C16 - Business of Insurance UPDATED ACTUAL Questions and
CORRECT Answers
1. What are the fun- 1.- The premiums of the many are used to pay the losses of the few.
damental princi-
ples of insur- 2.- The premium shall be commesurate with the risk
ance?
2. Explain the first The premium of the many are used to pay the losses of the few
principle of insur-
ance 1. Premiums paid by policyholders who have not made a claim fund the losses of
others less fortunate
2. The risk is transferred to the insurer
3. Company shares and spreads the risk
4. Insurers also spread the risk over diverse geographic areas
5. The sharing and spreading of the risk between insurers and reinsurers may take
place through pools, which are syndicates of insurance or re-insurance companies
that have organized to underwrite a particular risk or group of similar risks.
6. Insurance relies on the law of large numbers.
7. There must be a balance because the cost of transferring the risk to te insurer
must be affordable to the average consumer.
3. Explain the sec- The premiums shall be commensurate with the risk
ond principle of
insurance 1. 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 for claims.
2. Premiums must be adequate to pay future claims.
3. There is a balance that must be achieved because the price of the risk transfer
must be affordable to the average consumer.
4. Pricing risks adequately will help protect themselves from adverse selection.
5. Insurance premiums should also cover the costs of running the insurance
business and to provide a reasonable return to investors.
, C16 - Business of Insurance UPDATED ACTUAL Questions and
CORRECT Answers
4. Explain the law of The mathematical premise that states that the degree of uncertainty is reduced
large numbers as the number of events increases
Insurance system relies on the law of large numbers
Insurance companies rely on loss forecasts built by analyzing data from large
groups of similar risks.
Risks must be priced un such a way as to ensure that suflcient capital enters the
pool of funds to accomodate what is being drawn out by claims.
5. What is adverse Occurs when those with higher risks may purchase insurance in greater amounts
selection? than those with lower risks.
6. How do insur- Insurers protect themselves from adverse selection by attempting to measure risk
ers protect them- and either charging more for higher risks or refusing to cover them at all.
selves from ad-
verse selection?
7. How can adverse 1.- The insurance company charges too high a premium for a risk. Then the low
selection result? risk client will seek insurance elsewhere where they can get better rates. The
high-risk client will most probably stay because they will be unable to find better
terms.
2.- The broker places its poorer risks with one insurer and its better risks with
another.
3.- The insurance company doesn't charge adequately for the poorer risks; at-
tracting more of these undesirable risks.
8. What is the goal To give insurers peace of mind, by allowing them to feel confident that a major
of re-insurance unplanned event or negative trend will not cause them, their policyholders, and
their shareholders any undue financial concern.
, C16 - Business of Insurance UPDATED ACTUAL Questions and
CORRECT Answers
9. What are the 4 1. Finance
basic functions of 2. Stabilization
reinsurance? 3. Capacity
4. Resource protection against catastrophes
10. How is reinsur- 1. It offers a unique method of financing to insurance companies.
ance used for fi-
nancing? 2. The reinsurance transaction frees up capital that would otherwise be tied up
to meet obligations. This can be used to commence or expand operations or to
acquire a subsidiary.
3. It is also used to meet solvency requirements.
11. How is reinsur- 1. In order to manage the insurer's growth and development, reinsurance can be
ance used for sta- used to keep operational results within reasonable parameters; without fluctuat-
bilization? ing dramatically.
2. Stable results can maintain confidence of existing shareholders and attract new
capital.
12. How is reinsur- 1. Provides them the ability to insure businesses that are beyond their resources.
ance used for ca- For example a company purchases reinsurance to write a business it would not
pacity? normally write, as an accommodation to a policyholder to write an entire account.
2. Insurers can accept a large share of a risk being written by several insurers so
that they can have a say in its terms and conditions. Without re-insurance, they
would be limited to write small lines and and follow the terms of the leader.
3. Insurers can accommodate the needs of the big producers, by purchasing
reinsurance for some risks that it would not otherwise be in the position to write.
13. How is reinsur- Use reinsurance to protect resources such as their capital and surplus, their loss
ance used for ratio, and their investment position against catastrophic loss.
, resource protec-
tion?
14. What is in- 1. Allows company to pay dividends to shareholders
vestment income
used for? 2. Provides the capital required to finance growth.
15. List some of the 1. Banks are willing to issue mortgages on buildings that are insured
effects of insur- 2. Developers are willing to advance funds to building contractors on projects that
ance are guaranteed by surety bonds
3.Retailers are more willing to accept the commercial risk of operating a business
when able to purchase liability insurance.
4.Lawyers, doctors, architects, engineers, and other professionals are more will-
ing to provide their services when able to insure against the risk of liability for
malpractice.
5. Manufacturers are more willing to accept the risks associated with shipping
goods when the goods are insured against transportation risks.
6. Members of society are more willing to sanction the use of automobiles as long
as motorists carry third party insurance
16. What are the eco- 1. Insurance industry is interdependent on growth of economy. Without insurance
nomic impacts of no individual corporation or institution could enjoy financial security and therefore
insurance? have the peace of mind.
2. Government and marketplace impose insurance requirements.
3. Contributes to the economy by providing employment directly and indirectly.
Salaries, employee benefits, and the costs of goods and services to operate a
business represent large amounts of money being recycled into the economy.
4. Insurers hold billions of dollars in bonds, equities, real estate, and other invest-
ments. Such investments are used to help finance governments and businesses.
