Chapter03 Testbank

Chapter 03 Testbank
Student: ___________________________________________________________________________
1.
Which of the following statements is true?
A.
B.
C.
D.
Policy liabilities are a liability item for insurers that reflects their worst-case payment commitments on existing policy contracts.
Policy liabilities are an asset item for insurers that reflects their best-case payment inflows on existing policy contracts.
Policy liabilities are an asset item for insurers that reflects their expected payment inflows on existing policy contracts.
Policy liabilities are a liability item for insurers that reflects their expected payment commitments on existing policy contracts.
2.
A.
B.
C.
D.
The cash surrender value of a policy is normally only a portion of the contract's face value.
The cash surrender value of a policy is normally equal to the contract's face value.
The cash surrender value of a policy is normally more than the contract's face value.
A generalisation of the cash surrender value of a policy in relation to its face value is not possible.
3.
A. The surrender value of a policy is the cash value received from the insurer if a policyholder surrenders the policy prior to maturity.
B. The surrender value of a policy is the cash value received from the insurer if a policyholder surrenders the policy at maturity.
C. The surrender value of a policy is the cash value received from the policyholder if the insurance company surrenders the policy
prior to maturity.
D. The surrender value of a policy is the cash value received from the policyholder if the insurance company surrenders the policy at
maturity.
4.
Variable universal life insurance policies:
A.
B.
C.
D.
have fixed premiums and a fixed benefit payout.

have fixed premiums, but allow the benefit payout to vary with investment returns.
have a fixed benefit payout, but allow the premium to vary with investment returns.
allow both the premium and benefit payout to vary with investment returns.
5.
Cost economies are the principal advantage of over contracts, which arise from the group plan administration and reduced selling and
commission costs.
A.
B.
C.
D.
individual life group life

group life individual life
individual life personal life
None of the listed options are correct.
6.
A.
B.
C.
D.
Long-tail loss refers to a series of claims made after an initial claim has been made.
Long-tail loss refers to a claim that is made some time after a policy was written.
Short-tail loss refers to a series of claims made after an initial claim has been made.
Short-tail loss refers to a claim that is made some time after a policy was written.
7.
A.
B.
C.
D.
Net asset value refers to the book value of assets in a managed fund portfolio divided by the number of shares outstanding.
Net asset value refers to the book value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
Net asset value refers to the market value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
8.
A. A closed-end investment company is a specialised firm that invests in securities and assets of other firms.
B. A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a fixed supply of
shares outstanding itself.
C. A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a variable supply
of shares outstanding itself.
D. A closed-end investment company has a variable supply of shares outstanding itself.
9.
The primary function of insurance companies is to:
A.
B.
C.
D.
generate fees for the banks that sell insurance products

sell a variety of consumer investment products
protect policyholders from adverse events
assist in the transfer of wealth into the future
10.
Private placement refers to a securities issue placed:
A.
B.
C.
D.
with one or a few large institutional investors

in private, that is, without announcing it to the public
by a private person
with one of the stock exchanges
11.
A.
B.
C.
D.
Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death.
Life insurance allows individuals and their beneficiaries to protect against loss in income through premature retirement.
Life insurance allows individuals and their beneficiaries to protect against loss in income through unforeseen accidents.
Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death or retirement.
12.
A. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders make periodic premium
payments.
B. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders make a lump sum payment at
maturity of the policy.
C. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders receive periodic premium
payments.
D. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders receive a lump sum payment at
13.
Which of the following are basic life insurance contract types?
A.
B.
C.
D.
terminating insurance
whole-of-life
bundled life insurance
terminating insurance and whole-of-life
14.
A.
B.
C.
D.
A term insurance policy has no savings element attached to it.

The maximum term of a term life insurance is 20 years.
The minimum term of a term life insurance is five years.
A term insurance policy has no savings element attached to it and the maximum term of a term life insurance is 20 years.
15.
A.
B.
C.
D.
A whole-of-life insurance has no savings element attached to it.

Unlike term insurance, in the case of whole-of-life insurance there is uncertainty regarding a payout by the insurer.
A whole-of-life insurance protects the holder over their entire life.
All of the listed options are correct.
16.
A.
B.
C.
D.
The proceeds of life insurance policies are tax free after they have been in force for at least five years.
The proceeds of life insurance policies are tax free after they have been in force for at least 10 years.
The proceeds of life insurance policies are always taxed.
17.
A.
B.
C.
D.
Unbundled life insurance is also called investment-free insurance.

Bundled life insurance is also called investment-free insurance.
Unbundled life insurance is also called investment-linked insurance.
Bundled life insurance is also called investment-linked insurance.
18.
Insurance policy benefits are classified on an insurance company's balance sheet as:
A.
B.
C.
D.
liabilities, because the insurance company may have to pay out the benefits
assets, because policy benefits are valuable to the company
liabilities, because customers may fall behind on their premium payments
assets, because policy benefits are fully covered by premium payments
19.
Which of the following are key features of the regulatory and supervisory environment of the insurance industry?
A.
B.
C.
D.
Life insurance companies are now freed of capital adequacy regulations.

Life insurance companies have additional reporting requirements.
Overall, life insurance companies are less regulated than before to enhance innovation in the industry.
20.
Which of the following statements is true in the context of SOARS?
A.
B.
C.
D.
Oversight entities are subject to routine information gathering from statistical returns and onsite visits.
Mandated improvement entities are not at material risk of failure.
Normal entities lie outside APRA's tolerable risk range, but are unlikely to fail.
Restructure entities have lost APRA's confidence.
21.
A. Australian governments have encouraged national savings through superannuation.

B. The government has provided taxation incentives aimed at increasing voluntary contributions to superannuation by both employers
and employees.
C. The government has introduced legislative requirements forcing employers to contribute to superannuation on behalf of their
employees.
D. All of the listed options are correct.
22.
From 1997 to 2013, total superannuation assets in Australia increased from $0.3 trillion (58% of GDP) to:
A.
B.
C.
D.
$0.5 trillion (60% of GDP)

$1 trillion (82% of GDP)
23.
held the largest proportion of superannuation assets in 2013, rising from 11% in 1997 to 32% as at June 2013.
A.
B.
C.
D.
Small funds
Industry funds
Corporate funds
Retail funds
24.
Higher uncertainty of losses forces property-casualty firms to:
A.
B.
C.
D.
invest in more short-term assets than life insurance firms

invest in more long-term assets than life insurance firms
hold a lower percentage of capital and reserves than life insurance firms
invest in riskier equity securities than life insurance firms
25.
Which of the following are typical products offered by general insurance companies?
A.
B.
C.
D.
superannuation funds
life insurance policies
professional indemnity insurance
superannuation funds and professional indemnity insurance
26.
Which of the following is an adequate definition of liability insurance?
A. Liability insurance protects commercial firms against perils similar to home-owners' multiple peril insurance.
B. Liability insurance protects against theft or damage of commercial vehicles.
C. Liability insurance protects against liabilities relating to business operations of firms.
D. Liability insurance protects commercial firms against perils similar to home-owners' multiple peril insurance and protects against
liabilities relating to business operations of firms.
27.
Which of the following statements is true in relation to the balance sheet and balance sheet trends of general insurance companies?
A.
B.
C.
D.
They tend to have a high proportion of investments in equity assets.

They tend to have a low proportion of investments in bonds.
There has been little change in the structure of assets between 2002 and 2013, except for a decline in equity investments.
28.
Which of the following are reasons for underwriting risk to result?
A. Generated premiums are insufficient to cover claims incurred insuring a particular peril.
B. Generated premiums are insufficient to cover the administrative expenses of providing that insurance after taking into account the
investment income generated between the time premiums are received and the time claims are paid.
C. Generated premiums are insufficient to cover ordinary business expenses.
D. Generated premiums are insufficient to cover claims incurred insuring a particular peril and generated premiums are insufficient to
cover the administrative expenses of providing that insurance after taking into account the investment income generated between the
time premiums are received and the time claims are paid.
29.
Which of the following statements are true in the context of general insurance?
A. Loss rates on all general property policies are adversely affected by unexpected increases in inflation.
B. Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later.
C. Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later and loss rates
are more predictable on low-severity high-frequency lines than on high-severity low-frequency lines.
D. Loss rates on all general property policies are adversely affected by unexpected increases in inflation; long-tail losses arise where
the peril occurs during a coverage period but a claim is not made until many years later and loss rates are more predictable on lowseverity high-frequency lines than on high-severity low-frequency lines.
30.
Which of the following statements referring to the loss ratio are true?
A.
B.
C.
D.
The loss ratio measures the actual losses incurred on a line of insurance business.
A common measure of the overall underwriting profitability of a line of insurance business is the loss ratio.
The loss ratio measures the pure losses incurred on a line of insurance business relative to premiums earned.
The loss ratio measures the predicted losses incurred on a line of insurance business relative to premiums earned.
31.
A. Measuring and managing credit and interest rate risk are key concerns of general insurance managers.
B. If pure losses, underwriting losses and other costs are higher and investment yields lower than expected, general insurers suffer a
significant amount of deficit reserves.
C. On average, underwriting cycles measured from peak to peak can last anywhere from 12 to 20 years.
D. Measuring and managing credit and interest rate risk are key concerns of general insurance managers and if pure losses,
underwriting losses and other costs are higher and investment yields lower than expected, general insurers suffer a significant amount
of deficit reserves.
32.
The problem of adverse selection:
A.
B.
C.
D.
implies that many people who do not need insurance coverage have it through group plans.
means that those people who apply for insurance are the least likely to need insurance coverage.
causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.
creates a savings element along with the insurance component of the premium and policy.
33.
What is a common rationale for a managed fund?
A. the need for more diversity in investment products

B. the opportunity for retail investors to achieve superior diversification
C. the potential for retail investors to achieve superior returns
D. the opportunity for retail investors to achieve superior diversification and the potential for retail investors to achieve superior
returns
34.
Which of the following statements is true with regard to the regulation of managed funds?
A.
B.
C.
D.
Managed funds are unregulated.

