Assignment 1 - Introductory Insurance Accounting

Question 1

In general, to be understandable, information contained in financial reports must be intelligible, clearly disclosed, and

Answer 1

Transparent.

Question 2

Because accounting information must allow for comparisons between time periods and among entities, it must be, above all else,

Answer 2

Consistent

Question 3

In many cases, a trade-off exists between relevance and

Answer 3

Reliability

Question 4

Which one of the following is a specific characteristic of relevant accounting information?

Answer 4

It is timely.

Question 5

Information that can be used for economic decision making without regard for how it may affect economic, political, or social behavior embodies the characteristic of reliability known as… ?

Answer 5

Neutrality.

Question 6

When uncertainty exists, a conflict can arise between reliability and

Answer 6

Lack of Bias.

Question 7

In the United States, tax accounting rules for insurers are based on:

Answer 7

Statutory Accounting Principles

Question 8

Accounting frameworks designed for a broad range of users may be referred to as:

Answer 8

Generally Accepted Accounting Principles

Question 9

Management accounting frameworks are usually based on modified versions of generally accepted accounting principles and

Answer 9

Regulatory Accounting Rules

Question 10

What is one disadvantage to having one set of accounting rules for insurers?

Answer 10

Compromises must be made that are suboptimal to one or more sets of users.

Question 11

Investors and creditors are users who would need which one of the following accounting framework to provide useful information?

Answer 11

Generally accepted accounting principles

Question 12

A business wishes to cap large insurance claims of a given business unit when evaluating the annual results of that unit. This would be an example of which one of the following accounting frameworks?

Answer 12

Management accounting.

Question 13

Which one of the following best describes the framework for tax accounting rules?

Answer 13

Tax accounting rules can be based on GAAP or statutory accounting rules, or can be determined independently, based on the tax laws for the jurisdiction in question.

Question 14

Which one of the following best describes the purpose of rule hierarchies within accounting frameworks?

Answer 14

To resolve conflicts among rules that preparers of financial statements may encounter when applying those rules

Question 15

For Generally Accepted Accounting Principles (GAAP), the hierarchy is generally led by

Answer 15

The organization in charge of securities regulation for the jurisdiction in question.

Question 16

What is the primary purpose of an emerging issues task force within an accounting framework?

Answer 16

To provide guidance for decisions on emerging issues faster than is required for an official accounting standard

Question 17

In the United States, the top organization in the rules hierarchy for Generally Accepted Accounting Principles has designated which one of the following organizations as the accounting standard setter (although its rules are subject to veto)?

Answer 17

The Financial Accounting Standards Board (FASB)

Question 18

For Generally Accepted Accounting Principles (GAAP), second position in the hierarchy is held by

Answer 18

The standards set by the specified accounting standard setter for the jurisdiction in question.

Question 19

Which one of following statements represents an advantage of principle-based accounting standards versus rule-based standards?

Answer 19

They are potentially very flexible with regard to new and changing products and environments.

Question 20

On what basis are financial statements that adhere to generally accepted accounting principles (GAAP) typically produced?

Answer 20

A consolidated basis

Question 21

Under an asset-liability accounting approach, when is revenue recognized?

Answer 21

Once the insurer gains control of the asset resulting from the revenue

Question 22

A change in accounting estimate…

Answer 22

Generally affects only the latest reporting period.

Question 23

The focus of the deferral-matching accounting approach is

Answer 23

The income statement.

Question 24

Historical cost is

Answer 24

The price at which an asset or liability was originally obtained.

Question 25

In which one of the following sections of an insurer’s financial statement would forward-looking information be included?

Answer 25

Notes and disclosures

Question 26

On an insurer’s balance sheet, the unearned premium reserve is listed as

Answer 26

A liability.

Question 27

Which one of the following is a policy liability that might exist on an insurer’s balance sheet?

Answer 27

Liability for level premium renewable term life insurance

Question 28

An income statement is structured to calculate an organization’s

Answer 28

Profitability.

