Insurance Company Financial Structure: Reserves, Investments, and Balance Sheet Components Flashcards

A property and casualty insurer is required to maintain two principal types of financial reserves: _____ and unearned premium reserves.

The primary _____ for an insurance company are financial.

A company invests premium dollars and retained earnings in _____, which provide an important source of income for an insurer.

Bonds, common stock, preferred stock, real estate, mortgage-backed securities, marketable securities, and cash/cash equivalents are types of _____ assets.

What are the three main sections of a balance sheet for a property and casualty insurance company? _____, liabilities, and policyholders' surplus.

The _____ is a large liability item on a property and casualty insurance company's balance sheet.

The estimated cost of settling claims for loss that have already occurred but have not yet been paid is known as the _____ reserve.

Loss reserves that are established for each individual claim when it is reported are called _____ reserves.

What are the different methods for determining case reserves? _____, Average Value, and Tabular.

A claim reserve is established for each individual claim. The amount of loss reserve can be based on the _____ of someone in the claims department.

An average value is assigned to each claim. This method is used when the number of claims is large, and the average claim amount is relatively small. This is known as the _____ method.

Loss reserves are determined for claims where the amounts paid depend on life expectancy, duration of disability, and similar factors. This is the _____ method.

Established aggregate loss reserves for a specific coverage line use a formula based on the expected loss ratio. This is known as the _____ method.

A reserve that must be established for claims that have already occurred but have not yet been reported to the insurer is called the _____ reserve.

A liability item that represents the unearned portion of gross premiums on all outstanding policies at the time of valuation is known as the _____ reserve.

The difference between an insurance company's assets and liabilities is referred to as the _____ surplus.

_____ can be thought of as a cushion that can be drawn upon if liabilities are higher than expected.

An _____ statement summarizes revenues received and expenses paid during a specified period of time.

What are the two principal sources of income for an insurance company? _____ and investment income.

_____ are not considered wholly earned until the period of time for which they were paid has passed.

Represent the portion of the premiums for which insurance protection has been provided: _____ premiums.

Cash outflows from a business are referred to as _____.

What are some of the biggest expenses an insurance company may take on? Adjusting claims, paying the insured losses that occurred, and _____ expenses.

_____ expenses consist of commissions an insurance company pays agents for selling the company's products, premium taxes, and general expenses.

The _____ ratio is calculated as (Incurred Losses + Loss adjustment expenses) / Premiums earned.

The _____ ratio is calculated as Underwriting expenses / Premium written.

The _____ ratio is the sum of the loss ratio and the expense ratio.

The _____ income ratio is calculated as Net investment income / Earned premiums.

The _____ Operating Ratio is used to determine the company's total performance.

The Overall Operating Ratio is calculated as the Combined ratio minus the _____ income ratio.

Similar to property and casualty insurance, the assets of a life insurance company are primarily _____.

The average duration of investments differs between P&C and life insurance. Life insurance contracts are much longer, often over _____ years.

Permanent life insurance policies develop a savings element over time called the _____ value, which may be borrowed by the policyholder.

Life insurance companies may have separate account assets used for interest-sensitive products. These accounts are not subject to _____ law limitations.

What are the major liability items of life insurers? They are a liability item on the balance sheet that must be offset by assets equal to that amount, known as _____ reserves.

Why are policy reserves considered a liability item? They represent an obligation of the insurer to pay future _____ benefits.

A liability that represents funds owed to policyholders and to beneficiaries is called the reserve for amounts held on _____.

A statutory account designed to absorb asset value fluctuations not caused by changing interest rates is known as the _____ valuation reserve.

The difference between a life insurer's total assets and total liabilities is referred to as the _____ surplus.

Major sources of revenue in life insurance include _____ and investment income.

Major expenses in life insurance include claims payments such as death benefits, annuity benefits, matured endowments, and benefits paid under _____ insurance.

Total revenue minus total expenses, policyholder dividends, and federal income taxes results in a life insurer's net _____ from operation.