APRA is the primary regulator for managed funds.
ASIC is the primary regulator for managed funds.
The ACCC is the primary regulator for managed funds.
35.
A. Money market corporations are primarily concerned with wholesale deposit raising and lending.
B. Money market corporations are primarily concerned with retail deposit raising and lending.
C. Money market corporations are financial intermediaries that cover a large number of activities.
D. Money market corporations are financial intermediaries that cover a large number of activities and are primarily concerned with
wholesale deposit raising and lending.
36.
A.
B.
C.
D.
37.
Through , general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.
A.
B.
C.
D.
insurance
reinsurance
underwriting
private placement
38.
A. Pure arbitrage involves buying blocks of securities in anticipation of some information release.
B. Risk arbitrage involves buying an asset in one market at one price and selling it immediately in another market at a higher price.
C. Risk arbitrage involves buying blocks of securities in anticipation of some information release, pure arbitrage involves buying an
asset in one market at one price and selling it immediately in another market at a higher price and program trading is associated with
seeking a risk arbitrage between a cash market price and the futures market price of that instrument.
D. None of the listed options are correct.
39.
Which of the following statements is true with regard to the regulation of money market corporations?
A.
B.
C.
D.
Money market corporations are unregulated.

APRA is the primary regulator for money market corporations.
ASIC is the primary regulator for money market corporations.
The ACCC is the primary regulator for money market corporations.
40.
A. Finance companies are financial institutions that raise funds through the issue of debentures and unsecured notes from retail
investors.
B. Finance companies are financial institutions that raise funds through the issue of debentures and unsecured notes from wholesale
investors.
C. Finance companies are financial institutions that raise funds through the issue of T-bonds and secured notes from retail investors.
D. Finance companies are financial institutions that raise funds through the issue of T-bonds and secured notes from wholesale
investors.
41.
Which of the following did not occur in the life insurance industry during the most recent financial crisis?
A.
B.
C.
D.
Low equity values reduced asset-based fees on separate account assets.

Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns.
Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies.
Policy premium increased as more households and small businesses attempted to transfer risk to insurance companies.
42.
Investments in are restricted to more wealthy clients.
A.
B.
C.
D.
hedge funds
managed funds
trusts
43.
is a procedure of adjusting asset and balance sheet values to reflect current market prices.
A.
B.
C.
D.
Hedging
Marking to market
Underwriting
Balancing
44.
Insurance services offered by FIs protect individuals and businesses (policyholders) from the financial impact of adverse events.
True
False
45.
Reinsurance is insurance purchased by insurers from other insurers to limit the total loss an insurer would experience in case of a disaster.
True
False
46.
Reinsurance companies sell insurance products directly to the customer.
True
False
47.
Through securitisation, general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.
True
False
48.
An individual's life insurance policy usually covers the policyholder plus the policyholder's spouse and family.
True
False
49.
Loans on policy are loans made by insurance companies to its policyholders using their policies as collateral.
True
False
50.
Insurance companies are not subject to regulatory capital adequacy rules.
True
False
51.
Pure insurance companies are exposed to a single risk only, this being insurance risk.
True
False
52.
While insurance companies are exposed to credit, operational and investment risk, there is no direct regulation for these risks set out by APRA.
True
False
53.
SOARS stands for Supervisory Oversight and Regulations System.
True
False
54.
Superannuation funds manage funds saved throughout an employee's working life with the aim of providing the employee with a retirement
income.
True
False
55.
In general, the maximum levels of losses are less predictable for property lines than liability lines.
True
False
56.
In firm commitment underwriting, the investment banker acts as a principal, purchasing securities from the issuer at one price and seeking to place
them with public investors at a slightly higher price.
True
False
57.
Adverse selection is a situation where customers who most need insurance are more likely to apply for insurance.
True
False
58.
Annuities are the reverse of life insurance in that they are different means of liquidating a fund.
True
False
59.
Property-casualty insurers tend to have a higher level of liquidity risk than life insurers.
True
False
60.
Investments in hedge funds are restricted to more wealthy clients.
True
False
61.
Marking to market is a procedure of adjusting asset and balance sheet values to reflect current market prices.
True
False
62. Outline and briefly explain the different classes of life insurance as set out in the Life Insurance Act 1995.
63. Discuss the development of the general insurance industry over the period 1980 to 2014 and briefly explain the major risks of
underwriting general insurance.
64. What were the major incentives provided by the government to increase savings contributions to superannuation funds? Why is the
superannuation industry an important and vibrant part of the Australian financial sector?
65.
Outline the role that securitisation vehicles play in the Australian financial system and explain how the global financial crisis (GFC) impacted this
form of financing. What actions did the Australian government take as a response to such an impact?
66.
Insurance risk refers to the risk that:
A. a lot of policyholders make claims

B. the insurance market is saturated and thus the insurance companies cannot write additional policies
C. individuals and companies are over-insured leading to high liability values in insurance companies
D. actual policy liabilities turn out to be higher than provisions or reserves for policy liabilities
67.
To support risk assessment in insurance firms APRA introduced PAIRS. PAIRS stands for:
A. Policy and Insurance Ratification System

B. Policy and Insurance Rating System
C. Probability and Impact Ratification System
D. Probability and Impact Rating System
68.
A. PAIRS is the basis of APRA's risk-based approach to supervision.

