TRIP Financial Analysis & Planning 2 — Questions and Answers
Question 1: A trucking company's combined ratio is 108%. What does this indicate about its underwriting performance?
- The company is profitable on underwriting
- The company is losing money on underwriting operations (Correct answer)
- The company has a surplus of 8% in reserves
- The combined ratio is within the acceptable range for transportation
Correct answer: The company is losing money on underwriting operations
A combined ratio above 100% means the insurer pays out more in losses and expenses than it collects in premiums, indicating an underwriting loss.
Question 2: Which financial metric best measures how efficiently a transportation company converts revenue into net profit?
- Current ratio
- Debt-to-equity ratio
- Net profit margin (Correct answer)
- Quick ratio
Correct answer: Net profit margin
Net profit margin (net income divided by revenue) directly measures how much profit is generated per dollar of revenue.
Question 3: In transportation risk management, a 'captive insurance company' is primarily used to:
- Purchase reinsurance from commercial markets
- Self-fund retained risks through a company-owned insurer (Correct answer)
- Eliminate all exposure to third-party liability claims
- Reduce regulatory compliance requirements
Correct answer: Self-fund retained risks through a company-owned insurer
A captive insurer is a subsidiary created by a parent company to underwrite its own risks, allowing it to retain premiums and manage exposures internally.
Question 4: What is the primary purpose of an actuarial loss development triangle in transportation insurance?
- To project how reported losses will grow to their ultimate settled values (Correct answer)
- To calculate the current replacement value of the fleet
- To measure driver safety performance over time
- To determine premium adequacy for new business
Correct answer: To project how reported losses will grow to their ultimate settled values
Loss development triangles track how incurred losses change over successive evaluation periods, allowing actuaries to project ultimate loss amounts.
Question 5: A motor carrier with $5M in assets and $3.5M in liabilities has a leverage ratio of:
- 0.7:1 (Correct answer)
- 1.43:1
- 2.33:1
- 0.43:1
Correct answer: 0.7:1
The debt-to-asset ratio is $3.5M / $5M = 0.70, meaning liabilities represent 70% of total assets.
Question 6: Which budgeting approach requires transportation managers to justify all expenditures from zero each period rather than using the prior year as a baseline?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Rolling forecast budgeting
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a 'zero base' each period, requiring justification for every expense rather than adjusting prior-year figures.
Question 7: When evaluating a transportation company's liquidity, which ratio would MOST concern a risk manager if it fell below 1.0?
- Return on equity
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Operating ratio
Correct answer: Current ratio
A current ratio below 1.0 means current liabilities exceed current assets, indicating the company may not meet short-term obligations.
TRIP Financial Analysis & Planning 2
A trucking company's combined ratio is 108%.
What does this indicate about its underwriting performance?