Term
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Definition
| 1. A quantitative procedure that measures credit worthiness |
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Term
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Definition
| 2. The process of evaluating the credit information about an individual or organization. |
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Term
| 3. Account current billing |
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Definition
| 3. A billing plan under which the producer pays the insurer the premiums due according to a billing statement prepared by the producer |
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Definition
| 4. A billing plan under which the insurer sends the producer a statement of the policies that have been issued and the producer pays the insurer according to that statement |
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| 5. A billing plan under which the producer accounts to the insurer for each policy individually |
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| 6. A billing plan under which theinsurer assumes all responsibility for billing the policyholder and collecting the premiums due. |
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Definition
| 7. In the context of cash management, the dollar value of the time interval between when a payment is made and when the recipient has use of those funds |
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Definition
| 8. The delay between when a company receives a check and when it is cleared at the bank |
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| 9. The delay between getting a check recorded on the company's accounting records and depositing the check in the bank. |
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Definition
| 10. The delay betwen when a check is deposited and whit it has cleared. |
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| 11. The decrease in book cash without an immediate change in bank cash that occurs when a company issues a check. |
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Definition
| 12. The delay from the time a check is placed in the mail until it is received by the payee. |
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| 13. The amount of funds in an account that can earn interest, compensate for bank services, or be withdrawn. |
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Definition
| 14. The difference between the cash amount on the accounting records and the cash available at the bank |
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Term
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Definition
| 15. A service that provides for the collection and immediate deposit of accounts receivable. |
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Definition
| 16. An electronic transfer of funds directly from the payer bank to the payee bank. |
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Term
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Definition
| 17. A check that a company writes on a customer's behalf that is drawn on the customer's checking account to pay amounts due the company |
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Term
| 18. Automated Clearinghouse (ACH) |
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Definition
| 18. An electronic payment network used by individuals and businesses. |
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Term
| 19. Concentration account |
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Definition
| 19. A central account into which funds collected from all sources are transferred. |
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Term
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Definition
| 20. A special disbursement account that has a zero dollar balance but against which checks may be written |
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Term
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Definition
| 21. A payment instrument that is payable by the issuer rather than by a bank |
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Term
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Definition
| 22. The average amount of funds that must be retained in a bank account as indirect payment of bank service fees. |
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Term
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Definition
| 23. An amount that can be offset against bank fees and that is calculated by using an earnings credit rate (ECR) based on the level of deposit funds in a business checking account. |
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Term
| 1. Explain the objective of working capital management |
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Definition
| 1. The objective of working capital management is to ensure that a co has the resources needed to meet is day to day operational requirements and to take advantage of business opportunities that arise. |
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| 2. List the types of assets that are considered current for the purposes of assessing working capital. |
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Definition
2. Assets that are considered current for the purposes of assessing working capital include the following:
A. cash
B. Marketable Securities
C. Accounts Receivable. |
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Term
| 3. Describe typical working capital decisions a financial mgr makes when managing current assets. |
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Definition
3. a financial mgr typically makes the following types of decisions when managing current assets:
A. Whether the co should sell on credit
B. Credit terms that will be offered
C. To whom credit will be extended. |
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Term
| 4. Describe the purpose of a credit policy and why its implementation is important for insurers |
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Definition
| 4. A credit policy consists of guidelines for determining when credit is to be extended and types of installment plans that will be offered. Insurers implement a credit policy to minimize the incidence of noncollection of premiums. |
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Term
5. Describe how the following tools are used in applying a credit policy:
a. credit scoring
b. credit analysis. |
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Definition
5. The following tools are used in applying a credit policy:
A. Credit Scoring: Values or weights are assigned to certain credit-related characteristics that, years in current job, home ownership, pmt history, income, and assets.
