Chapter 1: An Introduction to the Economy

 Identify the three primary types of economies and describe the sectors that exist within these
economies
• Local/National/Global: City/Nation/International
• Raw materials: primary, foundation, secure materials needed for production
• Manufactured goods: secondary, turns raw to finished
• Services: tertiary, sales, transportation, distribution, facilitate transfer, enhance life
• Intellectual property: quaternary, designed to improve quality of life, gov/IT/research
 Describe the markets in which exchanges among participants occur
• Product/output: businesses supply finished good/services, received prices
• Labor: households offer labor to businesses and gov, received wages
• Financial/capital: supply money to users of capital directly or thru intermediary
• Foreign exchange: convert currencies to one acceptable to sellers
 Identify the major participants in an economy and describe how they function as buyers and
sellers
• Fiscal policy: use of gov spending and taxation to influence the economy
• Monetary policy: use to stabilize economy by increase/decrease money supply
• Transfer payment: Social Security benefits, unemployment benefits to households
• Intermediaries: facilitate movement of funds from buyers/savers to sellers/borrowers
• Intermediation: coordinated transfer of funds between buyers and sellers thru intermediary
 Explain the role of money in an economy and describe how funds flow between buyers and
sellers, borrowers and lenders, and investors and investment providers during marketplace exchanges

• medium of exchange, making and receiving payments

• way to measure value (units of account)
• store of value, retains its value over time
 Describe the four basic financial needs customers have and identify the kinds of financial
products that help satisfy those needs
• Cash Management and Credit
• Share Draft: An interest-earning checking account offered by credit unions
• Cash Management: An account that offers a package of checking services, brokerage
services, credit and debit cards, loans, and unified recordkeeping.
• Money Market Deposit Account (MMDA): A deposit account that invests in short-
term, low-risk investments and then pays interest according to the performance of
these investments. MMDAs offer limited check-writing privileges.
• Checking Account: A deposit account that allows customers to write checks for
specific amounts against funds on deposit.
• Installment Credit: loans that required to make periodic repayments ex. mortgage
• Non-installment Credit: loans with flexible payments ex. credit cards
• Asset Accumulation
• Deferred Annuity: accumulate interest or investment earnings and pay periodic profit
• Investment Account: holds securities owned by an investor
• Certificate of Deposit (CD): interest-earning deposit held for a period
• Savings Account: deposit account pays interest which can withdraw any time.
 • Asset Protection
• Life Insurance
• Medical Expense Insurance
• Disability Insurance
• Long-Term Care Insurance
• Property & Casualty Insurance
• Asset Decumulation (Distribution)
• Lump-sum from property, investments, retirement account, insurance, annuity
• Systematic withdrawal plan (SWP) allows withdrawals from investment account
 Explain how gross domestic product (GDP) and unemployment rates are used to measure
economic performance
• GDP consists of four components measured for a given period: consumption (C),
investment (I), government purchases (G), and net exports (Xn)
• GDP excludes certain types of production, such as housework and volunteer work. It also
fails to account for improvement in the quality of goods and services over time. Another
problem with GDP is that the factors included don’t always correlate with a country’s well-
being. For instance, GDP includes the cost of natural resource depletion as a measure of
economic activity, which by most accounts is not a positive factor. Because of these
limitations, GDP is typically used in conjunction with other measures to attain a more
balanced view of an economy’s condition
• Genuine Progress Index (GPI): positive and negative contributions that isn’t in GDP
• The unemployment rate is the percentage of people in the labor force who are without jobs
but who are actively seeking jobs. A low rate of unemployment signifies that money is
being made and that goods and services are being produced.
• Unemployment rate does not include individuals who have given up on finding work or
those who have dropped out of the labor force altogether.
• Unemployment Rate = Unemployed Labor Force / Total Civilian Labor Force
 Describe the stages in the business cycle and explain how trends and variations affect the
business cycle

•
• Expansion (boom): unemployment low GDP high, profit, production, spending increases
• Contraction (downturn): unemployment up GDP down
• Recession (slump): unemployment high GDP low
• Recovery: unemployment down GDP up
• Trend: increased life expectancies result in decrease in expenses for issuers and increase in
benefit costs for insurers issuing life annuities.
• Variation
• Seasonal (routine): flu season, holiday season, hurricane season
• Cyclical: economic changes ex. interest rate increases/decreases
• Random: natural disasters, wars
 Give examples of the economic indicators used to forecast and monitor changes in the business
cycles
• Leading: changes before GDP changes ex. stock prices, changes in first-time
unemployment benefits, changes in spending, new construction and orders for goods
• Coincident: changes with GDP changes ex. personal consumption, industrial production
• Lagging: changes after GDP changes ex. unemployment rates, prime rate
 From Test Prep:
• Economy: environment in which the production, distribution, and consumption of goods
and services by people, businesses, and governments are organized. The purpose of an
economy is to help its members satisfy their demands
• Economic scarcity: disparity between theoretically unlimited demands for goods and
services and limited resources available to fulfill those demands
Chapter 2: The Role of Insurance Companies in the
Economy