B. PAIRS is an internal rating system for scoring each entity in the regulated population of insurance and superannuation entities.
C. Due to PAIRS, APRA's supervision can be tailored to the risk profile of an individual entity.
Chapter 03 Testbank Key

1.
A.
B.
C.
D.
Policy liabilities are a liability item for insurers that reflects their worst-case payment commitments on existing policy contracts.
Policy liabilities are an asset item for insurers that reflects their best-case payment inflows on existing policy contracts.
Policy liabilities are an asset item for insurers that reflects their expected payment inflows on existing policy contracts.
Policy liabilities are a liability item for insurers that reflects their expected payment commitments on existing policy contracts.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products
2.
A.
B.
C.
D.
The cash surrender value of a policy is normally only a portion of the contract's face value.
The cash surrender value of a policy is normally equal to the contract's face value.
The cash surrender value of a policy is normally more than the contract's face value.
A generalisation of the cash surrender value of a policy in relation to its face value is not possible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
3.
A. The surrender value of a policy is the cash value received from the insurer if a policyholder surrenders the policy prior to maturity.
B. The surrender value of a policy is the cash value received from the insurer if a policyholder surrenders the policy at maturity.
C. The surrender value of a policy is the cash value received from the policyholder if the insurance company surrenders the policy
prior to maturity.
D. The surrender value of a policy is the cash value received from the policyholder if the insurance company surrenders the policy at
maturity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
4.
Variable universal life insurance policies:
A.
B.
C.
D.
have fixed premiums and a fixed benefit payout.

have fixed premiums, but allow the benefit payout to vary with investment returns.
have a fixed benefit payout, but allow the premium to vary with investment returns.
allow both the premium and benefit payout to vary with investment returns.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
5.
Cost economies are the principal advantage of over contracts, which arise from the group plan administration and reduced selling and
commission costs.
A.
B.
C.
D.
individual life group life

group life individual life
individual life personal life
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products
6.
A.
B.
C.
D.
Long-tail loss refers to a series of claims made after an initial claim has been made.
Long-tail loss refers to a claim that is made some time after a policy was written.
Short-tail loss refers to a series of claims made after an initial claim has been made.
Short-tail loss refers to a claim that is made some time after a policy was written.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
7.
A.
B.
C.
D.
Net asset value refers to the book value of assets in a managed fund portfolio divided by the number of shares outstanding.
Net asset value refers to the book value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
Net asset value refers to the market value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
Learning Objective: 3.5 Learn that many superannuation and life insurance products are managed funds
8.
A. A closed-end investment company is a specialised firm that invests in securities and assets of other firms.
B. A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a fixed supply of
shares outstanding itself.
C. A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a variable supply
of shares outstanding itself.
D. A closed-end investment company has a variable supply of shares outstanding itself.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Est time: 13
9.
The primary function of insurance companies is to:
A.
B.
C.
D.
generate fees for the banks that sell insurance products

sell a variety of consumer investment products
protect policyholders from adverse events
assist in the transfer of wealth into the future
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 13
Learning Objective: 3.1 Learn that despite the apparently diverse nature of activities, other FIs face risk exposures similar to those faced by DIs
10.
Private placement refers to a securities issue placed:
A.
B.
C.
D.
with one or a few large institutional investors

in private, that is, without announcing it to the public
by a private person
with one of the stock exchanges
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 13
Learning Objective: 3.6 Gain an appreciation of the role that managed funds, money market corporations, finance companies and securitisation vehicles and their
products play in the Australian financial markets and their structure and regulation
11.
A.
B.
C.
D.
Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death.
Life insurance allows individuals and their beneficiaries to protect against loss in income through premature retirement.
Life insurance allows individuals and their beneficiaries to protect against loss in income through unforeseen accidents.
Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death or retirement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
12.
A. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders make periodic premium
payments.
B. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders make a lump sum payment at
C. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders receive periodic premium
payments.
D. Ordinary life insurance involves policies marketed on an individual basis, on which policyholders receive a lump sum payment at
AACSB: Analytic
Bloom's: Application
Difficulty: Easy
Est time: 13
13.
Which of the following are basic life insurance contract types?
A.
B.
C.
D.
terminating insurance
whole-of-life
bundled life insurance
terminating insurance and whole-of-life
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
14.
A.
B.
C.
D.
A term insurance policy has no savings element attached to it.