Pre/post tax net income compared to total assets is used to measure the rate of return on policyholders' surplus, also known as _____.

Rates charged by insurers should be high enough to pay all losses and expenses. This is known as the requirement that rates must be _____.

Rates should not be so high that policyholders are paying more than the actual value of their protection. This is the requirement that rates must not be _____.

Exposures that are similar with respect to losses and expenses should not be charged significantly different rates. This is the requirement that rates must not be unfairly _____.

A rating system should meet all of these objectives: simplicity, responsiveness, stability, and encouragement of _____ control.

A rating system should be easy to understand so that producers can quote premiums with a minimum amount of time and expense. This is known as _____.

Rates should be stable over short periods of time so that consumer satisfaction can be maintained. This is known as being _____.

Rates should also be responsive over time to changing loss exposures and changing economic conditions. This is known as being _____.

A rating system should encourage _____-control activities.

The price per unit of insurance is referred to as the _____.

The unit of measurement used in insurance pricing is called the _____ unit.

The portion of the rate needed to pay losses and loss-adjustment expenses is known as the _____ premium.

The amount that must be added to the pure premium for other expenses, profit, and margin for contingencies is called the _____.

The gross rate consists of the pure premiums and a _____ element.

The gross premium is paid by the insured and is calculated as the gross rate multiplied by the number of _____ units.

Each exposure is individually evaluated, and the rate is determined largely by the judgement of the underwriter. This is known as _____ rating.

Exposures with similar characteristics are placed in the same underwriting class, and each is charged the same rate. This is known as _____ rating.

The pure premium for class rating is calculated as incurred loss and loss adjustment expenses divided by the number of _____ units.

The gross rate for class rating is calculated as the pure premium divided by (1 - _____ ratio).

A rating plan by which class rates (manual rates) are adjusted upward or downward based on individual loss experience is known as _____ rating.

Each exposure is individually rated. A basis rate is determined for each exposure, which is then modified by debits or credits for undesirable or desirable physical features. This is known as _____ rating.

The class or manual rate is adjusted upward or downward based on past loss experience. This is known as _____ rating.

The insured's loss experience during the current policy period determines the actual premium paid for that period. This is known as _____ rating.

What are the FOUR main reasons for insurance regulation? Maintain insurer solvency, compensate for inadequate consumer knowledge, ensure reasonable rates, and make insurance _____.

Premiums are paid in advance, but the period of protection extends into the future. If an insurer becomes insolvent and a future claim is not paid, the insurance protection paid for in advance is _____.

Individuals are exposed to great economic insecurity if insurers fail and outstanding claims are not paid. This is a reason for maintaining insurer _____.

When insurers become insolvent, certain social and economic costs are incurred. This is a reason for maintaining insurer _____.

Insurance contracts are technical, legal documents that contain complex clauses and provisions. Without regulation, an unscrupulous insurer could draft a contract so restrictive and legalistic that it would be _____.

Most consumers do not have sufficient information for comparing and determining the monetary value of different insurance contracts. This is a reason to compensate for inadequate consumer _____.

Some agents are unethical, and state licensing requirements in many states are minimal. This is a reason to compensate for inadequate consumer _____.

Rates should not be so high that consumers are being charged excessive prices, nor should they be so low that the solvency of insurers is threatened. This is to ensure _____ rates.

This regulation's goal is to make insurance available to all persons who need it. Insurers may be unwilling to insure all applicants for a given type of insurance because of underwriting losses, inadequate rates, adverse selection, and a host of additional factors. This is to make insurance _____.

Insurance regulation first began when state legislatures granted charters to new insurers, which authorized their formation and operation. The only regulatory controls were that charters were required to issue periodic reports and provide public information concerning their financial conditions. This was the first regulatory effect of _____.

The creation of state insurance commissions began in 1851 when New Hampshire became the first state with a separate regulatory commission. This was the second step of insurance _____.