 Describe the types of financial institutions and explain their role in an economy
• Depository: accepting deposits and makings loans, invests and pay interests
• Commercial banks
• Mutual savings bank
• Saving and Loan Associations
• Credit Unions
• Contractual Savings: acquiring funds at periodic intervals on a contractual basis
• Insurance: Life, Health, P&C
• Pension funds/plans: Private, Public, Voluntary
• Investment
• Securities broker/dealer: engaging in purchase and sale of financial instruments
• Investment banks: underwriting debt, IPO and equity offerings and acts as SET
• Mutual fund companies: pooling funds and use to buy financial instruments
• Professional management
• Diversification of investments
• Wide selection of funds
• Convenience
• Liquidity
 Give examples of how insurance companies affect the economy
• provide protection against financial losses
• provide funds needed to maintain the standard of living in the event of a head family death
• manage risks associated with conducting business by
• obtain financing
• fund development activities: commercial and retail developments and housing projects
• SIFI: financial institution that failure would pose a serious threat to the economy
 Define inflation, deflation, and related terms
• Inflation: increase in the price level for goods and services by increase in money supply
• Deflation: opposite of inflation
• CPI: average price of a market basket of goods and services
• Rate of Inflation = (New CPI/Old CPI – 1)*100%
 Explain how changes in price levels can affect insurance companies
• During inflation, employee salary expenses will be increased.
• During deflation, fixed-rate products will be kept in force.
 Explain the effects on insurers of increasing market interest rates and decreasing market interest
rates
• Real rate of interest = nominal rate of interest – expected inflation rate
• Interest spread = Interest rate earned – Interest-crediting rate
• Market interest rates increase
• Spread compression when it chooses to increase interest-crediting rates
• increase in surrender rates on its interest-sensitive products
• Market interest rates decrease
• losses of older assets due to customers’ refinancing
• spread compression on long-term guarantees products
• spread expansion on existing assets
 Differentiate between fiscal policy and monetary policy and explain how each is used to help
stabilize an economy
• Fiscal
• Expansionary: increase demand to increase economic activity during deflation or
recession ex. increase in gov spending, decrease in tax. If gov spending exceeds gov
revenue, it can create budget deficit. It has positive impact on insurers because product
revenues tend to increase and taxes decrease.
• Contractionary/Restrictive: opposite to expansionary, cause budget surplus
• Monetary
• Loose: increase money supply by quantitative easing (when short-term interest rates
are zero) or print new bank notes. It increases economic growth but cause inflation
• Tight: decrease money supply by increase FED reserve requirements. It decreases
inflation but increase unemployment and economic growth.
Chapter 3: Managing Solvency and Profitability

 Describe the relationship between solvency goals and profitability goals for an insurance
company and explain the risk-return trade-off
• Primary goals: remain solvent and profitable
• Solvency is a company’s ability to meet its long-term financial obligations on time.
• Profitability is a company’s overall success in delivering positive returns for its owners by
generating profits and increasing the value of the company.
• Risk-return trade-off: high risk high return, solvency opposite to profitability
• Long-term asset, Lending to poor credit, own investment that hard to sell at fair value, own
mortgage that allow borrower to repay anytime, own investment that pay return in a foreign
currency are all investments that have high risk and high return.
 Define risk management and explain the four basic approaches to managing risks
• Risk management: identifying, assessing and minimizing negative impact of risk
• Avoid: add provision ex. suicide exclusion
• Control: add product design features, underwriting guidelines
• Transfer: reinsurance
• Accept: issuing a policy
 Describe the primary types of risks that affect insurance company solvency
• Operational: inadequate internal processes and controls or systems or external events
• distribution
• event
• human resources
• technology/system
• business process
• Market
• equity
• inflation
• interest-rate: fluctuation in market int rate
• reinvestment-rate: change in int rate leads to lower income when reinvest
• currency
• liquidity
• Business
• competition
• regulatory
• Pricing
• mortality
• expense
• policyholder behavior: affect persistency
 Explain how regulators use minimum reserve requirements and minimum capital standards to
ensure that insurers remain solvent
• Minimum Reserve Requirements: cover contractual reserves
• Minimum Capital Standards: Risk-based (RBC)
 Define return and investment, and identify the major categories of life insurer investments
• Bond, Stock, Mortgages, Real Estate, Cash and Cash Equivalents
 Describe the primary types of investment risks that insurers face and give examples of each
• Credit Risk (default): borrowers make late payments or fail to pay its obligations
• Market Risk
• Diversification: investing in different assets with different characteristics
 Define the required rate of return, the risk-free rate of return, and the risk premium and explain
how these terms are relate
• Required rate of return = Risk-free rate of return + Risk premium
• Risk-free rate of return: return on a risk-free investment ex. US Treasury bill
 • Risk premium: compensation investors demand for accepting risk of investment
 Describe how insurers use asset-liability management (ALM) programs, enterprise risk
management (ERM) programs, and mandatory self-assessment programs to manage enterprise-
wide risks
• Asset-Liability Management (ALM)
• coordinate administration of insurer’s obligations to customers so as to manage risks
and still earn an adequate return to ensure assets exceeds liabilities/obligations
• ERM
• Risk control
• Strategic risk management
• Catastrophic risk management
• Risk management culture
Chapter 4: The Time Value of Money