B. Credit analysis: The process of evaluating credit info about an individual or oganization in order ot direct a credit decision. Credit analysis tools available to financial mgrs and udnerwriters include financial statements, business credit rating svcs, and consumer credit reporting agencies. |
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Term
| 6. Explain how a credit score is calculated using a simple credit-scoring model |
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Definition
6. A credit score is calculated in the following way using a simple credit-scoring model:
A. ascertain a score for each characteristing
B. Calculate a weighted score by multiplying the score and the weight for all characteristics
C. Total all weighted scores
D. Compare weighted total with the credit standard. |
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Term
| 7. Decribe the Z-score model and its application in credit scoring |
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Definition
| 7. The Z-score model is based on an equation that uses five different financial ratios calculated with info contained in income stmts and balance sheets. It is useful in predicting potential bankruptcy for industrial corporations. |
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Term
8. Describe how the following ocmmonly used credit analysis tools are useful to financial mgrs and underwriters when evaluating an individual or oganization.
A. Financial statements
B. Beusiness credit rating services
C. Consumer credit reporting agenc |
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Definition
8. Credit analysis tools that might be useful to financial mgrs and underwriters when evaluating an individual or organization include:
A. Financial Statements-Useful in identifying and assessing los exposures, providing data for financial and credit analysis, and providing data for credit scoring models.
B. Business Credit Rating Svcs: Designed to facilitate financial analysis and help those less skilled in financial analysis and help those less skilled in financial analysis to make credit decisions.
C. Consumer crdit reporting agencies: Useful for assessing applicants ability to pay premiums and for determining moral-hazard incentives. |
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Term
| 9. Id reasons an organization might decide to extend credit |
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Definition
| 9. An organization might decide to extend credit to increase sales and to generate additional income. |
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Term
| 10. List the five C's of credit, often used in the credit decision making process. |
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Definition
10. The five C's of credit are often used in the credit decision making process:
(!) character
(2) Capacity
(3) Conditions - General economic conditions
(4) Capital- Customers financial strength
(5) Collateral - Assets pledged by the customer against the debt |
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Term
11. Id the issues for consideration when making credit decisions regarding the following entities:
a. Policyholders
b. Agents and Brokers
c. Reinsurers |
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Definition
11. The following issues should be considered when making credit decisions regarding the following entities:
(A) Policyholders
1.Federal and state laws applicable to financing
2. opportunity to earn addl income through svc charges
3. effect on investment income
4. ability to protect against default in premium pmt
5. character and financial strength of the policyholder.
(B) Agents and Brokers:
1. Creditworthiness of the producer
2. ability of the producer to collect premiums in a timely manner
3. reilability of the producer to remit premiums to the insurer in a timely manner.
(C) Reinsurers:
1. Reinsurers current fiancial info
2. Reinsurers practices and experience with retrocession
3. Reinsurers general business reputation
4. Status of reinsurers authorization to transact reinsurance within the primary insurers state of domicile
5. need for and adequacy of collateral
6. reinsurer's financial ratings, state insurance dept examinations, loss reserves certifications |
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Term
| 12. Describe the three primary billing plans used by producers |
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Definition
12. Producers use the following three billing plans:
(1) Account current Billing: The producer pays the insurer the premiums due according to a billing stmt prpared by the producer. This plan offers producers the greatest flexability; however, it presents the highest risk to the insurer.
(2) Statement billing: Producer pays the insurer according to a stmt of policies issued that is sent by the insurer.
(3) Item billing - Producer accounts to the insurer for each policy individually. More expensive to administer but less risk from a credit decision perspective. |
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Term
| 13. Explain why regulators are concerned with reporting requirements regarding reinsurance recoverables. |
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Definition
| 13. Reugulators are concerned with reporting requirements regarding reinsurance recoverables because they represent a significant percentage of policyholders' surplus and could affect insurer solvency |
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Term
| 14. Id short term marketable securities that are considered cash equivilants for cash mgmt purposes |
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Definition
14. The following short-term marketable securities are considered cash equivilants in cash mgmt:
(a) certificates of deposit
(b) Commerical paper
(c) Repurchase agreements
(d) Treasury Bills |
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Term
| 15. Describe the activities involved in cash mgmt. |
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Definition
| 15. Cash management includes managing day to day cash inflows and outflows, forecasting, budgeting, and banking relations. |
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Term
| 16. Describe reasons for which co's hold some of their asets in the form of cash |
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Definition
16. Companies hold some of their assets in the form of cash for the following reasons:
(a) to meet transaction needs of day to day operations. The amt of cash needed varies based on the size of the transactions and the company's normal operating cycle.
