CAS Financial Analysis and Reporting 4

Question 1

What is the 'risk-based capital' (RBC) ratio and what does it measure?

Accepted Answer

A regulatory solvency measure comparing actual capital to the minimum capital required given an insurer's risk profile

Answer

The ratio of written premiums to invested assets

Answer

The percentage of assets held in risk-free government bonds

Answer

The ratio of IBNR reserves to total loss reserves

Question 2

Under statutory accounting, which assets are classified as 'non-admitted' and excluded from the balance sheet?

Accepted Answer

Assets such as furniture, goodwill, and certain deferred tax assets that lack ready liquidation value

Answer

U.S. Treasury bonds and agency securities

Answer

Reinsurance recoverables from licensed reinsurers

Answer

Cash and short-term investment equivalents

Question 3

What is an 'incurred but not reported' (IBNR) reserve and why is it required?

Accepted Answer

A reserve for losses that have occurred but have not yet been reported to the insurer

Answer

A reserve for known claims where the amount is uncertain

Answer

A reserve for future premium refunds on profitable policies

Answer

A reserve held by the reinsurer for ceded claims

Question 4

Which of the following best describes 'ceded reinsurance' on an insurer's financial statements?

Accepted Answer

Premiums paid and losses recovered from reinsurers for risk transferred to them

Answer

Premiums received from policyholders for business assumed from other insurers

Answer

Investment income earned on reserves ceded to reinsurers

Answer

The net retention of risk after pooling arrangements

Question 5

An insurer's balance sheet shows reinsurance recoverables as an asset. What credit risk does this create?

Accepted Answer

The risk that the reinsurer becomes insolvent and cannot pay amounts owed to the cedant

Answer

No risk, because reinsurance is fully guaranteed by state guaranty funds

Answer

The risk that the cedant overestimates losses and reinsurers demand premium refunds

Answer

The risk of regulatory disallowance of the reinsurance treaty

Question 6

What distinguishes 'written premium' from 'earned premium' in a given accounting period?

Accepted Answer

Written premium is the total premium on policies incepted during the period; earned premium is the portion applicable to expired coverage

Answer

Written premium is earned; earned premium is unearned

Answer

Written premium excludes endorsements; earned premium includes them

Answer

They are identical for annual policies incepting on January 1

Question 7

In a 'retrospective rating' plan, how does the final premium adjustment affect financial reporting?

Accepted Answer

Additional or return premiums are accrued as liabilities or assets based on loss experience, affecting both income and balance sheet

Answer

Final premiums are fixed at inception and require no adjustment

Answer

Retro adjustments are recorded only in the year the plan expires

Answer

Retro premiums are excluded from statutory financial statements