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Questions and Answers of
Corporate Finance
What is meant by "consolidation" in the insurance industry?
a. Why is loss forecasting necessary when making a decision about whether to retain or transfer loss exposures?b. What techniques can a risk manager use to predict future losses?
What is the danger of simply using past losses to estimate future losses?
What variables are difficult to quantify when analyzing investments in risk-control projects?
a. What is a risk management information system (RMIS)?b. What is a risk management intranet?
Commercial Insurance is a large stock property and liability insurer that specializes in the writing of commercial lines of insurance. The board of directors has appointed a committee to determine
Compare a stock insurer to a mutual insurer with respect to each of the following:a. Parties who legally own the companyb. Right to assess policyholders additional premiumsc. Right of policyholders
A luncheon speaker stated that “the number of life insurers has declined sharply during the past decade because of the increase in company mergers and acquisitions, demutualization of insurers, and
A newspaper reporter wrote that “Lloyds of London is an association that provides physical facilities and services to the members for selling insurance. The insurance is underwritten by various
Property and casualty insurance can be marketed under different marketing systems. Compare the independent agency system with the exclusive agency system with respect to each of the following:a.
What is a stock insurer and who elects a board of directorss?
What is a mass-merchandising plan in property and liability insurance?
a. Describe the basic features of mutual insurers.b. Identify the major types of mutual insurers.
The corporate structure of mutual insurers has changed over time. Briefly describe several trends that have had an impact on the corporate structure of mutual insurers.
Explain the basic characteristics of Lloyd's of London.
Describe the basic characteristics of a reciprocal exchange.
Describe briefly the following distribution systems in the marketing of life insurance.a. Personal selling systemsb. Financial institution distribution systemsc. Direct response systemd. Other
Describe briefly the following distribution systems in the marketing of property and casualty insurance.a. Independent agency systemb. Exclusive agency systemc. Direct writerd. Direct response
Reinsurance can be used by an insurer to solve several problems. Assume you are an insurance consultant who is asked to give recommendations concerning the type of reinsurance plan or arrangement to
Delta Insurance is a property insurer that entered into a surplus-share reinsurance treaty with Eversafe Re.Delta has a retention limit of $200,000 on any single building, and up to nine lines of
Property Insurance Company is a new property insurer. The company is growing rapidly because of a new homeowners policy that combines traditional homeowner coverages with insurance that pays off the
Felix is a property claims adjustor for a large property insurer. Janet is a policyholder who recently notified the company that the roof of her home incurred substantial damage because of a recent
Liability Insurance Company writes a substantial amount of commercial liability insurance. A large construction company requests $100 million of liability insurance to cover its business operations.
How does ratemaking, or the pricing of insurance, differ from the pricing of other products?
a. Define the meaning of underwriting.b. Briefly explain the basic principles of underwriting.c. Identify the major sources of information available to underwriters.
Briefly describe the following types of claims adjustors:a. Agentb. Company adjustorc. Independent adjustord. Public adjustor
a. What is the meaning of reinsurance?b. Briefly explain the reasons for reinsurance.c. Explain the meaning of "securitization of risk."
Distinguish between facultative reinsurance and treaty reinsurance.
Briefly explain the following types of reinsurance methods for sharing losses:a. Quota-share treatyb. Surplus-share treatyc. Excess-of-loss reinsuranced. Reinsurance pool
Briefly describe the following insurance company operations:a. Information systemsb. Accountingc. Legal servicesd. Loss control
Briefly describe the sales and marketing activities of insurers.
Explain the basic objectives in the settlement of claims.
Describe the steps involved in the settlement of a claim.
Carolyn is senior vice president of finance and chief actuary for Rock Solid Insurance Company (RSIC). Lonnie is double-majoring in finance and mathematics at State University. Lonnie applied for an
Based on the following information, determine Mutual Life Insurance Company's gain from operations before income taxes and dividends to policyholders:Total premium income...........