CORRECT Answers
1. What are the fun- 1.- The premiums of the many are used to pay the losses of the few.
damental princi-
ples of insur- 2.- The premium shall be commesurate with the risk
ance?
2. Explain the first The premium of the many are used to pay the losses of the few
principle of insur-
ance 1. Premiums paid by policyholders who have not made a claim fund the losses of
others less fortunate
2. The risk is transferred to the insurer
3. Company shares and spreads the risk
4. Insurers also spread the risk over diverse geographic areas
5. The sharing and spreading of the risk between insurers and reinsurers may take
place through pools, which are syndicates of insurance or re-insurance companies
that have organized to underwrite a particular risk or group of similar risks.
6. Insurance relies on the law of large numbers.
7. There must be a balance because the cost of transferring the risk to te insurer
must be affordable to the average consumer.
3. Explain the sec- The premiums shall be commensurate with the risk
ond principle of
insurance 1. 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 for claims.
2. Premiums must be adequate to pay future claims.
3. There is a balance that must be achieved because the price of the risk transfer
must be affordable to the average consumer.
4. Pricing risks adequately will help protect themselves from adverse selection.
5. Insurance premiums should also cover the costs of running the insurance
business and to provide a reasonable return to investors.
, C16 - Business of Insurance UPDATED ACTUAL Questions and
CORRECT Answers
4. Explain the law of The mathematical premise that states that the degree of uncertainty is reduced
large numbers as the number of events increases
Insurance system relies on the law of large numbers
Insurance companies rely on loss forecasts built by analyzing data from large
groups of similar risks.
Risks must be priced un such a way as to ensure that suflcient capital enters the
pool of funds to accomodate what is being drawn out by claims.
5. What is adverse Occurs when those with higher risks may purchase insurance in greater amounts
selection? than those with lower risks.
6. How do insur- Insurers protect themselves from adverse selection by attempting to measure risk
ers protect them- and either charging more for higher risks or refusing to cover them at all.
selves from ad-
verse selection?
7. How can adverse 1.- The insurance company charges too high a premium for a risk. Then the low
selection result? risk client will seek insurance elsewhere where they can get better rates. The
high-risk client will most probably stay because they will be unable to find better
terms.
2.- The broker places its poorer risks with one insurer and its better risks with
another.
3.- The insurance company doesn't charge adequately for the poorer risks; at-
tracting more of these undesirable risks.
8. What is the goal To give insurers peace of mind, by allowing them to feel confident that a major
of re-insurance unplanned event or negative trend will not cause them, their policyholders, and
their shareholders any undue financial concern.
, C16 - Business of Insurance UPDATED ACTUAL Questions and
CORRECT Answers
9. What are the 4 1. Finance
basic functions of 2. Stabilization
reinsurance? 3. Capacity
4. Resource protection against catastrophes
10. How is reinsur- 1. It offers a unique method of financing to insurance companies.
ance used for fi-
nancing? 2. The reinsurance transaction frees up capital that would otherwise be tied up
to meet obligations. This can be used to commence or expand operations or to
acquire a subsidiary.
3. It is also used to meet solvency requirements.
11. How is reinsur- 1. In order to manage the insurer's growth and development, reinsurance can be
ance used for sta- used to keep operational results within reasonable parameters; without fluctuat-
bilization? ing dramatically.
2. Stable results can maintain confidence of existing shareholders and attract new
capital.
12. How is reinsur- 1. Provides them the ability to insure businesses that are beyond their resources.
ance used for ca- For example a company purchases reinsurance to write a business it would not
pacity? normally write, as an accommodation to a policyholder to write an entire account.
2. Insurers can accept a large share of a risk being written by several insurers so
that they can have a say in its terms and conditions. Without re-insurance, they
would be limited to write small lines and and follow the terms of the leader.
3. Insurers can accommodate the needs of the big producers, by purchasing
reinsurance for some risks that it would not otherwise be in the position to write.
13. How is reinsur- Use reinsurance to protect resources such as their capital and surplus, their loss
ance used for ratio, and their investment position against catastrophic loss.
, resource protec-
tion?
14. What is in- 1. Allows company to pay dividends to shareholders
vestment income
used for? 2. Provides the capital required to finance growth.
15. List some of the 1. Banks are willing to issue mortgages on buildings that are insured
effects of insur- 2. Developers are willing to advance funds to building contractors on projects that
ance are guaranteed by surety bonds
3.Retailers are more willing to accept the commercial risk of operating a business
when able to purchase liability insurance.
4.Lawyers, doctors, architects, engineers, and other professionals are more will-
ing to provide their services when able to insure against the risk of liability for
malpractice.
5. Manufacturers are more willing to accept the risks associated with shipping
goods when the goods are insured against transportation risks.
6. Members of society are more willing to sanction the use of automobiles as long
as motorists carry third party insurance
16. What are the eco- 1. Insurance industry is interdependent on growth of economy. Without insurance
nomic impacts of no individual corporation or institution could enjoy financial security and therefore
insurance? have the peace of mind.
2. Government and marketplace impose insurance requirements.
3. Contributes to the economy by providing employment directly and indirectly.
Salaries, employee benefits, and the costs of goods and services to operate a
business represent large amounts of money being recycled into the economy.
4. Insurers hold billions of dollars in bonds, equities, real estate, and other invest-
ments. Such investments are used to help finance governments and businesses.