The maximum term of a term life insurance is 20 years.
The minimum term of a term life insurance is five years.
A term insurance policy has no savings element attached to it and the maximum term of a term life insurance is 20 years.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
15.
A.
B.
C.
D.
A whole-of-life insurance has no savings element attached to it.

Unlike term insurance, in the case of whole-of-life insurance there is uncertainty regarding a payout by the insurer.
A whole-of-life insurance protects the holder over their entire life.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
16.
A.
B.
C.
D.
The proceeds of life insurance policies are tax free after they have been in force for at least five years.
The proceeds of life insurance policies are always taxed.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
17.
A.
B.
C.
D.
Unbundled life insurance is also called investment-free insurance.

Bundled life insurance is also called investment-free insurance.
Unbundled life insurance is also called investment-linked insurance.
Bundled life insurance is also called investment-linked insurance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
18.
A.
B.
C.
D.
AACSB: Analytic
Difficulty: Hard
Est time: 13
19.
Which of the following are key features of the regulatory and supervisory environment of the insurance industry?
A.
B.
C.
D.
Life insurance companies are now freed of capital adequacy regulations.

Life insurance companies have additional reporting requirements.
Overall, life insurance companies are less regulated than before to enhance innovation in the industry.
AACSB: Analytic
Difficulty: Easy
Est time: 13
20.
Which of the following statements is true in the context of SOARS?
A.
B.
C.
D.
Oversight entities are subject to routine information gathering from statistical returns and onsite visits.
Mandated improvement entities are not at material risk of failure.
Normal entities lie outside APRA's tolerable risk range, but are unlikely to fail.
Restructure entities have lost APRA's confidence.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Est time: 13
21.
A. Australian governments have encouraged national savings through superannuation.

B. The government has provided taxation incentives aimed at increasing voluntary contributions to superannuation by both employers
and employees.
C. The government has introduced legislative requirements forcing employers to contribute to superannuation on behalf of their
employees.
AACSB: Reflective thinking
Difficulty: Hard
Est time: 13
Learning Objective: 3.4 Appreciate the importance, structure and regulation of superannuation in the Australian financial system
22.
From 1997 to 2013, total superannuation assets in Australia increased from $0.3 trillion (58% of GDP) to:
A.
B.
C.
D.

$1 trillion (82% of GDP)
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
23.
held the largest proportion of superannuation assets in 2013, rising from 11% in 1997 to 32% as at June 2013.
A.
B.
C.
D.
Small funds
Industry funds
Corporate funds
Retail funds
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Est time: <1
24.
Higher uncertainty of losses forces property-casualty firms to:
A.
B.
C.
D.
invest in more short-term assets than life insurance firms

invest in more long-term assets than life insurance firms
hold a lower percentage of capital and reserves than life insurance firms
invest in riskier equity securities than life insurance firms
AACSB: Analytic
Difficulty: Medium
Est time: 13
25.
Which of the following are typical products offered by general insurance companies?
A.
B.
C.
D.
life insurance policies
professional indemnity insurance
superannuation funds and professional indemnity insurance
AACSB: Analytic
Difficulty: Medium
Est time: 13
26.
Which of the following is an adequate definition of liability insurance?
A. Liability insurance protects commercial firms against perils similar to home-owners' multiple peril insurance.
B. Liability insurance protects against theft or damage of commercial vehicles.
C. Liability insurance protects against liabilities relating to business operations of firms.
D. Liability insurance protects commercial firms against perils similar to home-owners' multiple peril insurance and protects against
liabilities relating to business operations of firms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Est time: 13
27.
Which of the following statements is true in relation to the balance sheet and balance sheet trends of general insurance companies?
A.
B.
C.
D.
They tend to have a high proportion of investments in equity assets.

They tend to have a low proportion of investments in bonds.
There has been little change in the structure of assets between 2002 and 2013, except for a decline in equity investments.
AACSB: Analytic
Difficulty: Medium
Est time: 13
28.
Which of the following are reasons for underwriting risk to result?
A. Generated premiums are insufficient to cover claims incurred insuring a particular peril.
B. Generated premiums are insufficient to cover the administrative expenses of providing that insurance after taking into account the
investment income generated between the time premiums are received and the time claims are paid.
C. Generated premiums are insufficient to cover ordinary business expenses.
D. Generated premiums are insufficient to cover claims incurred insuring a particular peril and generated premiums are insufficient to
cover the administrative expenses of providing that insurance after taking into account the investment income generated between the
time premiums are received and the time claims are paid.
AACSB: Analytic
Difficulty: Hard
Est time: 35
29.
Which of the following statements are true in the context of general insurance?
A. Loss rates on all general property policies are adversely affected by unexpected increases in inflation.
B. Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later.
C. Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later and loss rates
are more predictable on low-severity high-frequency lines than on high-severity low-frequency lines.
D. Loss rates on all general property policies are adversely affected by unexpected increases in inflation; long-tail losses arise where
the peril occurs during a coverage period but a claim is not made until many years later and loss rates are more predictable on lowseverity high-frequency lines than on high-severity low-frequency lines.
AACSB: Analytic
Difficulty: Hard
Est time: 35
30.
Which of the following statements referring to the loss ratio are true?
A.
B.
C.
D.
The loss ratio measures the actual losses incurred on a line of insurance business.
A common measure of the overall underwriting profitability of a line of insurance business is the loss ratio.
The loss ratio measures the pure losses incurred on a line of insurance business relative to premiums earned.
The loss ratio measures the predicted losses incurred on a line of insurance business relative to premiums earned.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
31.
A. Measuring and managing credit and interest rate risk are key concerns of general insurance managers.
B. If pure losses, underwriting losses and other costs are higher and investment yields lower than expected, general insurers suffer a
significant amount of deficit reserves.
C. On average, underwriting cycles measured from peak to peak can last anywhere from 12 to 20 years.
D. Measuring and managing credit and interest rate risk are key concerns of general insurance managers and if pure losses,
underwriting losses and other costs are higher and investment yields lower than expected, general insurers suffer a significant amount
of deficit reserves.
AACSB: Analytic
Difficulty: Hard
Est time: 13
32.
The problem of adverse selection:
A.
B.
C.
D.
implies that many people who do not need insurance coverage have it through group plans.
means that those people who apply for insurance are the least likely to need insurance coverage.
causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.
creates a savings element along with the insurance component of the premium and policy.
AACSB: Analytic
Difficulty: Hard
Est time: 13
33.
What is a common rationale for a managed fund?
A. the need for more diversity in investment products

B. the opportunity for retail investors to achieve superior diversification
C. the potential for retail investors to achieve superior returns
D. the opportunity for retail investors to achieve superior diversification and the potential for retail investors to achieve superior
returns
AACSB: Analytic
Difficulty: Medium
Est time: 13
34.
Which of the following statements is true with regard to the regulation of managed funds?
A.
B.
C.
D.
Managed funds are unregulated.

APRA is the primary regulator for managed funds.
ASIC is the primary regulator for managed funds.
The ACCC is the primary regulator for managed funds.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 13
35.
A. Money market corporations are primarily concerned with wholesale deposit raising and lending.
B. Money market corporations are primarily concerned with retail deposit raising and lending.
C. Money market corporations are financial intermediaries that cover a large number of activities.
D. Money market corporations are financial intermediaries that cover a large number of activities and are primarily concerned with
wholesale deposit raising and lending.
AACSB: Analytic
Difficulty: Medium
Est time: 13
36.
A.
B.
C.
D.
AACSB: Analytic
Difficulty: Medium
Est time: 13
37.
Through , general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.
A.
B.
C.
D.
insurance
reinsurance
underwriting
private placement
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 13
38.
A. Pure arbitrage involves buying blocks of securities in anticipation of some information release.
B. Risk arbitrage involves buying an asset in one market at one price and selling it immediately in another market at a higher price.
C. Risk arbitrage involves buying blocks of securities in anticipation of some information release, pure arbitrage involves buying an
asset in one market at one price and selling it immediately in another market at a higher price and program trading is associated with
seeking a risk arbitrage between a cash market price and the futures market price of that instrument.
D. None of the listed options are correct.
AACSB: Analytic
Difficulty: Hard
Est time: 13
39.
Which of the following statements is true with regard to the regulation of money market corporations?
A.
B.
C.
D.
Money market corporations are unregulated.

APRA is the primary regulator for money market corporations.
ASIC is the primary regulator for money market corporations.
The ACCC is the primary regulator for money market corporations.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
40.
A. Finance companies are financial institutions that raise funds through the issue of debentures and unsecured notes from retail
investors.
B. Finance companies are financial institutions that raise funds through the issue of debentures and unsecured notes from wholesale
investors.
C. Finance companies are financial institutions that raise funds through the issue of T-bonds and secured notes from retail investors.
D. Finance companies are financial institutions that raise funds through the issue of T-bonds and secured notes from wholesale
investors.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
41.
Which of the following did not occur in the life insurance industry during the most recent financial crisis?
A.
B.
C.
D.
Low equity values reduced asset-based fees on separate account assets.

Asset-based fees declined on products such as variable annuities and pension fund assets that were tied to equity returns.
Low interest rates and harsh economic conditions caused many policyholders to terminate or surrender their policies.
Policy premium increased as more households and small businesses attempted to transfer risk to insurance companies.

Bloom's: Knowledge
Difficulty: Hard
Est time: 13
42.
Investments in are restricted to more wealthy clients.
A.
B.
C.
D.
hedge funds
managed funds
trusts
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
43.
is a procedure of adjusting asset and balance sheet values to reflect current market prices.
A.
B.
C.
D.
Hedging
Marking to market
Underwriting
Balancing
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
44.
Insurance services offered by FIs protect individuals and businesses (policyholders) from the financial impact of adverse events.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
45.
Reinsurance is insurance purchased by insurers from other insurers to limit the total loss an insurer would experience in case of a disaster.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
46.
Reinsurance companies sell insurance products directly to the customer.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
47.
Through securitisation, general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: 13
48.
An individual's life insurance policy usually covers the policyholder plus the policyholder's spouse and family.
FALSE
AACSB: Analytic
Difficulty: Easy
Est time: <1
49.
Loans on policy are loans made by insurance companies to its policyholders using their policies as collateral.
TRUE
AACSB: Analytic
Difficulty: Easy
Est time: <1
50.
Insurance companies are not subject to regulatory capital adequacy rules.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
51.
Pure insurance companies are exposed to a single risk only, this being insurance risk.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
52.
While insurance companies are exposed to credit, operational and investment risk, there is no direct regulation for these risks set out by APRA.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
53.
SOARS stands for Supervisory Oversight and Regulations System.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
54.
Superannuation funds manage funds saved throughout an employee's working life with the aim of providing the employee with a retirement
income.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
55.
In general, the maximum levels of losses are less predictable for property lines than liability lines.
FALSE
AACSB: Analytic
Difficulty: Medium
Est time: <1
56.
In firm commitment underwriting, the investment banker acts as a principal, purchasing securities from the issuer at one price and seeking to place
them with public investors at a slightly higher price.
TRUE
AACSB: Analytic
Difficulty: Medium
Est time: <1
57.
Adverse selection is a situation where customers who most need insurance are more likely to apply for insurance.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
58.
Annuities are the reverse of life insurance in that they are different means of liquidating a fund.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
59.
Property-casualty insurers tend to have a higher level of liquidity risk than life insurers.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1
60.
Investments in hedge funds are restricted to more wealthy clients.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
61.
Marking to market is a procedure of adjusting asset and balance sheet values to reflect current market prices.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1
62. Outline and briefly explain the different classes of life insurance as set out in the Life Insurance Act 1995.
There are two basic classes of life insurance as set out in the Life Insurance Act 1995:
superannuation business and ordinary business. Superannuation business is conducted by life insurers as well as specialist superannuation funds.
superannuation business as defined in the Life Insurance Act 1995, that is, business that is:
1. effected for the purposes of a superannuation or retirement scheme, or accepted by the person maintaining such a scheme for the purposes of
the scheme, or
2. vested in the trustee of a fund established or maintained by a person (being a fund) where the applicable terms and conditions provide for:
a. the payment of contributions to the fund by that person, and
b. payments being made from the fund, by reason of injury, sickness, retirement or death of employees of that person or of a company in
which that person has a controlling interest.
Ordinary business consists of all other life insurance business. Ordinary life insurance policies are marketed on an individual basis, and are contracts
where policyholders (the policy owner) make periodic (or regular) premium payments throughout the life of the policy, or a lump sum or single
premium paid at the commencement of the contract. The three traditional contractual forms are: term life, whole-of-life and endowment life. Newer
life insurance contracts include investment-linked life, annuities, disability, and critical illness.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Hard
Est time: 510
63. Discuss the development of the general insurance industry over the period 1980 to 2014 and briefly explain the major risks of
underwriting general insurance.
In December 2013, there were a total of 104 general insurers in Australia. The rationalisation of the industry has been ongoing since the 1980s, with a
significant drop in the number of insurers from a peak of 172 in 1985. In addition to consolidation, the Australian general insurance industry has
undergone a major shift in regulation and operating dynamics over the 16 years to 2013. With deregulation of Australias financial markets and
removal of entry barriers, foreign competition led to modernisation and growth in the industry.
Consolidation occurred through privatisation, demutualisation and/or takeover, by both local and overseas companies. Further, during the 1990s,
bank insurance subsidiaries emerged, adding a new dimension to the competition in the industry. Moreover, the bank competitors introduced a
different type of business model. Consolidation of the industry has also increased its concentration, with the top 10 general insurers accounting for 61
per cent of gross premium revenue in 2014, and 60 per cent of the total industry assets of $116 billion.
General underwriting risk results when the premiums generated on a given insurance line are insufficient to cover: (1) the claims (losses) incurred
insuring the peril, and (2) the administrative expenses of providing that insurance (legal expenses, commissions, taxes and so on) after taking into
account the investment income generated between the time premiums are received and the time claims are paid. Thus, underwriting risk may result
from (1) unexpected increases in loss rates; (2) unexpected increases in expenses; and/or (3) unexpected decreases in investment yields or returns.
Next, we look more carefully at each of these three areas of general underwriting risk.