A large casualty insurer writes a substantial amount of private passenger auto insurance. An actuary analyzed claims data for a specific class of drivers for a recent one-year policy period. The
For the past calendar year, a property insurer reported the following financial information for a specific line of insurance:Premiums written.................. $25,000,000 Expenses
a. Why are property and casualty insurance companies required to maintain loss reserves?b. Briefly explain the following methods for determining loss reserves:1. Judgment method2. Average value
a. What are the three major sections of a balance sheet?b. What is the balance sheet equation?
a. What types of assets appear on the balance sheet of an insurance company?b. Why are the liabilities of a property and casualty insurance company difficult to measure?
a. How is the combined ratio of a property and casualty insurance company calculated, and what does the combined ratio measure?b. How is it possible for a property and casualty insurance company to
Name three ways in which the assets of a life insurance company differ from the assets of a property and casualty insurance company.
In the context of rate making, explain the meaning of:a. rateb. exposure unitc. pure premiumd. gross premium
Briefly describe the following methods for determining a class rate:a. pure premium methodb. loss ratio method
a. What are the two major sources of revenue for a property and casualty insurance company?b. What are the major expenses of a property and casualty insurance company?
What do the reserves on a life insurance company's balance sheet represent?
a. What are the major regulatory objectives that must be satisfied in insurance rate making?b. What are the major business objectives?
Explain the following methods of merit rating:a. schedule ratingb. experience ratingc. retrospective rating
Ashley is an actuary who is employed by the Nebraska Department of Insurance. Her duties include monitoring the financial position of insurance companies doing business in Nebraska. Based on an
The Financial Services Company is a large life insurer that sells annuity products to retired people. Company actuaries have designed a new annuity contract that combines lifetime annuity benefits
Opal, age 75, has a $100,000 ordinary life insurance policy that has a cash value of $35,000. Opal is concerned about the cost of long-term care in a nursing home. A new agent of a national life
Although domiciled in Nebraska, Auto Insurance is licensed to sell auto insurance in 10 states. A different set of rates applies in each state. In five states, prior approval of rates is required.
Janet, age 35, is divorced and has two preschool children. Janet earns only the federal minimum wage, and money is tight. Her former husband failed to make child-support payments for the past three
Explain why the insurance industry is regulated.
Identify the principal areas of insurance company operations that are regulated by the states.
a. Explain the major arguments for repeal of the McCarran-Ferguson Act.b. Explain the major arguments against repeal of the McCarran-Ferguson Act.
Identify the major techniques that regulators use to monitor insurance company solvency.
Describe the risk-based capital standards that insurers must meet.
Briefly explain the significance of the following legal cases and legislative acts with respect to insurance regulation:a. Paul v. Virginiab. South-Eastern Underwriters Association Casec.
Briefly describe the major types of rating laws.
Explain the following actions by agents that are prohibited by state law:a. Twistingb. Rebating
a. Explain the major arguments for federal regulation of the insurance industry.b. Explain the major arguments in support of state regulation of the insurance industry.c. Describe the shortcomings of
Jeff is a book dealer who purchased a building from Richard. Jeff obtained a loan from the Gateway Bank to purchase the building, which held a mortgage on the building. Jeff planned to store his
Jake borrowed $800,000 from the Gateway Bank to purchase a fishing boat. He keeps the boat at a dock owned by the Harbor Company. He uses the boat to earn income by fishing. Jake also has a contract
Ashley purchased a dining room set for $5000 and insured the furniture on an actual cash value basis.Three years later, the set was destroyed in a fire. At the time of loss, the property had
A drunk driver ran a red light and smashed into Kristen's car. The cost to repair the car is $8000. She has collision insurance on her car with a $500 deductible.a. Can Kristen collect from both the
One requirement for the formation of a valid insurance contract is that the contract must be for a legal purpose.a. Identify three factors, other than the legal purpose requirement, that are
Nicole is applying for a health insurance policy. She has a chronic liver ailment and other health problems.She honestly disclosed the true facts concerning her medical history to the insurance
a. Explain the principle of indemnity.b. How is actual cash value calculated?c. How does the concept of actual cash value support the principle of indemnity?
a. What is a valued policy? Why is it used?b. What is a valued policy law?c. What is a replacement cost policy?
