Financial Analysis & Reporting Flashcards
7 cards from real GAP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Analysis & Reporting flashcards as text
A GAP program's expense ratio is 35% and its loss ratio is 58%. What is its combined ratio, and what does it imply?
Answer: 93%, indicating a modest underwriting profit
Combined ratio = loss ratio + expense ratio = 58% + 35% = 93%; a result below 100% indicates an underwriting profit of 7 points.
Which method for calculating GAP refunds results in lower refund amounts to the consumer compared to a pro-rata calculation?
Answer: Rule of 78s (sum-of-the-digits)
The Rule of 78s front-loads premium recognition, resulting in less unearned premium remaining at any given cancellation point compared to pro-rata calculation.
A finance company reviewing its GAP portfolio uses 'severity' as a key metric. In this context, severity refers to:
Answer: The average dollar amount paid per GAP claim
Loss severity is the average dollar cost per claim, calculated as total claims paid divided by the number of claims, distinct from frequency which measures how often claims occur.
In a GAP program's financial analysis, what does a high 'persistency rate' indicate?
Answer: A high percentage of policies remaining in force without early cancellation
Persistency rate measures the proportion of GAP contracts that remain active rather than being cancelled early, with higher rates indicating healthier program economics.
Which financial disclosure is required in a GAP administrator's annual report under most state regulations?
Answer: Reserve adequacy certification by a qualified actuary
Most state insurance regulators require a reserve adequacy certification signed by a qualified actuary, confirming that loss and unearned premium reserves are sufficient.
A GAP book of business reports a 'written-to-earned' premium lag. What causes this lag?
Answer: The time between policy inception and ratable premium recognition over the coverage period
The written-to-earned lag occurs because premiums are fully recorded as 'written' at inception but are only 'earned' ratably as the coverage period elapses.
When benchmarking a GAP program's financial performance, which external data source is most relevant for loss cost calibration?
Answer: NADA or Black Book total-loss settlement trends and vehicle depreciation curves
NADA and Black Book publish vehicle valuation and depreciation data that directly inform GAP loss cost projections by showing how much ACV diverges from outstanding loan balances over time.