ACE Financial Analysis & Valuation 2

Question 1

An insurance company's combined ratio is 108%. What does this indicate about its underwriting performance?

Accepted Answer

The company is losing money on underwriting operations

Answer

A combined ratio above 100% means the insurer is paying out more in losses and expenses than it collects in premiums, indicating an underwriting loss.

Question 2

Which financial statement component best reflects an insurer's ability to meet short-term policyholder obligations?

Accepted Answer

Liquid assets on the balance sheet

Answer

Liquid assets (cash and short-term investments) on the balance sheet indicate an insurer's immediate capacity to pay short-term obligations.

Question 3

In the context of ACORD data standards, which metric is used to assess the adequacy of an insurer's loss reserves relative to its earned premiums?

Accepted Answer

Reserve development ratio

Answer

The reserve development ratio tracks how original reserve estimates change over time, indicating whether initial reserves were adequate.

Question 4

What does the term 'policyholder surplus' represent on an insurance company's balance sheet?

Accepted Answer

The excess of assets over liabilities, representing net worth

Answer

Policyholder surplus is the difference between an insurer's total admitted assets and total liabilities, representing the company's net worth.

Question 5

Which valuation approach would be MOST appropriate when assessing a specialty insurance line with limited market comparables?

Accepted Answer

Income-based discounted cash flow approach

Answer

When market comparables are scarce, a discounted cash flow (DCF) approach is preferred as it values the business based on projected future earnings.

(ACE) ACORD Certified Expert Practice Test

(ACE) ACORD Certified Expert Practice Test

ACE Financial Analysis & Valuation 2