CAS Financial Analysis and Reporting 2 — Questions and Answers
Question 1: Under GAAP, which method must property-casualty insurers use to recognize premium revenue?
- Recognize all premium at policy inception
- Earn premium ratably over the policy period (Correct answer)
- Recognize premium only upon claims payment
- Defer all premium until policy expiration
Correct answer: Earn premium ratably over the policy period
GAAP requires P&C insurers to earn premium ratably over the exposure period of the policy.
Question 2: What is the primary purpose of the Schedule P in the NAIC Annual Statement?
- Report investment income by asset class
- Display loss and loss adjustment expense development triangles (Correct answer)
- Summarize reinsurance ceded transactions
- Show premium written by state jurisdiction
Correct answer: Display loss and loss adjustment expense development triangles
Schedule P presents paid and incurred loss development triangles used to evaluate reserve adequacy over time.
Question 3: An insurer's combined ratio is 108%. What does this indicate?
- The insurer is profitable before investment income
- Underwriting operations are generating a loss (Correct answer)
- Investment returns exceed underwriting losses
- The insurer's surplus is growing
Correct answer: Underwriting operations are generating a loss
A combined ratio above 100% means underwriting expenses and losses exceed earned premiums, indicating an underwriting loss.
Question 4: Which statutory accounting principle (SAP) differs most significantly from GAAP regarding policy acquisition costs?
- SAP requires amortization of acquisition costs over the policy term
- SAP expenses acquisition costs immediately, while GAAP defers and amortizes them (Correct answer)
- SAP and GAAP treat acquisition costs identically
- SAP capitalizes acquisition costs as intangible assets
Correct answer: SAP expenses acquisition costs immediately, while GAAP defers and amortizes them
Under SAP, policy acquisition costs are expensed immediately (conservatism), whereas GAAP defers them as DAC and amortizes over the policy period.
Question 5: In the NAIC Annual Statement, what does 'surplus as regards policyholders' represent?
- Total liabilities minus total admitted assets
- The excess of admitted assets over liabilities, equivalent to statutory net worth (Correct answer)
- Unearned premium reserve plus loss reserves
- Net premiums written in the calendar year
Correct answer: The excess of admitted assets over liabilities, equivalent to statutory net worth
Surplus as regards policyholders is the statutory equivalent of equity, calculated as admitted assets minus total liabilities.
Question 6: Which ratio measures how efficiently an insurer uses its surplus to write business?
- Loss ratio
- Expense ratio
- Premium-to-surplus ratio (Correct answer)
- Operating ratio
Correct answer: Premium-to-surplus ratio
The net premiums written-to-surplus ratio (leverage ratio) measures how much business is written relative to the capital base.
Question 7: What is the effect of adverse loss development on an insurer's statutory surplus?
- Surplus increases as reserves are strengthened
- Surplus decreases because additional reserve additions reduce net income (Correct answer)
- Surplus is unaffected until claims are paid
- Surplus increases due to the tax benefit of higher reserves
Correct answer: Surplus decreases because additional reserve additions reduce net income
When reserves are strengthened due to adverse development, the increase in liabilities reduces net income and therefore reduces surplus.
CAS Financial Analysis and Reporting 2
Under GAAP, which method must property-casualty insurers use to recognize premium revenue?