Explain the following legal doctrines:a. Misrepresentationb. Concealmentc. Warranty
Insurance contracts have certain legal characteristics that distinguish them from other contracts. Explain the following legal characteristics of insurance contracts.a. Aleatory contractb. Unilateral
Explain the general rules of agency that govern the actions of agents and their relationship to insureds.
Explain the meaning of:a. Waiverb. Estoppel
a. Explain the meaning of an insurable interest.b. Why is an insurable interest required in every insurance contract?
a. Explain the principle of subrogation.b. Why is subrogation used?
List the four requirements that must be met to form a valid insurance contract.
Identify three sources of authority that enable an agent to bind the principal.
Mike took his friend, Donna, out to dinner on her birthday. While driving Donna home, Mike became ill and asked Donna to drive. While driving Mike's car, Donna negligently injured another motorist
Michael owns a small plane that he flies on weekends.His insurance agent informs him that aircraft are excluded as personal property under his homeowners policy. As an insured, he feels that his
a. A manufacturing firm incurred the following insured losses, in the order given, during the current policy year. Loss Amount of LossA ............. $ 2500B
Stephanie owns a small warehouse that is insured for $200,000 under a commercial property insurance policy. The policy contains an 80 percent coinsurance clause. The warehouse sustained a $50,000
Assume that a $300,000 liability claim is covered under two liability insurance contracts. Policy A has a $500,000 limit of liability for the claim, while Policy B has a $125,000 limit of liability.
Andrew owns a commercial office building that is insured under three property insurance contracts. He has $100,000 of insurance from Company A, $200,000 from Company B, and $200,000 from Company C.a.
Ashley has an individual medical expense insurance policy with a $1000 calendar-year deductible and a 20 percent coinsurance clause. Ashley had outpatient surgery to remove a bunion on her foot and
The Lincoln Saltdogs is a professional minor league baseball team in the American Association league.The clubhouse is insured for $600,000 under a commercial property insurance policy with an 80
Identify the basic parts of an insurance contract.
a. Define the term "conditions."b. Does the insurer have to pay an otherwise covered loss if the insured fails to comply with the policy conditions? Explain your answer.
a. What is an endorsement or rider?b. If an endorsement conflicts with a policy provision, how is this problem resolved?
Describe a typical coinsurance clause in an individual or group medical expense insurance policy.
Explain the meaning of primary insurance and excess insurance.
a. Describe the major types of exclusions typically found in insurance contracts.b. Why are exclusions used by insurers?
a. Describe the following types of deductibles:1. Straight deductible2. Calendar-year deductible3. Aggregate deductibleb. Explain the purposes of deductibles in property insurance contracts.
What is the fundamental purpose of a coinsurance clause?
What is the purpose of other-insurance provisions?
a. What is the meaning of "named insured"?b. Can other parties be insured under a policy even though they are not specifically named? Explain your answer.
Sharon, age 28, is a single parent who earns $30,000 annually as a secretary at a local university. She is the sole support of her son, age 3. Sharon is concerned about the financial well-being of
Richard, age 45, is married with two children in high school. He estimates that his average annual earnings over the next 20 years will be $60,000. He estimates that one-third of his average annual
a. The human life value is one method for estimating the amount of life insurance to own. Keeping all other factors unchanged explain the effect, if any, of each of the following:1. The discount rate
Kelly, age 35, is a single parent and has a one-year-old son. She earns $45,000 annually as a marketing analyst. Her employer provides group life insurance in the amount of twice the employee’s
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