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C16 BUSINESS INSURANCE EXAM NEWEST 2024-
2025 COMPLETE 98 QUESTIONS AND CORRECT
DETAILED ANSWERS (VERIFIED ANSWERS).
GRADED A
An organization may choose to form multiple companies in order to provide flexibility in what main areas? - ANS-Multiple companies with a single corporate structure will be required to provide flexibility in areas such as distribution channels, products offered, underwriting eligibility, underwriting criteria and rating plans. -Allows an organization to use independent distribution networks as well as direct sales force. -Allows for flexibility in the products that are offered as well as types of risks targeted Define adverse selection. - ANS1. Describes the process by which potential policyholders use their private knowledge of their own high level of risk when deciding whether or not to buy insurance.
- High-risk individuals will try to buy lots of insurance and pay a comparatively high rate of premium if they are allowed.
- Low-risk clients might not buy any insurance because the price is too high. Define subscribed capital. How does it differ from paid-up capital? - ANS-Private stock insurance companies are responsible for much of the insurance written in Canada and throughout the world. -Security to policyholders for assumed liability is represented by subscribed or paid-up capital and any surplus. SUBSCRIBED CAPITAL is the amount of stock sold by a corporation. Policyholders contribute to a communal fund by paying premium for their insurance if premium do not cover the liabilities, then the contributed capital of investors will fund the shortfall. PAID-UP CAPITAL represents that part of subscribed capital that has been paid in full by the shareholders.
For accounting purposes, how is earned premium calculated? - ANS-Earned premium identifies that part of the premium allocated towards a policy period that has gone by. -Total of premiums written during the period + unearned premium reserve at the beginnings of the period - unearned premium reserve at the end of the period = premiums earned for the period How are brokers affected by market cycles? - ANS-During a soft market cycle, brokers enjoy the abundance of capacity, premium rates decline and underwriters are less demanding. However a decline in rates means a decline in commission -During a hard market cycle, brokers must labour intensively to find capacity for their clients needs and must negotiate more diligently to obtain reasonable prices. Commission income rises when premium increases. How are consumers affected by market cycles? - ANS-During a soft market cycle, consumers are simply more neutral in their reaction to the insurance industry -During a hard market cycle, consumers become wary, distressed and often angry. They are faced with premiums that are suddenly not affordable, availability that is
restrictive and coverage terms are limited. Consumers are in an awkward situation as they cannot afford to buy insurance that is mandated by law How does an insurer's distribution method effect commissions? - ANS-Direct writers tend to spend a higher percentage of revenue on expenses but lower proportion on commission than companies that use independent brokers. -This is because employees and captive agents are often paid a salary or a lower level of commission than independent brokers How does OSFI determine the amount of capital required for insurance companies? - ANS-Capacity is a function of capital available and extent of exposure that insurers are prepared to accept -The level of capital and surplus must be sufficient to cover expenses, commissions, premium taxes and claims which are incurred prior to policy premiums becoming earned. GUIDELINE TO CAPACITY:
-The free market system anticipates a self-regulating market that will ensure that prices reflect the true cost of doing business; rating boards and commissions only create imbalances in the free market pricing system. -Higher staffing requirements or different software applications to rate and report date might be required -increased operating costs and politically-imposed premiums could reduce the insurer's profitability and return on equity Identify a large loss that exhausted a significant amount of capital for the insurance industry in 2001? - ANS-Hundreds of millions in shareholder capital was lost as a result of terrorist attacks on the twin towers in NYC and the scandalously improper accounting practices that occurred in corporate America thereafter -although insurers and reinsurers in the U.S. market were primarily affected by the severe claims filed, the Canadian market also felt it's effects because it tend to illicit reaction in the international market Identify FIVE new areas of challenge that the insurance industry faces. - ANS1. 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 the government Identify FOUR considerations of a company intending to acquire another company? - ANS1. Fit with the purchaser: culture and expertise of the staff
- Outstanding liabilities of the acquired company: purchaser may try to persuade the seller to retain its existing liabilities
- Integration of companies: purchaser must consider overall situation to develop strategies for a smooth transition. Goals might include desire to retain the purchased company's book of business, staff and distribution network.