 Define the time value of money

 Describe the difference between simple interest and compound interest and be able to calculate
interest earnings using each type of interest
 Distinguish between a nominal and an effective interest rate
 Explain the Rule of 72 and how it is used
 Perform future value calculations and describe insurer applications of future value
 Differentiate between an ordinary annuity and an annuity due and provide examples of each
 Perform present value calculations and describe insurer applications of present value
 Explain the rules that govern future values and present values
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations
Chapter 5: Product Design and Development

 Describe the four primary positions in an insurer’s product mix

 Give examples of the structural and functional characteristics that distinguish financial products
from other goods and services
 Distinguish between intensive growth strategies and diversified growth strategies
 Describe the primary types of new products and give examples of each type
 Describe the major components of a comprehensive business analysis
 Describe the important components of a product’s financial design, such as the cost of benefits,
operating expenses, and investment earnings
 Explain the use of trend analysis and modeling in product design and development
 Give examples of adverse and favorable deviations identified during product evaluation
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations
Chapter 6: Achieving Operational Efficiency

 Describe insurance company expenses, including investment expenses, expenses for contractual
benefits, and operating expenses
 Distinguish between controllable and noncontrollable expenses, direct and indirect expenses, and
fixed and variable expenses
 Describe how insurance companies use rightsizing, outsourcing, information technology, and
remote work arrangements to eliminate or reduce general operating expenses
 Explain how insurers manage commission expenses for life insurance and annuity products
 Describe how insurers can use benchmarking, total quality management (TQM), Six Sigma, lean
management, and business process reengineering (BPR) to improve operating efficiency
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations
Chapter 7: Managing Information

 Describe the primary components of information technology

 Explain how insurers use information technology to improve business processes and manage
information
 Explain how insurers use information technology to manage relationships with customers
 Describe the kinds of data security risks insurers face and give examples of the technologies they
can use to manage those risks
 Give examples of the types of data analytics insurers use to model and measure performance
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations
Chapter 8: Analyzing Statistical Data

 Define descriptive statistics and describe the benefits they provide

 Calculate the three primary measures of central tendency—mean, median, and mode—and
describe the strengths and limitations of each measure
 Calculate the three primary measures of dispersion—range, variance, and standard deviation—
and explain their importance
 Distinguish between normal and non-normal distributions and identify insurance situations in
which they apply
 Describe the three primary forms of probability sampling and identify the strengths and
limitations of each form
 Demonstrate how the law of large numbers affects the accuracy of conclusions drawn from
sample data
 Describe situations in which nonprobability sampling is, and is not, appropriate for insurers
 Identify some of the actions insurers can take to reduce various forms of sampling bias
 Describe how sample values differ from population values and explain how insurers can improve
the statistical validity and accuracy of sample results
 Explain how identifying trends in population data can help insurance companies make decisions
about products and markets
 Describe the three forms of financial modeling estimates
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations
Chapter 9: Presenting Data Visually

 Explain the primary benefits of using tables to present data and describe the different ways to
organize tables
 Describe the three primary types of charts insurance companies use to display data and the
benefits these charts offer
 Demonstrate an understanding of how insurers can use flowcharts, Gantt charts, and PERT
networks to manage projects
 Describe how insurance companies can use dashboards and balanced scorecards to manage
business performance
 Identify some characteristics of effective data presentation
 Give examples of situations in which tables, charts, and graphs can present deceptive information
and identify ways to avoid these problems
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations
Chapter 10: Financial Reports and Plans

 Recognize essential information contained in the income statement and the balance sheet and
explain how these financial statements relate to one another
 Describe the purpose of a cash flow statement and a statement of owners’ equity
 Explain the purpose, content, and intended audience of the annual report and the Annual
Statement
 Describe what a ratio is and explain the role ratios play in analyzing an insurance company’s
performance
 Describe and calculate the types of financial ratios that insurers use and be able to interpret what
the numbers mean
 Describe the ratio-based systems used by regulators and rating agencies to monitor and evaluate
insurance company solvency and profitability problems
 Describe the benefits and disadvantages of budgeting
 Distinguish among various approaches to budgeting and give examples of budgets that insurers
use
• Legal: matters regarding contracts and disputes
• Demutualization: mutual to stock; Mutualization: stock to mutual
• Compliance: operations follow policies, procedures, laws and regulations