(B) To meet precautionary needs, for which cash is required as a financial reserve in case current cash needs exceed the current cash balance.
(c) To meed speculative needs, for which mgmt determines the amt of cash the co must have to take advantage of investment and purchase opportunities. |
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Term
| 17. Contrast the cash operating cycles of noninsurers and insurers. |
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Definition
| 17. The cash operating cycle for a noninsuer typically begins with the initial investment of cash in the production of the co's products and ends with the receipt of cash in the sale of those products. The cash operating cycle for an insurer is in reverse; it begins when the insurer receives the premiums and ends when the insurer pays claims. |
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Term
18. Explain how the following activities help track and control the flow of funds through a company:
a. managing float
b. accelerating collections
c. controlling disbursements |
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Definition
18. The following activities help track and control the flow of funds through a co.
(a) managing float: companies attempt to shorten cash inflows and lengthen cash outflows to maximize the cash resources available
(b)Accelerating collections: co';s try to realize the best cash position on a daily basis by managing cash inflows
(c)Controlling disbursements: Co's minimize the amt of cash held for transaction needs by slowing down disbursements, which increases cash available for short-term investing. |
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Term
| 19. Id the components of availability and disbursement float. |
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Definition
| 19. The components of availability float are processing loat and clearing float. The components of disbursement float are mail float, processing float, and clearing float. |
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Term
| 20. Describe methods used to accelerate fund collections |
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Definition
20. The following methods are used to accelerate fund collections:
(a) Lockboxes: the collection and immediate deposit of accounts receivable increases the availability of funds through float reduction.
(b) wire transfers: Provide the fastest way to electronically send or receive funds on a same day basis, and eliminate availability float.
(c) Pre-authorized checks: checks are written on a customer's behalf and are drawn from the customer's checking acount.
(d) Automated clearinghouse (ACH) transactions: pre-authorized electronic debits to checking accounts that typically provide for next-day settlement. |
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Term
21. Explain how the following accounts provide a way of avoiding the possibility of overdrafts:
a. concentration account
b. zero balance account |
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Definition
21. The following accounts provide a way of avoiding the possibility of overdrafts:
(a) Concentration account: A central account into which funds collected from all sources are transferred
(b)Zero Balance Account: A disbursement account into which a transfer of funds from a concentration account is automatically made each day to cover all daily transactions. This eliminates the possibility of overdrafts as long as the conentration account is properly funded. |
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Term
| 22. List the criteria a financial mgr is likely to use in selecting a bank |
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Definition
| 22. A financial mgr is likely to use quality, service, and price as criteria in selcting a bank for cash mgmt purposes. |
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Term
| 23. Id the most important criteria a financial mgr considers when slecting a bank for cash mgmt svc. |
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Definition
23. The most important cash mgmt svc criteria a financial mgr considers in selecting a bank include the following:
(a)strong regional presence
(b) Willingness to customize svcs
(c) Expertise of cash mgmt specialists
(d) Responsiveness to customer needs
(e) Competitive Pricing
(f) History of freedom from operating errors
(g) Superior data processing technology
(h) Knowledge of the insurance business |
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Term
| 24. List possible pmt methods for bank svc activities. |
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Definition
24. Payment methods for bank service activities include the following:
(a) Granting earnings allowances on compensating balances
(b) Requiring a separate pmt for the fees
(c) Combination of the preceding two methods. |
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