RM 497 EXAM 1 100% VERIFIED!!
Taxonomy - ANSWER Ways to classify insurance
Life Health Insurance (LH) - ANSWER Protection from damage from a personal risk (ex-
Investments)
Property Casualty Insurance (PC) - ANSWER Protection from damage to a property,
lawsuits, and related losses
Social Insurance - ANSWER Programs in which eligibility is based on prior
contributions to government, usually in the form of payroll taxes (ex- social security)
Ordinary Insurance (individual insurance) - ANSWER Individually issued life, health,
and retirement coverages
Industrial Insurance (individual insurance) - ANSWER Small amounts of protection
Credit Insurance (individual insurance) - ANSWER Secures the borrowers loan
balance if they die or become disabled
Group Insurance - ANSWER Policies covering over 50 people in one contract
Indemnification - ANSWER The insured is restored to his or her approximate financial
position prior to the occurrence of the loss
Valued Policy - ANSWER Pays a stated amount if loss occurs
,Human Life Value - ANSWER Basis for valuing a persons life in life insurance,
measured from the persons dependants
Roles of Employee Benefit Plans - ANSWER Accommodation/enhancement benefits,
PTO, protection programs*
Types of Employee Benefits - ANSWER Legally required benefits (social security),
Discretionary benefits (retirement plans)
Characteristics of a perfectly competitive market - ANSWER - Large number of buyers
and sellers
- No barriers to entry or exit
- Homogeneous product
- Buyers and sellers have full and equal information about the products
McCarren-Ferguson Act - ANSWER 1945 US Law exempting insurance from most
federal regulation, and placing it under the authority of the individual states
Department of Justice (monitoring competition) - ANSWER Focuses on horizontal price
fixing, monopolization, mergers
Federal Trade Commission (monitoring competition) - ANSWER Focuses on price fixing
and mergers
How to measure large buyers and sellers - ANSWER - Number of competitors
- Concentration Ratio: market share of the largest firms in the market
- Herfindahl Index
Herfindahl-Hirschman Index (HHI) - ANSWER An index of market concentration found
by summing the square of percentage shares of firms in the market
, - Not concentrated: HHI < 1500
- Moderately concentrated: 1500 < HHI < 2500
- Highly concentrated: HHI > 2500
- Monopoly: HHI = 10,000 or 100^2
Rating Bureau - ANSWER A company financed by a lot of small insurance companies
because they want them to do statistics to find out how much they should charge based
on previous years losses
Product Differentiation - ANSWER Buyers prefer one firm's product over its
competition, and that firm then earns more profits and builds a market share
Rating Agencies - ANSWER - Paid to rate by the company
- AIG was improperly rated and they got in trouble
- A RATING = charging higher prices
AM Best - ANSWER Specialize in rating insurance companies
Mutual Insurer - ANSWER Private company, owned by the customer
Asymmetric information - ANSWER Case in which one party in a transaction has info
that the other does not have
Junk Bond - ANSWER a lower-rated, potentially higher-paying bond with high interest
rates
Adverse Selection (asymmetric information favoring policyholders) - ANSWER
Tendency for high risk customers to take advantage of an insurer using their
information advantage (ex- may want to buy more insurance than lower risk customers)
Taxonomy - ANSWER Ways to classify insurance
Life Health Insurance (LH) - ANSWER Protection from damage from a personal risk (ex-
Investments)
Property Casualty Insurance (PC) - ANSWER Protection from damage to a property,
lawsuits, and related losses
Social Insurance - ANSWER Programs in which eligibility is based on prior
contributions to government, usually in the form of payroll taxes (ex- social security)
Ordinary Insurance (individual insurance) - ANSWER Individually issued life, health,
and retirement coverages
Industrial Insurance (individual insurance) - ANSWER Small amounts of protection
Credit Insurance (individual insurance) - ANSWER Secures the borrowers loan
balance if they die or become disabled
Group Insurance - ANSWER Policies covering over 50 people in one contract
Indemnification - ANSWER The insured is restored to his or her approximate financial
position prior to the occurrence of the loss
Valued Policy - ANSWER Pays a stated amount if loss occurs
,Human Life Value - ANSWER Basis for valuing a persons life in life insurance,
measured from the persons dependants
Roles of Employee Benefit Plans - ANSWER Accommodation/enhancement benefits,
PTO, protection programs*
Types of Employee Benefits - ANSWER Legally required benefits (social security),
Discretionary benefits (retirement plans)
Characteristics of a perfectly competitive market - ANSWER - Large number of buyers
and sellers
- No barriers to entry or exit
- Homogeneous product
- Buyers and sellers have full and equal information about the products
McCarren-Ferguson Act - ANSWER 1945 US Law exempting insurance from most
federal regulation, and placing it under the authority of the individual states
Department of Justice (monitoring competition) - ANSWER Focuses on horizontal price
fixing, monopolization, mergers
Federal Trade Commission (monitoring competition) - ANSWER Focuses on price fixing
and mergers
How to measure large buyers and sellers - ANSWER - Number of competitors
- Concentration Ratio: market share of the largest firms in the market
- Herfindahl Index
Herfindahl-Hirschman Index (HHI) - ANSWER An index of market concentration found
by summing the square of percentage shares of firms in the market
, - Not concentrated: HHI < 1500
- Moderately concentrated: 1500 < HHI < 2500
- Highly concentrated: HHI > 2500
- Monopoly: HHI = 10,000 or 100^2
Rating Bureau - ANSWER A company financed by a lot of small insurance companies
because they want them to do statistics to find out how much they should charge based
on previous years losses
Product Differentiation - ANSWER Buyers prefer one firm's product over its
competition, and that firm then earns more profits and builds a market share
Rating Agencies - ANSWER - Paid to rate by the company
- AIG was improperly rated and they got in trouble
- A RATING = charging higher prices
AM Best - ANSWER Specialize in rating insurance companies
Mutual Insurer - ANSWER Private company, owned by the customer
Asymmetric information - ANSWER Case in which one party in a transaction has info
that the other does not have
Junk Bond - ANSWER a lower-rated, potentially higher-paying bond with high interest
rates
Adverse Selection (asymmetric information favoring policyholders) - ANSWER
Tendency for high risk customers to take advantage of an insurer using their
information advantage (ex- may want to buy more insurance than lower risk customers)