Difficulty: Hard
Est time: 510
64. What were the major incentives provided by the government to increase savings contributions to superannuation funds? Why is the
superannuation industry an important and vibrant part of the Australian financial sector?
Over the past 20 years, Australian governments have mandated minimum superannuation savings, and in addition have encouraged voluntary
national savings through superannuation. In 1992, the Australian government introduced a Superannuation Guarantee Charge on all employers,
requiring that a legislated proportion of an employees salary (currently 9 per cent) be paid into a superannuation account. The encouragement for
voluntary contributions has been principally through taxation incentives aimed at increasing contributions to superannuation by both employers and
employees. The result of these incentives has been a phenomenal growth in the superannuation industry.
Superannuation funds manage funds saved throughout an employees working life with the aim of providing the employee with a retirement income.
Contributions to superannuation funds are usually made by both employees and their employers. Superannuation is the largest source of long-term
savings in Australia and the second most significant source of wealth for many Australians after the family home. Australian superannuation assets
represent 90.9 per cent of GDP. This ranks Australia in third place globally and significantly higher than the OECD average.

Bloom's: Analysis
Difficulty: Hard
Est time: 510
65.
Outline the role that securitisation vehicles play in the Australian financial system and explain how the global financial crisis (GFC) impacted this
form of financing. What actions did the Australian government take as a response to such an impact?
Securitisation vehicles have had an important influence on the structure of the Australian financial system particularly since the mid-1990s.
Securitisation allows financial institutions to fund their lending activities indirectly through capital markets rather than through deposits. They do this
by selling assets to a specially created company or trust, usually referred to as a special purpose vehicle (SPV), which finances the purchase by
issuing securities to investors using the assets as collateral. Securitisation in Australia is dominated by the securitisation of residential mortgages.
However, the securitisation of other assets such as commercial mortgages, trade receivables, other loans and asset-backed bonds has also been
undertaken.
From the early to mid-1990s until the onset of the GFC, the Australian securitisation market expanded rapidly, so that by 2007 securitisation vehicles
held 7 per cent of financial system assets. However, following the first signs of the GFC in 2007 in the US and as the causes became better
understood, there was a reassessment of the risks associated with structured credit products, including securitised assets. It is not surprising that
Australian securitisation programs also suffered the loss of confidence and reputational damage and that the share of financial sector assets of
securitisation vehicles fell to 3 per cent by December 2010.
While the GFC was fuelled in part by the lack of transparency and the complexity of the securities issued in the US, this was not the case in Australia.
Despite this, the reputations of all securitisation vehicles around the globe were affected, and as liquidity in the market dried up, so did the mortgagebacked securities issues. As the securitisation industry was a significant vehicle for mortgage finance, and also as smaller banks and non-bank DIs
relied on securitisation to fund their asset base, the Australian government set up a program within the Australian Office of Financial Management
(AOFM) to purchase mortgage-backed securities.

Bloom's: Knowledge
Difficulty: Hard
Est time: 1015
66.
Insurance risk refers to the risk that:
A. a lot of policyholders make claims

B. the insurance market is saturated and thus the insurance companies cannot write additional policies
C. individuals and companies are over-insured leading to high liability values in insurance companies
D. actual policy liabilities turn out to be higher than provisions or reserves for policy liabilities
AACSB: Analytic
Difficulty: Medium
Est time: 13
67.
To support risk assessment in insurance firms APRA introduced PAIRS. PAIRS stands for:
A. Policy and Insurance Ratification System

B. Policy and Insurance Rating System
C. Probability and Impact Ratification System
D. Probability and Impact Rating System
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: 13
68.
A. PAIRS is the basis of APRA's risk-based approach to supervision.

B. PAIRS is an internal rating system for scoring each entity in the regulated population of insurance and superannuation entities.
C. Due to PAIRS, APRA's supervision can be tailored to the risk profile of an individual entity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Est time: 13
Chapter 03 Testbank Summary

Category
# of Que
stions
AACSB: Analytic
62
AACSB: Communication
1
5
Bloom's: Analysis
1
21
Bloom's: Knowledge
46
Difficulty: Easy
21
Difficulty: Hard
17
Difficulty: Medium
30
Est time: 13
39
Est time: 1015
1
Est time: 35
2
Est time: 510
3
Est time: <1
23
Learning Objective: 3.1 Learn that despite the apparently diverse nature of activities, other FIs face risk exposures similar to those faced
8
by DIs
27
17
5
4
Learning Objective: 3.6 Gain an appreciation of the role that managed funds, money market corporations, finance companies and securiti
11
sation vehicles and their products play in the Australian financial markets and their structure and regulation

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Chapter 03 Testbank

have fixed premiums and a fixed benefit payout.

individual life group life

generate fees for the banks that sell insurance products

with one or a few large institutional investors

A term insurance policy has no savings element attached to it.

A whole-of-life insurance has no savings element attached to it.

Unbundled life insurance is also called investment-free insurance.

Life insurance companies are now freed of capital adequacy regulations.

A. Australian governments have encouraged national savings through superannuation.

$0.5 trillion (60% of GDP)

invest in more short-term assets than life insurance firms

They tend to have a high proportion of investments in equity assets.

A. the need for more diversity in investment products

Managed funds are unregulated.

Money market corporations are unregulated.

Low equity values reduced asset-based fees on separate account assets.

A. a lot of policyholders make claims

A. Policy and Insurance Ratification System

A. PAIRS is the basis of APRA's risk-based approach to supervision.