Washington Life Producer Practice Exam

What term describes an insurer's ability to make unpredictable payouts to policyowners?

1. Assets

2. Liquidity

3. Capital

4. Solvency

The correct answer is: Liquidity

The correct term that describes an insurer's ability to make unpredictable payouts to policyowners is liquidity. Liquidity refers to how easily an insurer can access cash or cash-equivalents to meet its short-term obligations, such as paying claims. It is essential for an insurance company to maintain sufficient liquidity to ensure that it can fulfill its promises to policyholders, especially during times of high claim activity. In the context of insurance, liquidity is particularly crucial because the timing and amount of claims can be unpredictable. An insurer needs to be prepared to pay these claims promptly and efficiently, which requires having readily available funds. Other terms, while related to an insurer's financial health, do not specifically address the immediate capacity to handle claim payouts. Assets refer to everything the insurer owns that has value. Capital generally pertains to the financial resources available to the insurer and is a broader concept that includes retained earnings and other resources for growth and stability. Solvency refers to the insurer's ability to meet all its long-term financial obligations, which is a different aspect of financial health that doesn't focus solely on immediate cash availability or the unpredictable nature of claim payouts.