Financial Institutions Management 4th Edition by Saunders -Test Bank

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Sample Test

Chapter 03 Testbank

Student: ___________________________________________________________________________

Which of the following statements is true?

1. Policy liabilities are a liability item for insurers that reflects their worst-case payment commitments on existing policy contracts.
B. Policy liabilities are an asset item for insurers that reflects their best-case payment inflows on existing policy contracts.
C. Policy liabilities are an asset item for insurers that reflects their expected payment inflows on existing policy contracts.
D. Policy liabilities are a liability item for insurers that reflects their expected payment commitments on existing policy contracts.

Which of the following statements is true?

1. The cash surrender value of a policy is normally only a portion of the contract’s face value.
B. The cash surrender value of a policy is normally equal to the contract’s face value.
C. The cash surrender value of a policy is normally more than the contract’s face value.
D. A generalisation of the cash surrender value of a policy in relation to its face value is not possible.

Which of the following statements is true?

1. 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.

Variable universal life insurance policies:

1. have fixed premiums and a fixed benefit payout.
B. have fixed premiums, but allow the benefit payout to vary with investment returns.
C. have a fixed benefit payout, but allow the premium to vary with investment returns.
D. allow both the premium and benefit payout to vary with investment returns.

Cost economies are the principal advantage of ¼ over ¼ contracts, which arise from the group plan administration and reduced selling and commission costs.

1. ¼ individual life ¼ group life ¼
B. ¼ group life ¼ individual life ¼
C. ¼ individual life ¼ personal life ¼
D. None of the listed options are correct.

Which of the following statements is true?

1. Long-tail loss refers to a series of claims made after an initial claim has been made.
B. Long-tail loss refers to a claim that is made some time after a policy was written.
C. Short-tail loss refers to a series of claims made after an initial claim has been made.
D. Short-tail loss refers to a claim that is made some time after a policy was written.

Which of the following statements is true?

1. Net asset value refers to the book value of assets in a managed fund portfolio divided by the number of shares outstanding.
B. Net asset value refers to the book value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
C. Net asset value refers to the market value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
D. None of the listed options are correct.

Which of the following statements is true?

1. 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.

The primary function of insurance companies is to:

1. generate fees for the banks that sell insurance products
B. sell a variety of consumer investment products
C. protect policyholders from adverse events
D. assist in the transfer of wealth into the future

10.

Private placement refers to a securities issue placed:

1. with one or a few large institutional investors
B. in private, that is, without announcing it to the public
C. by a private person
D. with one of the stock exchanges

11.

Which of the following statements is true?

1. Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death.
B. Life insurance allows individuals and their beneficiaries to protect against loss in income through premature retirement.
C. Life insurance allows individuals and their beneficiaries to protect against loss in income through unforeseen accidents.
D. Life insurance allows individuals and their beneficiaries to protect against loss in income through premature death or retirement.

12.

Which of the following statements is true?

1. 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 maturity of the policy.

13.

Which of the following are basic life insurance contract types?

1. terminating insurance
B. whole-of-life
C. bundled life insurance
D. terminating insurance and whole-of-life

14.

Which of the following statements is true?

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

15.

Which of the following statements is true?

1. A whole-of-life insurance has no savings element attached to it.
B. Unlike term insurance, in the case of whole-of-life insurance there is uncertainty regarding a payout by the insurer.
C. A whole-of-life insurance protects the holder over their entire life.
D. All of the listed options are correct.

16.

Which of the following statements is true?

1. The proceeds of life insurance policies are tax free after they have been in force for at least five years.
B. The proceeds of life insurance policies are tax free after they have been in force for at least 10 years.
C. The proceeds of life insurance policies are tax free after they have been in force for at least 15 years.
D. The proceeds of life insurance policies are always taxed.

17.

Which of the following statements is true?

1. Unbundled life insurance is also called investment-free insurance.
B. Bundled life insurance is also called investment-free insurance.
C. Unbundled life insurance is also called investment-linked insurance.
D. Bundled life insurance is also called investment-linked insurance.

18.

Insurance policy benefits are classified on an insurance company’s balance sheet as:

1. liabilities, because the insurance company may have to pay out the benefits
B. assets, because policy benefits are valuable to the company
C. liabilities, because customers may fall behind on their premium payments
D. 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?

1. Life insurance companies are now freed of capital adequacy regulations.
B. Life insurance companies have additional reporting requirements.
C. Overall, life insurance companies are less regulated than before to enhance innovation in the industry.
D. All of the listed options are correct.

20.

Which of the following statements is true in the context of SOARS?

1. Oversight entities are subject to routine information gathering from statistical returns and onsite visits.
B. Mandated improvement entities are not at material risk of failure.
C. Normal entities lie outside APRA’s tolerable risk range, but are unlikely to fail.
D. Restructure entities have lost APRA’s confidence.

21.

Which of the following statements is true?

1. 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:

1. $0.5 trillion (60% of GDP)
B. $1 trillion (82% of GDP)
C. $1.6 trillion (106% of GDP)
D. $2.2 trillion (151% of GDP)

23.

¼ held the largest proportion of superannuation assets in 2013, rising from 11% in 1997 to 32% as at June 2013.

1. Small funds
B. Industry funds
C. Corporate funds
D. Retail funds

24.

Higher uncertainty of losses forces property-casualty firms to:

1. invest in more short-term assets than life insurance firms
B. invest in more long-term assets than life insurance firms
C. hold a lower percentage of capital and reserves than life insurance firms
D. invest in riskier equity securities than life insurance firms

25.

Which of the following are typical products offered by general insurance companies?

1. superannuation funds
B. life insurance policies
C. professional indemnity insurance
D. superannuation funds and professional indemnity insurance

26.

Which of the following is an adequate definition of liability insurance?

1. 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?

1. They tend to have a high proportion of investments in equity assets.
B. They tend to have a low proportion of investments in bonds.
C. There has been little change in the structure of assets between 2002 and 2013, except for a decline in equity investments.
D. All of the listed options are correct.

28.

Which of the following are reasons for underwriting risk to result?

1. 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?

1. 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 low-severity high-frequency lines than on high-severity low-frequency lines.

30.

Which of the following statements referring to the loss ratio are true?

1. The loss ratio measures the actual losses incurred on a line of insurance business.
B. A common measure of the overall underwriting profitability of a line of insurance business is the loss ratio.
C. The loss ratio measures the pure losses incurred on a line of insurance business relative to premiums earned.
D. The loss ratio measures the predicted losses incurred on a line of insurance business relative to premiums earned.

31.

Which of the following statements is true?

1. 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:

1. implies that many people who do not need insurance coverage have it through group plans.
B. means that those people who apply for insurance are the least likely to need insurance coverage.
C. causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.
D. creates a savings element along with the insurance component of the premium and policy.

33.

What is a common rationale for a managed fund?

1. 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?

1. Managed funds are unregulated.
B. APRA is the primary regulator for managed funds.
C. ASIC is the primary regulator for managed funds.
D. The ACCC is the primary regulator for managed funds.

35.

Which of the following statements is true?

1. 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.

Insurance policy benefits are classified on an insurance company’s balance sheet as:

37.

Through ¼ , general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.

1. insurance
B. reinsurance
C. underwriting
D. private placement

38.

Which of the following statements is true?

1. 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?

1. Money market corporations are unregulated.
B. APRA is the primary regulator for money market corporations.
C. ASIC is the primary regulator for money market corporations.
D. The ACCC is the primary regulator for money market corporations.

40.

Which of the following statements is true?

1. 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?

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

42.

Investments in ¼ are restricted to more wealthy clients.

1. superannuation funds
B. hedge funds
C. managed funds
D. trusts

43.

¼ is a procedure of adjusting asset and balance sheet values to reflect current market prices.

1. Hedging
B. Marking to market
C. Underwriting
D. 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:

1. 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:

1. Policy and Insurance Ratification System
B. Policy and Insurance Rating System
C. Probability and Impact Ratification System
D. Probability and Impact Rating System

68.

Which of the following statements is true?

1. 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.
D. All of the listed options are correct.

Chapter 03 Testbank Key

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

Which of the following statements is true?

Variable universal life insurance policies:

Cost economies are the principal advantage of ¼ over ¼ contracts, which arise from the group plan administration and reduced selling and commission costs.

1. ¼ individual life ¼ group life ¼
B. ¼ group life ¼ individual life ¼
C. ¼ individual life ¼ personal life ¼
D. None of the listed options are correct.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.5 Learn that many superannuation and life insurance products are managed funds

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Hard
Est time: 1–3
Learning Objective: 3.5 Learn that many superannuation and life insurance products are managed funds

The primary function of insurance companies is to:

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
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:

1. with one or a few large institutional investors
B. in private, that is, without announcing it to the public
C. by a private person
D. with one of the stock exchanges

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
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.

Which of the following statements is true?

12.

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: 1–3
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

13.

Which of the following are basic life insurance contract types?

1. terminating insurance
B. whole-of-life
C. bundled life insurance
D. terminating insurance and whole-of-life

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

14.

Which of the following statements is true?

15.

Which of the following statements is true?

16.

Which of the following statements is true?

17.

Which of the following statements is true?

18.

Insurance policy benefits are classified on an insurance company’s balance sheet as:

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

19.

Which of the following are key features of the regulatory and supervisory environment of the insurance industry?

20.

Which of the following statements is true in the context of SOARS?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Hard
Est time: 1–3
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

21.

Which of the following statements is true?

AACSB: Reflective thinking
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
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:

1. $0.5 trillion (60% of GDP)
B. $1 trillion (82% of GDP)
C. $1.6 trillion (106% of GDP)
D. $2.2 trillion (151% of GDP)

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 3.4 Appreciate the importance, structure and regulation of superannuation in the Australian financial system

23.

¼ held the largest proportion of superannuation assets in 2013, rising from 11% in 1997 to 32% as at June 2013.

1. Small funds
B. Industry funds
C. Corporate funds
D. Retail funds

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Hard
Est time: <1
Learning Objective: 3.4 Appreciate the importance, structure and regulation of superannuation in the Australian financial system

24.

Higher uncertainty of losses forces property-casualty firms to:

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

25.

Which of the following are typical products offered by general insurance companies?

1. superannuation funds
B. life insurance policies
C. professional indemnity insurance
D. superannuation funds and professional indemnity insurance

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

26.

Which of the following is an adequate definition of liability insurance?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Hard
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

27.

Which of the following statements is true in relation to the balance sheet and balance sheet trends of general insurance companies?

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

28.

Which of the following are reasons for underwriting risk to result?

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

29.

Which of the following statements are true in the context of general insurance?

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

30.

Which of the following statements referring to the loss ratio are true?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

31.

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 3.1 Learn that despite the apparently diverse nature of activities, other FIs face risk exposures similar to those faced by DIs

32.

The problem of adverse selection:

33.

What is a common rationale for a managed fund?

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.5 Learn that many superannuation and life insurance products are managed funds

34.

Which of the following statements is true with regard to the regulation of managed funds?

1. Managed funds are unregulated.
B. APRA is the primary regulator for managed funds.
C. ASIC is the primary regulator for managed funds.
D. The ACCC is the primary regulator for managed funds.

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 3.5 Learn that many superannuation and life insurance products are managed funds

35.

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
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

36.

Insurance policy benefits are classified on an insurance company’s balance sheet as:

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

37.

Through ¼ , general insurers are able to transfer all or part of the insured risk to a new contract with another insurance company.

1. insurance
B. reinsurance
C. underwriting
D. private placement

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

38.

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
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

39.

Which of the following statements is true with regard to the regulation of money market corporations?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
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

40.

Which of the following statements is true?

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
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

41.

Which of the following did not occur in the life insurance industry during the most recent financial crisis?

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Est time: 1–3
Learning Objective: 3.1 Learn that despite the apparently diverse nature of activities, other FIs face risk exposures similar to those faced by DIs

42.

Investments in ¼ are restricted to more wealthy clients.

1. superannuation funds
B. hedge funds
C. managed funds
D. trusts

43.

¼ is a procedure of adjusting asset and balance sheet values to reflect current market prices.

1. Hedging
B. Marking to market
C. Underwriting
D. Balancing

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
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

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
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

46.

Reinsurance companies sell insurance products directly to the customer.

FALSE

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

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: 1–3
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

48.

An individual’s life insurance policy usually covers the policyholder plus the policyholder’s spouse and family.

FALSE

AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: <1
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

49.

Loans on policy are loans made by insurance companies to its policyholders using their policies as collateral.

TRUE

50.

Insurance companies are not subject to regulatory capital adequacy rules.

FALSE

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
Learning Objective: 3.1 Learn that despite the apparently diverse nature of activities, other FIs face risk exposures similar to those faced by DIs
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

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

53.

SOARS stands for Supervisory Oversight and Regulations System.

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

AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 3.4 Appreciate the importance, structure and regulation of superannuation in the Australian financial system

55.

In general, the maximum levels of losses are less predictable for property lines than liability lines.

FALSE

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

56.

TRUE

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
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

57.

Adverse selection is a situation where customers who most need insurance are more likely to apply for insurance.

TRUE

58.

Annuities are the reverse of life insurance in that they are different means of liquidating a fund.

TRUE

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
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

60.

Investments in hedge funds are restricted to more wealthy clients.

TRUE

61.

Marking to market is a procedure of adjusting asset and balance sheet values to reflect current market prices.

TRUE

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:

3. the payment of contributions to the fund by that person, and

4. 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: 5–10
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

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 Australia’s 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.

AACSB: Reflective thinking
Bloom’s: Application
Difficulty: Hard
Est time: 5–10
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products

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 employee’s 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 employee’s 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.

AACSB: Reflective thinking
Bloom’s: Analysis
Difficulty: Hard
Est time: 5–10
Learning Objective: 3.4 Appreciate the importance, structure and regulation of superannuation in the Australian financial system

65.

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 mortgage-backed 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.

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Est time: 10–15
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

66.

Insurance risk refers to the risk that:

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 3.1 Learn that despite the apparently diverse nature of activities, other FIs face risk exposures similar to those faced by DIs
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products

67.

To support risk assessment in insurance firms APRA introduced PAIRS. PAIRS stands for:

1. Policy and Insurance Ratification System
B. Policy and Insurance Rating System
C. Probability and Impact Ratification System
D. Probability and Impact Rating System

68.

Which of the following statements is true?

Chapter 03 Testbank Summary

Category	# of Questions
AACSB: Analytic	62
AACSB: Communication	1
AACSB: Reflective thinking	5
Bloom’s: Analysis	1
Bloom’s: Application	21
Bloom’s: Knowledge	46
Difficulty: Easy	21
Difficulty: Hard	17
Difficulty: Medium	30
Est time: 1–3	39
Est time: 10–15	1
Est time: 3–5	2
Est time: 5–10	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 by DIs	8
Learning Objective: 3.2 Gain an understanding of the structure, characteristics and regulation of life insurers and their products	27
Learning Objective: 3.3 Learn about the general insurance industry and gain an understanding of its products	17
Learning Objective: 3.4 Appreciate the importance, structure and regulation of superannuation in the Australian financial system	5
Learning Objective: 3.5 Learn that many superannuation and life insurance products are managed funds	4
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

Chapter 05 Testbank

Student: ___________________________________________________________________________

Repricing gap refers to the:

1. difference between rate-sensitive assets and rate-sensitive liabilities

2. sum of rate-sensitive assets and rate-sensitive liabilities

3. difference between rate-sensitive liabilities and rate-sensitive assets

4. difference between rate-insensitive assets and rate-insensitive liabilities

The term ‘rate-sensitive assets’ refers to assets:

1. whose interest rate will be repriced over some future period

2. with a particularly high interest rate

3. with a particularly low interest rate

4. for which demand is highly dependent on the level of interest rates

Which of the following statements is true?

1. APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.

2. Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange.

3. APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.

4. Australian FIs are only required to use the repricing gap if they are internationally active.

What is spread effect?

1. Periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.

2. The effect that a change in the spread between rates on rate-sensitive assets and rate-sensitive liabilities has on net interest income as interest rates change.

3. The effect of mismatch of asset and liabilities within a maturity bucket.

4. The premium paid to compensate for the future uncertainty in a security’s value.

The cumulative gap over the whole balance sheet by definition:

1. must be greater than zero

2. must be lower than zero

3. must equal zero

4. can take any value

Which of the following statements is true?

1. A negative gap indicates that a rise in interest rates would lower the bank’s net interest income.

2. A positive gap indicates that a rise in interest rates would lower the bank’s net interest income.

3. A negative gap indicates that a rise in interest rates would increase the bank’s net interest income.

4. None of the listed options are correct.

Which of the following statements is true?

1. A negative gap indicates that a rise in interest rates would increase the bank’s net interest income.

2. A positive gap indicates that a rise in interest rates would increase the bank’s net interest income.

3. A positive gap indicates that a fall in interest rates would increase the bank’s net interest income.

4. None of the listed options are correct.

Consider the following repricing buckets and gaps:

What is the annualised change in the bank’s future net interest income if the overnight interest rate decreased by 100 basis points?

-$700

1. $700

-$7000

1. $7000

Consider the following repricing buckets and gaps:

What is the annualised change in the bank’s future net interest income if the overnight interest rate increased by 100 basis points?

-$700

1. $700

-$7000

1. $7000

10.

Consider the following repricing buckets and gaps:

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