Financial Modeling & Forecasting Flashcards

A GAP model uses a 'prospective' rating approach rather than a 'retrospective' approach. The key distinction is:

Answer: Prospective pricing is based on future expected losses; retrospective pricing adjusts premium after the policy period based on actual experience

Prospective rating sets premium upfront based on projected future losses, while retrospective rating adjusts the final premium after the period ends based on what actually occurred.

Which financial statement line item is most directly affected when a GAP program increases its reinsurance cession from 50% to 75%?

Answer: Net written premium

Net written premium = gross written premium minus ceded reinsurance premium, so increasing the cession rate directly reduces net written premium.

A GAP financial model incorporates a 'policyholder surplus' concept. In the context of a GAP obligor (insurer), policyholder surplus is best defined as:

Answer: Total admitted assets minus total liabilities, representing the insurer's net worth and claims-paying cushion

Policyholder surplus is the insurer's net worth (assets minus liabilities) and serves as a buffer to pay claims beyond what reserves cover.

When projecting GAP claim counts using an exposure-based model, 'earned car years' represents:

Answer: The time-weighted count of GAP policies in force during the period, measured in car-years of coverage

Earned car years measure the actual coverage exposure by weighting each policy by the fraction of the year it was active, providing the denominator for claim frequency calculation.

A GAP pricing model includes an 'expense loading' of 35%. This loading primarily covers:

Answer: Administrative costs, dealer commissions, marketing, and overhead allocated to each policy

Expense loading adds the non-loss costs—commissions, administration, marketing, and overhead—on top of the pure loss cost to arrive at the final premium.

In a multi-year GAP financial forecast, which factor most justifiably causes projected claim frequency to decline in later years of a loan cohort?

Answer: Loan balance running off faster than vehicle depreciation, reducing the period of negative equity

As loan balances are paid down, the probability that a balance exceeds ACV diminishes, so GAP exposure and claim frequency naturally decline in later loan cohort years.

A GAP administrator compares its 'actual versus expected' (A/E) loss ratio for Q2. An A/E ratio of 1.22 most likely indicates:

Answer: Actual claims were 22% higher than modeled, suggesting the pricing or reserving assumptions need revision

An A/E ratio above 1.0 means actual losses exceeded expected losses; a ratio of 1.22 signals the model is under-projecting losses and assumptions should be reviewed.