Question of the Week

Which of the following statements is(are) true with respect to the factors that a manager must take into account when managing the portfolios of casualty insurance companies?

I. The amount of new underwriting business that may be undertaken is solely dependent upon the firm's capital, and is irrespective of the firm's investment income.
II. The degree of inflation protection may be reduced with the firm's ability to raise premiums.
III. Long term asset appreciation is of greater importance than short-term liquidity.
IV. Income from underwriting activities are fully taxable.

a) I, II, and III only
b) III only
c) II and IV only
d) I and III only


The correct answer is: c)

(I) is incorrect because while he amount of new underwriting business that may be undertaken is dependent upon the firm's capital, any investment income will only add to that capital. Thus, the greater the investment income, the higher will be the firm's capital, and therefore its ability to underwrite more insurance.
(II) is true because raising premiums has the same effect as earning an inflation premium from the investments.
(III) is incorrect because casualty insurers have unpredictable cash flow streams, thus liquidity is extremely important.

Professionals FAQs
  1. Where can I look for a financial planner?

    References from trusted friends or family members can help you find a financial planner; however, keep in mind that your friends' financial situations and goals may differ from yours and, therefore, their planners won't necessarily be the best fit for you.The Certified Financial Planner (CFP) Board of Standards certifies financial planners and maintains an online list of certified financial planners on its CFP Board of Standards website.
  2. If I am looking to get an Investment Banking job. What education do employers prefer? MBA or CFA?

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The caveat here is that the MBA would most probably need to be from a Top-20 B-School.The Chartered Financial Analyst (CFA) is well worth considering if you (a) are aiming for an entry-level position in investment banking, and/or (b) cannot afford to shell out six figures for an MBA or have to settle for a lesser-known B-school.That's because in the investment banking field, most entry-level positions are at the analyst level.
  3. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't count on it. The CFA Institute has long emphasized that ethics is a particular area of focus for it. The seriousness with which the CFA Institute views ethics is evident from the fact that for exam candidates with borderline total scores, performance on the ethics section can mean the difference between passing and failing the exam.
  4. Under the USA, registration as an IAR includes all of the following EXCEPT:

    Under the USA, registration as an IAR includes all of the following EXCEPT: A. Minimum net capitalB. Passing a qualification examC. Filing a consent to service of processD. Posting a surety bond The correct answer is "A", since only an IA would need to prove minimum net capital requirements.