TRIP Financial Analysis & Planning 3 — Questions and Answers
Question 1: A transportation company's loss ratio is 72% and its expense ratio is 31%. Its combined ratio is:
- 103% (Correct answer)
- 41%
- 72%
- 231%
Correct answer: 103%
The combined ratio equals the loss ratio plus the expense ratio: 72% + 31% = 103%.
Question 2: In transportation financial planning, 'working capital' is defined as:
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Long-term debt minus equity
- Operating income minus interest expense
Correct answer: Current assets minus current liabilities
Working capital equals current assets minus current liabilities and measures a company's short-term financial health and operational liquidity.
Question 3: Which risk financing technique transfers risk to a third party while allowing the insured to retain a portion of the loss through a deductible?
- Pure self-insurance
- High-deductible insurance policy (Correct answer)
- Risk retention group membership
- Finite risk insurance
Correct answer: High-deductible insurance policy
High-deductible policies transfer catastrophic risk to the insurer while the insured self-funds losses up to the deductible amount.
Question 4: A fleet manager is evaluating whether to lease or purchase vehicles. Which financial concept determines the true cost of each option over time?
- Gross margin analysis
- Net present value analysis (Correct answer)
- Break-even analysis
- Contribution margin analysis
Correct answer: Net present value analysis
NPV analysis discounts all future cash flows for each option to their present value, enabling a true apples-to-apples financial comparison.
Question 5: Under GAAP accounting, transportation companies must recognize a loss reserve when a liability is:
- Possible and the amount can be estimated
- Probable and the amount can be reasonably estimated (Correct answer)
- Certain and the exact amount is known
- Remote but potentially significant
Correct answer: Probable and the amount can be reasonably estimated
GAAP (ASC 450) requires loss accrual when a liability is probable of occurring and the amount can be reasonably estimated.
Question 6: A risk manager negotiates a retrospective rating plan where the minimum premium is $80,000 and the maximum is $200,000. If actual losses are $10,000, the company pays:
- $10,000 plus basic premium only
- $80,000 (the minimum premium) (Correct answer)
- $200,000 (the maximum premium)
- $10,000 adjusted for the loss conversion factor
Correct answer: $80,000 (the minimum premium)
In retrospective rating, the minimum premium is the floor the insured pays regardless of how low actual losses are.
Question 7: Which financial statement would a risk manager review to understand a transportation company's cash generation from its core operations?
- Balance sheet
- Income statement
- Statement of cash flows — operating activities (Correct answer)
- Statement of retained earnings
Correct answer: Statement of cash flows — operating activities
The operating activities section of the cash flow statement shows cash generated or consumed by core business operations, separate from investing and financing.
TRIP Financial Analysis & Planning 3
A transportation company's loss ratio is 72% and its expense ratio is 31%.
Its combined ratio is: