Bcom Bachelor of Commerce Bachelor of Commerce: Banking & Insurance 3 — Questions and Answers
Question 1: What is 'adverse selection' in the insurance industry?
- Insurers choosing only low-risk clients
- High-risk individuals being more likely to purchase insurance than low-risk individuals (Correct answer)
- Insurers cancelling risky policies at renewal
- The process of selecting coverage limits
Correct answer: High-risk individuals being more likely to purchase insurance than low-risk individuals
Adverse selection occurs when those most likely to file claims (high-risk individuals) disproportionately seek insurance, threatening insurer profitability.
Question 2: What does 'CAMEL' stand for in bank examination ratings?
- Capital, Assets, Management, Earnings, Liquidity (Correct answer)
- Credit, Adequacy, Management, Equity, Leverage
- Cash, Assets, Margin, Equity, Loans
- Capital, Adequacy, Market, Earnings, Leverage
Correct answer: Capital, Assets, Management, Earnings, Liquidity
CAMEL is a supervisory rating system evaluating banks on Capital adequacy, Asset quality, Management, Earnings, and Liquidity.
Question 3: Which type of insurance covers a business's loss of income when operations are halted due to a covered disaster?
- General liability insurance
- Business interruption insurance (Correct answer)
- Professional indemnity insurance
- Product liability insurance
Correct answer: Business interruption insurance
Business interruption insurance compensates a company for lost income and ongoing expenses when a covered event forces a temporary shutdown.
Question 4: What is the purpose of a 'letter of credit' in banking?
- To certify a customer's creditworthiness to other banks
- To guarantee payment to a seller provided specified conditions are met (Correct answer)
- To transfer funds between two domestic banks
- To authorize a wire transfer overseas
Correct answer: To guarantee payment to a seller provided specified conditions are met
A letter of credit is a bank's written commitment to pay a seller on behalf of a buyer once delivery conditions are fulfilled, commonly used in international trade.
Question 5: In banking, what is the 'prime rate'?
- The rate charged between banks for overnight loans
- The interest rate the Federal Reserve charges commercial banks
- The benchmark rate banks use for loans to their most creditworthy customers (Correct answer)
- The average mortgage rate offered nationally
Correct answer: The benchmark rate banks use for loans to their most creditworthy customers
The prime rate is the interest rate that commercial banks charge their best, most creditworthy corporate customers, often tied to the federal funds rate.
Question 6: What distinguishes a 'stock insurance company' from a 'mutual insurance company'?
- Stock companies are non-profit; mutual companies are for-profit
- Stock companies are owned by shareholders; mutual companies are owned by policyholders (Correct answer)
- Stock companies only offer life insurance; mutual companies offer all lines
- Mutual companies are publicly traded; stock companies are private
Correct answer: Stock companies are owned by shareholders; mutual companies are owned by policyholders
Stock insurers are owned by shareholders who may earn dividends, while mutual insurers are owned by their policyholders who may share in profits.
Question 7: What is 'moral hazard' in the context of insurance?
- Fraud committed during the claims process
- The tendency for insured parties to take greater risks because losses are covered (Correct answer)
- Insurers denying claims on ethical grounds
- A conflict of interest between agent and insurer
Correct answer: The tendency for insured parties to take greater risks because losses are covered
Moral hazard refers to the increased risk-taking behavior that can occur when individuals are insulated from the consequences of their actions by insurance coverage.
Bcom Bachelor of Commerce Bachelor of Commerce: Banking & Insurance 3
What is 'adverse selection' in the insurance industry?