Financial Modeling & Forecasting 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 Modeling & Forecasting flashcards as text
When building a GAP reserve model, IBNR (Incurred But Not Reported) reserves are necessary primarily because:
Answer: Total loss events may occur before the claim is formally filed with the administrator
IBNR reserves account for the time lag between a total loss event and when the administrator receives and records the resulting GAP claim.
In a GAP financial forecast, 'earned premium' differs from 'written premium' because:
Answer: Earned premium recognizes revenue pro-rata over the contract term as risk is assumed
Earned premium is recognized over the coverage period as risk is absorbed, while written premium is recorded at policy inception regardless of remaining term.
A GAP program's combined ratio is 108%. What does this indicate about the program's underwriting profitability?
Answer: The program is underwriting at a loss—claims and expenses exceed earned premium
A combined ratio above 100% means that losses plus expenses exceed earned premium, indicating an underwriting loss before investment income.
Which forecasting method is most appropriate when a GAP administrator has only 18 months of historical claims data?
Answer: Bornhuetter-Ferguson method
The Bornhuetter-Ferguson method blends a priori loss estimates with emerging experience, making it more reliable than chain-ladder when historical data is limited.
In a GAP model, which scenario best illustrates adverse selection risk in the insured portfolio?
Answer: Dealers preferentially enrolling high-LTV, subprime borrowers in GAP programs
Adverse selection occurs when the highest-risk borrowers (high-LTV, subprime) are disproportionately enrolled, causing actual claims to exceed modeled expectations.
A GAP pricing actuary increases the model's assumed annual vehicle depreciation rate from 15% to 20% in Year 1. All else equal, what happens to the projected break-even premium?
Answer: It increases, because faster depreciation widens the gap and raises expected claim severity
Faster depreciation increases the spread between outstanding loan balance and ACV, raising projected claim severity and thus the break-even premium needed.
What is the primary purpose of a 'waterfall' cash flow model in a GAP reinsurance structure?
Answer: To allocate premium, losses, and expenses in priority order among layers of reinsurers
A waterfall model shows how cash flows through reinsurance layers in priority order, ensuring each layer is funded before excess flows to the next.