Question 29

The two principal liability accounts on an insurer’s balance sheet are

Answer 29

Claim liabilities and unearned premium.

Question 30

Which one of the following asset accounts on an insurer’s balance sheet arises from the delay between policyholders’ premium payment to the insurer or its agents and the transmittal of these premiums to the insurer?

Answer 30

Premium balances or premium receivables

Question 31

Under the deferral-matching approach to premium accounting

Answer 31

Written premiums are generally defined as the amount of premium charged for that policy during the reporting period.

Question 32

The effect of premium billing on the balance sheet or income statement is dependent upon when the premium is received. If the billed premium is received before the effective date of the policy

Answer 32

The amount of the premium is treated as a deposit liability until the effective date.

Question 33

Which one of the following is true with regard to the asset-liability approach as an accounting standard for insurance contracts?

Answer 33

The asset-liability approach does not use the earned premium concept and affects the income statement.

Question 34

An insurer sold a commercial policy to Twinkle Lighting Company on March 1, 2010 with an effective date of May 1, 2010. Twinkle Lighting did not submit the premium of $240 until July 1, 2010. Under the deferral-matching approach to premium accounting, the unearned premium as of June 30, 2010 would be

Answer 34

$200

Question 35

The asset-liability approach may be used as a new accounting standard for insurance contracts, rather than the deferral-matching approach. Under the asset-liability approach, revenue is recognized

Answer 35

When the insurer gains control of the asset resulting from the revenue.

Question 36

A reinstatement premium under reinsurance treaties is charged when

Answer 36

A covered event exhausts treaty limits.

Question 37

Under a deferral-matching approach, the written premium that results from the prospective addition of another driver to an automobile policy would

Answer 37

Initially affect only unearned premium.

Question 38

Insurers charge an initial deposit premium on a policy when

Answer 38

The policy is formally agreed to before all contract details have been finalized.

Question 39

Under a deferral-matching approach, the portion of written premium that relates to future coverage periods is considered

Answer 39

An unearned premium liability.

Question 40

An insurance policy that requires the payment of a final premium based on losses incurred under the contract is referred to as a(n)

Answer 40

Retrospectively rated policy.

Question 41

Which one of the following is an example of premium earned before it is written?

Answer 41

Audit premium.

Question 42

Under U.S. regulatory accounting, the liability for extended reporting endorsements covering a definite period into the future is recorded as

Answer 42

Unearned premium reserves.

Question 43

Some premium payment plans may include additional payments that exceed the amount required if the premium was paid in full at the policy inception. Such additional payments that are a function of the amount of premium payment are treated under U.S. regulatory accounting as

Answer 43

Finance charges.

Question 44

Which one of the following might be a reason for a regulatory accounting system to gross up the reported premiums by the amount of credits for large deductible arrangements?

Answer 44

To avoid a negative impact on smaller insureds under a premium assessment system

Question 45

Which one of the following is a term used to represent premium that has been earned but not yet billed?

Answer 45

Earned but not reported

Question 46

Under which one of the following circumstances might an actuary be required to calculate a non-pro rata earning pattern for the premium?

Answer 46

For policies in which the insurance risk is not evenly spread throughout the policy period

Question 47

Based on accounting rules, which one of the following earning approaches may be allowed, as an exception, when the effect is not material to the financial statements?

Answer 47

Pro rata

Question 48

Under a deferral-matching approach, which one of the following determines whether a pro rata or non-pro rata approach should be used to calculate the unearned premium reserve?

Answer 48

Whether the associated coverage is evenly spread over the policy term

Question 49

A premium deficiency reserve is established for which one of the following reasons?

Answer 49

To prevent a bias in financial statements toward a future earnings loss from the liability runoff

Question 50

Which one of the following statements is a basic concept used in evaluation of the premium deficiency reserve?

Answer 50

The balance sheet date is the key date to be used in the calculation of the premium deficiency reserve.

Question 51

Regarding premium recognition, which one of the following treatments might be used for a continuous policy to account for written premium?

Answer 51

Annual premium payments viewed as a series of annual policies with only the current year premium treated as “written”

Question 52

Deficiencies in reserves with regard to expected losses over the unexpired portion of a policy will be reflected in

Answer 52

The unearned premium reserve.

Question 53

Which one of the following statements is true regarding loss reserves and the unearned premium reserve?

Answer 53

Loss reserves and the unearned premium reserve cover different portions of claim obligations with no overlap.

Question 54

If loss reserves are determined to be deficient, an insurer is most likely to

Answer 54

Reevaluate the adequacy of the unearned premium reserve.

Question 55

Which one of the following best describes loss reserves?

Answer 55

The estimate of the ultimate cost of incurred but unpaid losses

Question 56

Deficiency in the loss reserves…

Answer 56

Does not necessarily indicate a deficiency in the unearned premium reserve.

Question 57

Which one of the following represents an insurer’s right to recover the amount of claim payment from a responsible third party?

Answer 57

Subrogation

Question 58

Additional case reserves are most common for which one of the following types of claims?

Answer 58

Claims under assumed reinsurance contracts.

Question 59

When a claim payment is made but the corresponding entry has not yet been made, the payment is registered to

Answer 59

A suspense account.

Question 60

Which one of the following accounting standards or rules may apply to self-insured liabilities related to workers compensation claims?

Answer 60

Employee benefit accounting

Question 61

Which one of the following is an approach used to determine the initial recognition of losses for the current accident year?

Answer 61

Accrual of estimated incurred losses based on the level of earned exposure

Question 62

The reserve representing the estimated deficiency in the aggregate of case reserves for known claims are known as

Answer 62

Bulk reserves.

Question 63

If an insurer has a 20 percent quota share ceded reinsurance contract for all direct insurance and the insurer’s direct loss reserve at year-end is $500,000, what is the net loss reserve on the insurer’s balance sheet?

Answer 63

$400,000

Question 64

Which one of the following best describes the potential effect when the categorization of defense costs changes from loss adjustment expenses (LAE) by the ceding company to losses by the assuming company under a reinsurance contract?

Answer 64

The change in categorization will distort analyses of losses versus LAE on a combined industry basis.

Question 65

Which one of the following best describes the U.S. GAAP accounting treatment of ceded loss reserves on an insurer’s balance sheet?

Answer 65

Ceded loss reserves are treated as an asset.

Question 66

An adjustment for risk in the commutation of a reinsurance agreement

Answer 66

Increases the economic value.

Question 67

Which one of the following best describes an accounting issue that arises for reinsurers from bordereaux?

Answer 67

Bordereaux frequently lack detail.

Question 68

Which one of the following best describes an aggregate loss cover reinsurance contract?

Answer 68

An aggregate loss cover reinsurance contract is often used as a part of insurer acquisitions.

Question 69

Which one of the following general approaches to deposit accounting is characterized by the fact that the deposit is a function of the initial deposit, past payments, and the current estimate of all future payments?

Answer 69

Retrospective approach

Question 70

Which one of the following is true with regard to the prospective approach to deposit accounting?

Answer 70

The current value of the deposit is set equal to the present value of future payments, irrespective of the initial deposit or past payments.

Question 71

Deposit accounting for a contract typically observes which one of the following rules?

Answer 71

The deposit generally represents a present value of future payment obligations.

Question 72

Which one of the following is the defining characteristic of the bank deposit approach to deposit accounting?

Answer 72

The ending deposit for a reporting period is dependent on the beginning balance, the credited rate, and any deposits or withdrawals during the period.

Question 73

Deposit accounting may be required by a particular accounting framework for an insurance or reinsurance contract when

Answer 73

No risk transfer exists.

Question 74

Under the bank deposit approach to deposit accounting

Answer 74

The initial deposit grows with interest credited at an interest rate whose calculation is determined in advance and declines with withdrawals.