The significance of the Paul v. Virginia court case was that the states, rather than the federal government, had the right to regulate the _____ industry.

The Interstate Commerce Act of 1887 regulated railroads, requiring freight rates to be _____.

The Sherman Antitrust Act of 1890 outlawed _____.

The Clayton Antitrust Act of 1914 amended the Sherman Antitrust Act to deal with price discrimination, price-fixing, and other business practices declared to be unfair. This act was designed to prevent _____.

The Robinson-Patman Act of 1936 amended the Clayton Antitrust Act to further prohibit _____.

The Supreme Court ruled that insurance was commerce and therefore it was interstate commerce when conducted across state lines. The result of the South-eastern Underwriters Association court case of 1944 was to subject insurers to _____ regulation.

The McCarran Ferguson Act of 1945 states that continued regulation and taxation of the insurance industry by the states are in the public interest. It also states that federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by _____ law.

The Gramm-Leach-Bliley Act of 1999 changed federal law that earlier prevented banks, insurers, and investment firms from competing fully in other financial markets outside their core area. This act allowed for greater _____ in the financial services industry.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contained numerous provisions to reform the financial services industry and to deal with destabilizing practices of commercial banks, investment firms, mortgage companies, and credit rating agencies. This act aimed to increase _____ in the financial system.

What are the three methods for regulating insurers? _____, courts, and state insurance departments.

Legislation is used to regulate the formation of insurance companies, licensing of agents and brokers, financial requirements for maintaining solvency, insurance rates, marketing, sales, and claims practices, taxation, and rehabilitation or liquidation of insurers. This is an example of legislation being used to regulate _____.

State and federal courts periodically hand down decisions concerning the constitutionality of state insurance laws, the interpretation of policy clauses and provisions, and the legality of administrative actions by state insurance departments. This is an example of courts being used to regulate _____.

All states have a separate insurance department or bureau. Through administrative rulings, the state insurance commissioner wields considerable power over insurers doing business in the state. This is an example of state insurance departments being used to regulate _____.

State insurance commissioners belong to an organization called the _____. Founded in 1871, they meet periodically to discuss industry problems that might require legislation or regulation.

A new insurer is typically formed by incorporation. The insurer receives a charter or certificate of incorporation from the state which authorizes its formation and legal existence. After being formed, an insurer must be licensed. If the insurer is a capital stock insurer, it must meet certain capital and surplus requirements. A new mutual insurer must meet a minimum surplus requirement. A license can be issued to a domestic, foreign, or alien insurer. This is an example of the formation and licensing of _____.

An insurer domiciled in the state must be licensed in the state as well as in other states where it does business. This is known as a _____ insurer.

An out-of-state insurer that is chartered by another state must be licensed to do business in the state. This is known as a _____ insurer.

An insurer chartered by a foreign country must also meet certain licensing requirements to operate in the state. This is known as an _____ insurer.

Admitted assets are assets that an insurer can show on its statutory balance sheet in determining its financial condition. Reserves are liability items on an insurer's balance sheet that reflect obligations that must be met in the future. Surplus is the difference between an insurer's assets and liabilities. These are areas of insurance that are regulated under _____ regulation.

Risk-based capital means that insurers must have a certain amount of capital, depending on the riskiness of their investments and insurance operations. Insurers are monitored by regulators based on how much capital they have relative to their risk-based capital requirements. This is an example of _____ regulation.

Insurance rates must be filed and approved by the state insurance department before they can be used. This is known as the _____ approval law.

If the rate change is based solely on the loss experience, the insurer must file the rates with the state insurance department, and the rates may be used immediately. This is known as the _____ prior-approval law.

Insurers are required only to file the rates with the state insurance department, and the rates can be used immediately. This is known as the _____ and use law.

Under this law, insurers can put into effect immediately any rate changes, but the rates must be filed with the regulatory authorities within a certain period after first being used. This is known as the _____ and file law.

Insurance Company Financial Structure: Reserves, Investments, and Balance Sheet Components

Related Decks