Study 4: Financial Management And Analysis Flashcards
What are unearned premiums defined as?
A) Net reserve position due from reinsurers, ceded amounts from gross claim liabilities, and gross unearned premiums
B) All gross claim reserves due to claimants and to settle claims based on all reserve estimates
C) Portion of gross written premium (sales) that is refundable if the policy is cancelled
D) Net premium due from broker/policyholder less commissions
C) Portion of gross written premium (sales) that is refundable if the policy is cancelled
Unearned premiums are the portion of gross written premium (sales) that is refundable if the policy is cancelled.
What is combined ratio used to measure?
A) Overall underwriting performance
B) Volume of revenue
C) Total losses
D) The difference between premiums earned and losses
A) Overall underwriting performance
The combined ratio is used by insurance companies to measure overall underwriting performance. It shows the profitability of the insurance operations and is also considered an indicator of management’s efficiency.
Which of the following is not attributed to the balance sheet?
A) Snapshot of the financial position of the entity at a point in time
B) Shows accumulated wealth and outstanding obligations
C) Shows what the company owns and owes
D)Net income over a period of time
D) Net income over a period of time
The balance sheet is an indicator of the financial position of the rent it’s at a point in time and shows what the company owner and owns.
How is net income on a statement of income calculated?
A) Net income = liabilities + shareholders’ equity
B) Net income = revenues - expenses
C) Net income = claim ratio + underwriting expense ratio
D) Net income = liabilities + owners’ equity
B) Net income = revenue - expenses
Net income is the difference between revenues and expenses. It is expressed as net income = revenue - expenses.
What does time comparison entail?
A) Comparing the figures reported in the current report to that of the previous accounting period.
B) Comparing the current results to the budget or plan.
C) Comparing the results of one aspect to the results of another area or another period.
D) Compare the results to external sources such as stock exchange indexes.
A) Comparing the figures reported in the current report to that of the previous accounting period.
Time comparison compares the figures reported in the current report to that of the previous accounting period. The figures show whether financial conditions have improved or deteriorated.
What does a budget comparison entail?
A) Comparing the results to external sources such as stock exchange indexes.
B) Comparing the figures reported in the current report to that of the previous accounting period.
C) Comparing the current results to the budget or plan
D) Comparing the results of one aspect to the results of another area or another period.
C) Comparing the current results to the budget or plan.
A budget comparison involves comparing the current results to the budget or plan.
What does a relationship comparison entail?
A) Comparing the results of one aspect to the results of another area or another period.
B) Comparing the figures reported in the current report to that of the previous accounting period.
C) Comparing the results to external sources such as stock exchange indexes
D) Using ratios to compare the results of one aspect to the results of another area or another period.
D) Using ratios to compare the results of one aspect to the results of another area or another period.
A relationship comparison uses ratios to compare the results of one aspect to the results of another area or another period.
What does a benchmark comparison entail?
A) Comparing the results of one aspect to the results of another area or another period
B) Compare the results to external sources such as stock exchange indexes.
C) Comparing the figures reported in the current report to that of the previous accounting period
D) Using ratios to compare the results of one aspect to the results of another area or another period.
B) Compare the results to external sources such as stock exchange indexes.
A benchmark comparison compares the results to external sources such as stock exchange indexes and the results that similar companies have experienced in the marketplace and any other appropriate source.
What is unearned premium reserve defined as?
A) Total of the gross premiums
B) Total of the net revenue
C) Policy liability on the balance sheet that represents the portion of the written premium related to the unexpired portion of the policy term.
D) Amount of profit that can be rolled over each year
C) Policy liability on the balance sheet that represents the portion of written premium related to the unexpired portion of the policy term.
Unearned premium reserve (UPR) is the policy liability on the balance sheet that represents the portion of the written premium related to the unexpired portion of the policy term.
What is the change in UPR?
A) The income statement account which is the dual-entry offset to all activity in the UPR balance account
B) Net claims incurred/net premiums earned
C) Deferred acquisition cost
D) The assumed activity from agreements where the company is providing coverage to another insurance company.
A) The income statement account which is the dual-entry offset to all activity in the UPR balance account.
UPR is the policy liability on the balance sheet that represents the portion of the written premium related to the unexpired portion of the policy term. Change in UPR is the income statement account that is the dual-entry offset to all activity in the UPR balance account.
Narrative: Explain what a combined ratio is. (5 marks)
A combined ratio is any 5 of the following
1) Used by insurance companies to measure overall underwriting performance
2) Shows the profitability of the insurance operations
3) Considered an indicator of management’s efficiency
4) A combined ratio of less than 100 percent indicates that the company is making an underwriting profit
5) A ratio above 100 percent means that it is losing money by paying out more in claims than it earns from premiums
6) Does not take investment income into account
7) Components of the combined ratio:
7. 1) Combined operation ratio (COR) = claims ratio + underwriting expense ratio
7. 2) Claims ratio = net claims incurred to net premiums earned
7. 3) Underwriting expense ratio = underwriting expenses to net premiums earned
Narrative: Outline FIVE (5) accounts that appear in a statement of income. (5 marks)
Accounts that appear in a statement of income (any five of the following)
1) Direct premiums written (DWPW or DWP) - premium sales to policyholders
2) Ceded premiums written (CPW or CWP) - premium transferred to a reinsurer
3) Net premiums written (NPW or NWP) = DPW - SPW
4) Net premiums earned (NPE or NEP)= revenues for the insurance company from non-refundable gross premium less reinsurance related to gross earned
5) Other underwriting revenues - revenues as presented on the financial statements, but this amount is included as a reduction to expenses for the common performance ratios for an insurance company.
6) Net claims incurred - gross less ceded; claims paid, claims expenses (internal and external), and change in all claim reserves (case, IBNR, expense, other actuarial reserves)
7) Underwriting expenses - include commissions, operating expense, and premium taxes
Narrative: Outline FIVE (5) concepts/accounting principles that GAAP ( Generally accepted accounting principles) adhere to. (5 marks)
GAAP adheres to there concepts/ accounting principles (any 5 of the following)
1) Money measurement - money, in this case, is not solely a reference to cash. This indicates that business activity with a measurable monetary amount is recorded as an accounting record.
2) Entity - specifies that the financial activity being measured belongs to an individual entity, such as a business entity, corporation, partnership, or investment fund
3) Going concern - assumes that the entity will exist in future
4) Cost - governs how to attribute the values of the original transactions to purchase an asset or incur an expense
5) Dual aspect - to balance the basic accounting equation of asserts = liabilities - owners’ equity, every transaction must have two effects on the entity’s accounts.
6) Realization - This principle impacts the timing of when financial transactions should be made
7) Conservatism - Guides the insurance professional, if there is a choice, to pick the valuation that will lower assets and revenue and increase liabilities and expenses
8) Matching - expenses are reported in the same period and matched to revenues they helped to earn
9) Consistency - to support the organization of financial activity in the statements, once decided, the insurance professional must treat all similar events the same in the future
10) Materiality - specifies that trivial matters are not recorded.
