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39 Cards in this Set

  • Front
  • Back
what are the two sources of income for an insurance company?
1. underwriting income (the insurance premium)
2. investment income
what is the equation for an insurance company's profits?
profit= premiums + investments - operating expense - payments
what does life insurance insure against?
what is indemnity insurance?
insurance company agrees to indemnify (reimburse) insured for covered medical/hospital expenses; deductibe/co-pay protect insurance company from fraud
what is managed care insurance?
HMOs- Health Maintenance Orgs.
PPOs- Preferred Provider Orgs.
POSs- Point of Service Orgs.
these put constraints on doctor/hospital + type of service provided
What is P&C insurance?
Property and Casualty Insurance
protects against: fire, flood, vehicle collisions, theft
What is Liability Insurance?
risk insured against is litigation
What is disablity insurance?
risk insured against is inability of employed persons to earn an income
What is the difference between guaranteed renewable and noncancellable?
guaranteed renewable- insurer cannot change time but can change premium for entire class of policy
noncancellable- insurer can make no changes
What is Long-Term Care Insurance?
risk insured against is outliving assets and being unable to care for oneself
What is a guaranteed investment contract (GIC)?
0 coupon bond with an insurance company; when bond matures insurance company must pay principle + guaranteed creiting rate
What is an annuity?
"a mutual fund in an insurance wrapper"; because of insurance wrapper annuity gets preferential tax treatment- income and realized capital gains are not taxable if not withdrawn from the annuity; also insurance company may promise to pay back investor's original investment no matter what
What problems do the insurance industry face?
1. time + magnitude of payments is uncertain
2. lag between receipts + payments
What is the NAIC?
National Association of Insurance Commissioners- voluntary association of state insurance commissioners that creates models for insurnace
Who monitors insurance companies?
accountants and auditors, rating agencies, government regulators
What are STAT surplus and GAAP surplus?
STAT surplus- state statute requires insurance company to maintain a surplus
GAAP surplus- accoutants require the surplus
What is the structure of an insurance company?
1. home office- guarantor, manufacturer of policy
2. investment company
3. distributor
What is bankassurance?
commercial bank distributes insurance company products
What is a "virtual insurance company"?
all work outsourced: designing of contracts, reinsuring policies (transfer risk to another company); outsource investments; brokers distribute
What is the difference between a stock insurance company and a mutual insurance company?
stock insurance company- owned by independent shareholders; short-term view
mutual insurance company- no stock, no external owners; long-term view
What is demutualization?
insurnace company changes from a mutual insurance company to a stock insurance company
What are the benefits and negatives of a mutual insurance company?
1. no short-term interests
2. no shareholders, so profits can reduce premiums
3. longer time-frame for investments; higher return
1. too long a horizon, inefficient
Why do insurance companies go public?
1. more able to raise equity capital
2. stock is a better acquisition currency than cash
3. hire better executives
What is a Mutual Holding Company (MHC)?
upstream mutual company (no stock holders) then up to 49.9% of company becomes a subsidiary held in stock
What is term life insurance/pure life insurace?
pays if you die before terms is over, no value if you die after; policyholder cannot borrow against it
What is the difference between level term and annual renewable term?
level term has same premium during period; annual renewable term is increasing
What is whole life insurance?
policy has a growing cash value which holder can borrow against or withdra
What is guaranteed cash value life insurance- non-particpating vs. participating?
guarantees a minimum cash value at the end of the year; non-participating has no upside; participating means cash value depends on company's investments
What is variable life insurance?
policy holder chooses in which accounts money is invested
What is survivorship/second to die insurance?
two people are insured and policy pays benefit when the second person dies; annual premium is usually less
What is the difference between an insurance company's general account products and its separate account products?
general account is a liability of insurance company
Are risks greater for L&H or P&C?
P&C because of randomness of natural catastrophes, and unpredictability of court awards; life companies have less common stock, longer maturity bonds
Insurance company tax exemptions?
inside buildup of cash value is not taxed as either income or capital gains; neither is beneficiary of an insurance policy subject to income tax
What is the Glass-Steagall Act (33)?
separated commercial banking, investment banking, and insurance; did not want one source to control funding
What is the Gramm-Leach-Bliley Act (GLB) (99)?
removed Glass-Steagall Act; led to CitiGroup
Why are internationals buying US insurance and financial companies?
1. rapid growth of US financial businesses relative to international
2. attractive demographics + US clients
3. less regulated US insurance industry
What is an IRA?
individual retirement account; most set up by employee
What is a 401(k)?
set up by employer
What are traditional/Roth/rollover IRAs?
traditional- contributions tax deductible
Roth- contributions taxed, distributions not taxed
rollover- individual leaves company but is able to continue retirement plan