when insured
Provides peace of mind
provides financial security
Facilitates economic growth
Lawyers, doctors, architects, engineers more willing to provide services when they
are insured against liability and malpractice
9. Why is there a Residual Market is a last resort for consumers. it pertains to risks that are high
need for resid- level in which the consumer cannot find insurance in the mainstream market.
ual market mech- Every insurer licensed to write Automobile Insurance in the FA industries has to
anisms? follow the rules set out by the Board of Directors with regards to scope, terms and
standard of coverage. FA does not issue policies, but rather designates insurance
companies to offer specific services and claims handling.
10. In property and 1. Independent broker/agents:
casualty insur-
ance, what are -Most insurance business written in Canada has been placed through brokers
, C16 The Business of Insurance- chapter 1-6 UPDATED ACTUAL
Questions and CORRECT Answers
the two tradition- which has its roots in the British system
al methods of
distribution and -The size of the country and its sparse and dispersed population has made
how do they dif- broker-based business a more practical option. Economical and eflcient way for
fer? insurers to market their products
2. Direct response method:
-hybrid of direct right of distributing insurance directly to consumers by using
different types of media to encourage customers to respond to insurance mar-
keting campaigns. Consumers call toll free to a centralized call centre for advice
or to purchase insurance
-certain traditional insurers have chosen to adopt this approach for at least some
of the business they write
11. List FOUR per- 1. Consumers remain in control of the sales process.
ceived advan-
tages of the 2. Professional advice with no commission costs or fees paid.
direct response
3. Technology-enabled sales and service (telephone, internet, etc.)
method.
4. Extended hours of access for consumers
12. What are FOUR 1. Financing - frees up capital that would otherwise be tied to obligations.
basic functions of
reinsurance. 2. Stabilization - used to keep operational results within reasonable parameters
without fluctuating dramatically.
3. Capacity - insurers may require the ability to insure business that are beyond
their resources. For competitive reasons they may want to accept a large share of
a risk and cater to big producers.