- Computer system compatibility: must compare its existing system to any acquired system to determine their compatibility.
In property and casualty insurance, what are the two traditional methods of distribution and how do they differ? - ANS1. Independent broker/agents: -Most insurance business written in Canada has been placed through brokers which has its roots in the British system -The size of the country and its sparse and dispersed population has made broker- based business a more practical option. Economical and efficient way for insurers to market their products
- Direct response method: -hybrid of direct right of distributing insurance directly to consumers by using different types of media to encourage customers to respond to insurance marketing campaigns. Consumers call toll free to a centralized call centre for advice or to purchase insurance -certain traditional insurers have chosen to adopt this approach for at least some of the business they write
List FIVE possible results of government insurance reform legislation. - ANS1. Informed and empowered consumers
- Timely and fair claims management
- Meaningful choice for insurance companys
- Low system costs
- Market stability List FOUR characteristics of an insurer that OSFI would review to measure an insurer's inherent risk. - ANS-OSFI stresses profitability, adequacy and quality of capital earnings, adequacy of reserves for policy liabilities, adequacy of reinsurance protection, the quality of assets the quality of internal controls.
- Issues advisories outlining its views of best practices or risk management measures.
- Provides notice to inform public of items of interest
- Extended hours of access for consumers List the two fundamental principles of insurance. - ANS1. The premiums of the many are used to pay the losses of the few.
- 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 development -Insurance is the promise to indemnify another person against the possibility of a loss -Significant claim is paid based on a nominal premium List THREE developments that resulted from the project established by OSFI, the Insurance Bureau of Canada (IBC) and regulators in 3 provinces to regulate the management of an insurer's earthquake exposures - ANS1. Insurers must document procedures outlining to OSFI how they plan to manage their earthquake risk (including coverage limits)
- They must advise how their financial resources would cover their calculated PML (Probably Maximum Loss)
- The insurers are required by OSFI to reserve against potential liabilitiess arising from a major earthquake List three ways that insurance benefits society. - ANS-Insurance provides a certain freedom of action, encouraging activities to flourish in industries, commerce, organizations and families -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 thousands of Canadians
- Set more exacting underwriting standards.
- Gives loss control and loss prevention measures significant consideration.
- Tighten policy terms to limit exposures.
- Mark substantial rate increases
- Terminate relationship with brokers with unprofitable results or who only have a small volume of business
- Withdraw from the jurisdiction, a class of business, or an individual risk when sufficient market share has not been gained or a portfolio or individual risk is not profitable
- Withdraw from the market altogether by selling the company to another insurer or placing it into what is known as a run-off (cease to write new business and only service existing policies)
Name three successive multi-layered goal setting levels. - ANS-Senior management sets goals that filter down to its various departments and to the units within departments, and to each individual employee
- Department goals.
- Unit goals.
- Individual goals Name TWO board committees that are mandatory according to the Insurance Companies Act? - ANSICA stipulates that federally regulated insurance companies must have both an audit committee and a conduct review committee.
- AUDIT COMMITTEE: Role is to improve the financial reporting process. They are generally responsible for reviewing the performance of investment portfolios to ensure that capital is managed effectively to earn an adequate return. Also responsible for the internal control procedures or documentation of the company, reporting on whether the design of the internal controls contain any material weakness.
-Predicting long tail pricing because it is difficult 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 State a responsibility of federal insurance regulatory authorities. - ANS-consumer protection is the heart of all government regulation -the focus of regulation is:
- Solvency 2.Market Conduct
- Affordability of insurance
- Availability Affordability and availability are of most concern for mandated products. The chairperson and the board prepare rules and guidelines for the operation of the company. Identify FIVE areas likely to be involved. - ANS1. Types of insurance and extent of the coverage to be sold.
- Territory in which the company will operate.
- Underwriting policy.
- Agency Policy.
- Investment Policy. Theoretically what would an overcapitalised insurer want to accomplish in relation to its premium volume? - ANS-Overcapitalised insurers have a business problem: they will want to increase their premium volume to take full advantage of their capital at their disposal
