CFE Statutory Accounting Principles & Insurance Financial Statements 2 — Questions and Answers
Question 1: What is an 'unearned premium reserve' in insurance statutory accounting?
- A reserve for premiums that policyholders have failed to pay on time
- The portion of collected premiums applicable to the unexpired portion of a policy (Correct answer)
- Premiums held in escrow pending resolution of disputed claims
- The reserve for expected future premium income not yet billed
Correct answer: The portion of collected premiums applicable to the unexpired portion of a policy
The unearned premium reserve represents premiums already collected but attributable to future coverage periods—if a policy is cancelled, this portion would be refunded to the policyholder.
Question 2: What does 'Schedule D' of the NAIC Annual Statement report?
- Direct premiums written by state and line of business
- Reinsurance ceded and assumed transactions by counterparty
- Investment holdings including bonds and stocks (Correct answer)
- Claims experience by line of business and accident year
Correct answer: Investment holdings including bonds and stocks
Schedule D of the NAIC Annual Statement reports the insurer's investment portfolio, including bonds (Part 1) and common and preferred stocks (Part 2), detailing each holding.
Question 3: What does the 'combined ratio' measure in property-casualty insurance?
- The ratio of admitted assets to nonadmitted assets on the balance sheet
- The ratio of policyholder surplus to total liabilities
- The ratio of reinsurance ceded to direct premiums written
- The sum of the loss ratio and the expense ratio (Correct answer)
Correct answer: The sum of the loss ratio and the expense ratio
The combined ratio is the sum of the loss ratio (losses incurred/premiums earned) and expense ratio (expenses/premiums written); a ratio below 100% indicates underwriting profitability.
Question 4: What is 'loss development' in the context of insurance reserving?
- The process of marketing new insurance products to expand loss coverage
- The change in estimated ultimate claim costs as more information emerges over time (Correct answer)
- The increase in premium rates due to deteriorating loss experience
- The development of new actuarial models for loss pricing
Correct answer: The change in estimated ultimate claim costs as more information emerges over time
Loss development refers to how initial claim estimates change (typically increase) as claims mature and more information about their ultimate cost becomes available to the insurer.
Question 5: What is 'reinsurance ceded' from the perspective of a primary insurer?
- Reinsurance coverage received from another company to protect the primary insurer
- Insurance written directly to the policyholder without reinsurance support
- Risk transferred to a reinsurer in exchange for a reinsurance premium (Correct answer)
- The maximum loss the primary insurer retains on any single occurrence
Correct answer: Risk transferred to a reinsurer in exchange for a reinsurance premium
'Reinsurance ceded' represents the portion of risk that a primary (ceding) insurer transfers to a reinsurer, reducing its net exposure in exchange for paying a reinsurance premium.
Question 6: What are IRIS (Insurance Regulatory Information System) ratios?
- Financial ratios used by insurance companies internally to price their products
- A set of financial ratios used by regulators to identify insurers that may warrant further examination (Correct answer)
- Ratios that determine the maximum premiums an insurer can charge by line
- Investment return ratios required to be disclosed to policyholders annually
Correct answer: A set of financial ratios used by regulators to identify insurers that may warrant further examination
IRIS ratios are a set of financial ratios developed by the NAIC that regulators use to screen insurance companies and prioritize those needing further regulatory attention or examination.
Question 7: Under SAP, how is a 'surplus note' issued by an insurance company classified on the statutory balance sheet?
- As long-term debt, identical to a bond issuance
- As a contingent liability pending regulatory approval of repayment
- As equity (surplus) rather than debt, with regulatory approval (Correct answer)
- Excluded from both assets and liabilities as an off-balance-sheet item
Correct answer: As equity (surplus) rather than debt, with regulatory approval
Surplus notes are classified as surplus (equity) under SAP with regulatory approval, because repayment of both principal and interest requires prior approval from the state insurance regulator.
CFE Statutory Accounting Principles & Insurance Financial Statements 2
What is an 'unearned premium reserve' in insurance statutory accounting?