C16 Business of Insurance Exam
Questions & Correct Answers
100%
-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) - correct answer ✔✔5 Ways Insurance companies spread risk
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) - correct answer
✔✔Two principles of insurance
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 - correct answer ✔✔Short tail and Long
tail compared
-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
- - correct answer ✔✔Negative consumer perceptions of industry and how to improve
-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 - correct answer ✔✔10 ways insurance
affects society and economy
-gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned event were to occur -
correct answer ✔✔Goal of reinsurance
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 - correct answer ✔✔Four basic
functions of Insurance
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 - correct answer ✔✔Five areas of challenge facing
insurance industry
- severe injuries
-long-tail trends for prior accident years
-inadequate reserving
- - correct answer ✔✔Long-tail catastrophic auto injury exposures affect reinsurers and insurers
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 - correct answer ✔✔Law of Large numbers:
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) - correct answer ✔✔5. Adverse Selection
-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 - correct answer ✔✔7. Two concerns of
Ontario Auto excess reinsurers that relate to long-tail liabilities:
Questions & Correct Answers
100%
-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) - correct answer ✔✔5 Ways Insurance companies spread risk
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) - correct answer
✔✔Two principles of insurance
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 - correct answer ✔✔Short tail and Long
tail compared
-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
- - correct answer ✔✔Negative consumer perceptions of industry and how to improve
-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 - correct answer ✔✔10 ways insurance
affects society and economy
-gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned event were to occur -
correct answer ✔✔Goal of reinsurance
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 - correct answer ✔✔Four basic
functions of Insurance
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 - correct answer ✔✔Five areas of challenge facing
insurance industry
- severe injuries
-long-tail trends for prior accident years
-inadequate reserving
- - correct answer ✔✔Long-tail catastrophic auto injury exposures affect reinsurers and insurers
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 - correct answer ✔✔Law of Large numbers:
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) - correct answer ✔✔5. Adverse Selection
-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 - correct answer ✔✔7. Two concerns of
Ontario Auto excess reinsurers that relate to long-tail liabilities:
