ACE Financial Analysis & Valuation 3 — Questions and Answers
Question 1: Which ACORD form element is critical when capturing data needed to calculate the earned premium for a mid-term policy change?
- Policy inception date only
- Effective date of the endorsement and pro-rata factors (Correct answer)
- Annual premium amount and loss history
- Agent commission schedule
Correct answer: Effective date of the endorsement and pro-rata factors
To calculate earned premium for a mid-term change, you need the endorsement effective date and the applicable pro-rata or short-rate factor.
Question 2: What does adverse loss development indicate in the context of insurance financial analysis?
- Claims are being settled faster than expected
- Original loss reserves were understated, requiring upward revision (Correct answer)
- The insurer's combined ratio has improved over time
- Investment returns are offsetting underwriting losses
Correct answer: Original loss reserves were understated, requiring upward revision
Adverse loss development occurs when actual claims exceed original reserve estimates, forcing the insurer to increase reserves and recognize additional losses.
Question 3: A reinsurance treaty with a 70% quota share arrangement means:
- The reinsurer pays 70% of losses exceeding the retention limit
- The reinsurer assumes 70% of premiums and losses on covered policies (Correct answer)
- The cedent retains 70% of all risks written
- The reinsurer provides capacity for 70% more than the cedent's surplus
Correct answer: The reinsurer assumes 70% of premiums and losses on covered policies
In a quota share treaty, the reinsurer takes a fixed percentage (70%) of both premiums and losses on the covered business.
Question 4: Which financial metric best measures an insurer's investment portfolio efficiency?
- Net investment yield (investment income / average invested assets) (Correct answer)
- Gross premium written to surplus ratio
- Operating cash flow to net income ratio
- Loss ratio trend factor
Correct answer: Net investment yield (investment income / average invested assets)
Net investment yield measures how effectively an insurer generates income from its invested assets relative to the portfolio's total value.
Question 5: When performing a price-to-book (P/B) valuation for a property & casualty insurer, what book value adjustment is typically needed?
- Add back deferred acquisition costs
- Mark loss reserves to fair value and adjust for reserve adequacy (Correct answer)
- Exclude reinsurance recoverables from the calculation
- Add goodwill from prior acquisitions to surplus
Correct answer: Mark loss reserves to fair value and adjust for reserve adequacy
P/B valuations for P&C insurers require adjusting stated book value for the difference between carried reserves and actuarially estimated reserve adequacy.
Question 6: In insurance financial analysis, what does the 'two-year operating ratio' combine?
- Loss ratio and expense ratio from two consecutive years
- Combined ratio and net investment income ratio (Correct answer)
- Underwriting profit and investment income as a percentage of premiums
- Policyholder surplus growth over two calendar years
Correct answer: Combined ratio and net investment income ratio
The two-year operating ratio combines the combined ratio with the net investment income ratio to reflect overall profitability including investment results.
Question 7: Which component of the ACORD framework supports standardized data exchange required for automated financial statement generation?
- ACORD AL3 transaction standards
- ACORD XML data standards (Correct answer)
- ACORD SEMCI initiative
- ACORD RIMS protocol
Correct answer: ACORD XML data standards
ACORD XML data standards provide structured, machine-readable data formats that enable automated processing and financial statement generation across systems.
ACE Financial Analysis & Valuation 3
Which ACORD form element is critical when capturing data needed to calculate the earned premium for a mid-term policy change?