C16 The Business of Insurance UPDATED 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-
ples of insurance. 2. The premiums shall be commensurate with the risk.
-Insurance fulfils a societal need
-Provides consumers with financial security for particular types of accidental losses.
Also underpins the economy facilitating economic growth and societal develop-
ment
-Insurance is the promise to indemnify another person against the possibility of a
loss
-Significant claim is paid based on a nominal premium
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 1. A mathematical premise which states that the degree of uncertainty is reduces
large numbers. as the number of events increase.
2. Insurance relies on the forecasts of loss certainty in a large group of similar
risks.
3. Enough risks must be priced in such a way as to ensure that suflcient capital
enters the pool of funds to accommodate what is being drawn out to pay for claims.
5.
, C16 The Business of Insurance UPDATED Questions and
CORRECT Answers
Define adverse 1. 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.
2. High-risk individuals will try to buy lots of insurance and pay a comparatively
high rate of premium if they are allowed.
3. Low-risk clients might not buy any insurance because the price is too high.
6. In insurance, 1. Refers to the amount of time between an incident and the determination of the
what is a tail? claim.
2. Short-tail lines are those where the injury becomes known quite quickly.
3. Long-tail lines are those which a claim may be separated from the circumstances
that caused it by as many as 10, 15, 20 years or more. Many product liability lines
have long-tail exposures.
7. Name TWO con- 1. Severe Injuries.
cerns of On-
tario automobile 2. Long-tail trends for prior accident years.
excess reinsur-
3. Inadequate reserving at the primary insurance level
ers that relate
to the effects
-Primary insurance companies rely on reinsurers to back stop auto coverage
of long-tail liabili-
particularly for catastrophic claims that end up costing over 1M.
ties.
-As of recent times there have been relatively light catastrophic events which led to
minor rate increase for reinsurance catastrophe treaties.
-Claims from two to five million have reinsurance layers. There has been a general
increase in the number of claims exceeding thresholds such as 2M-5M over the
past 10 years.
, C16 The Business of Insurance UPDATED Questions and
CORRECT Answers
-Predicting long tail pricing because it is diflcult to accurately predict the outcome
of claims that have not yet occurred and will remain open for years before the final
settlement is reached
-Reinsurers have seen patterns of very late reporting of catastrophic injury claims
by insurers and after being recognized and reported, they continue to develop
adversely for years
8. List three ways -Insurance provides a certain freedom of action, encouraging activities to flourish
that insurance in industries, commerce, organizations and families
benefits society.
-Insurance industry facilitates growth but depends on growth of the economy
-Insurance may facilitate borrowing towards the purchase of a home, car or cottage
(an asset)
-Insurance industry contributes to the economy by providing employment to thou-
sands of Canadians
-Insurance companies hold large investment holdings, such as investments to help
finance governments and businesses.
-Risk exposures are escalating. As the planet becomes more crowded, weather
becomes more erratic, values become more concentrated, technologies become
more advances and our societies become more litigious
-Money paid to indemnify people and fix property and bodily injury boosts the
economy
9. Why is there a -Residual market mechanisms are established by the auto mobile insurance indus-
need for resid- try to provide a last resort insurance facility for consumers. Not-for-profit Facility
ual market mech- Association (FA)
anisms?
-Quebec operates it's residual independently
CORRECT Answers
1. List the two fun- 1. The premiums of the many are used to pay the losses of the few.
damental princi-
ples of insurance. 2. The premiums shall be commensurate with the risk.
-Insurance fulfils a societal need
-Provides consumers with financial security for particular types of accidental losses.
Also underpins the economy facilitating economic growth and societal develop-
ment
-Insurance is the promise to indemnify another person against the possibility of a
loss
-Significant claim is paid based on a nominal premium
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 1. A mathematical premise which states that the degree of uncertainty is reduces
large numbers. as the number of events increase.
2. Insurance relies on the forecasts of loss certainty in a large group of similar
risks.
3. Enough risks must be priced in such a way as to ensure that suflcient capital
enters the pool of funds to accommodate what is being drawn out to pay for claims.
5.
, C16 The Business of Insurance UPDATED Questions and
CORRECT Answers
Define adverse 1. 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.
2. High-risk individuals will try to buy lots of insurance and pay a comparatively
high rate of premium if they are allowed.
3. Low-risk clients might not buy any insurance because the price is too high.
6. In insurance, 1. Refers to the amount of time between an incident and the determination of the
what is a tail? claim.
2. Short-tail lines are those where the injury becomes known quite quickly.
3. Long-tail lines are those which a claim may be separated from the circumstances
that caused it by as many as 10, 15, 20 years or more. Many product liability lines
have long-tail exposures.
7. Name TWO con- 1. Severe Injuries.
cerns of On-
tario automobile 2. Long-tail trends for prior accident years.
excess reinsur-
3. Inadequate reserving at the primary insurance level
ers that relate
to the effects
-Primary insurance companies rely on reinsurers to back stop auto coverage
of long-tail liabili-
particularly for catastrophic claims that end up costing over 1M.
ties.
-As of recent times there have been relatively light catastrophic events which led to
minor rate increase for reinsurance catastrophe treaties.
-Claims from two to five million have reinsurance layers. There has been a general
increase in the number of claims exceeding thresholds such as 2M-5M over the
past 10 years.
, C16 The Business of Insurance UPDATED Questions and
CORRECT Answers
-Predicting long tail pricing because it is diflcult to accurately predict the outcome
of claims that have not yet occurred and will remain open for years before the final
settlement is reached
-Reinsurers have seen patterns of very late reporting of catastrophic injury claims
by insurers and after being recognized and reported, they continue to develop
adversely for years
8. List three ways -Insurance provides a certain freedom of action, encouraging activities to flourish
that insurance in industries, commerce, organizations and families
benefits society.
-Insurance industry facilitates growth but depends on growth of the economy
-Insurance may facilitate borrowing towards the purchase of a home, car or cottage
(an asset)
-Insurance industry contributes to the economy by providing employment to thou-
sands of Canadians
-Insurance companies hold large investment holdings, such as investments to help
finance governments and businesses.
-Risk exposures are escalating. As the planet becomes more crowded, weather
becomes more erratic, values become more concentrated, technologies become
more advances and our societies become more litigious
-Money paid to indemnify people and fix property and bodily injury boosts the
economy
9. Why is there a -Residual market mechanisms are established by the auto mobile insurance indus-
need for resid- try to provide a last resort insurance facility for consumers. Not-for-profit Facility
ual market mech- Association (FA)
anisms?
-Quebec operates it's residual independently
