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CPCU 540 > Chapter 5 > Flashcards

Chapter 5 Flashcards

0
Q

What is the majority of policyholders surplus comprised of?

A

Past earnings

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1
Q

What affects capacity?

A

Growth

Investment results

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2
Q

Liquidity ratio formula

A

Cash + invested assets (FMV) / unearned premium + lae & loss reserve

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3
Q

What value of the liquidity ratio is desirable?

A

1.0

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4
Q

What result would aggressive valuation of reserves it reduction of FMV of investments have in the liquidity ratio?

A

Decrease

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5
Q

What does the premium-to-surplus ratio measure?

A

Relative exposure to underwriting risks

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6
Q

Capacity ratio formula

A

Net written premiums / surplus

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7
Q

What is a weakness of the capacity ratio?

A

Only considers one year if net written premiums

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8
Q

What does a high capacity ratio mean?

A

Company is aggressive in using surplus to leverage premium writing.

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9
Q

What is the value for capacity ratio recommended by the NAIC?

A

3:1

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10
Q

What does the reserves to surplus ratio measure?

A

Leverage

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11
Q

reserves to surplus ratio formula

A

Unearned premium reserve + loss&lae reserves / surplus

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12
Q

Combined ratio formula

A

Loss ratio + expense ratio

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13
Q

Ep formula?

A

Written premiums / expenses

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14
Q

Loss ratio formula?

A

Ep/claims

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15
Q

Operating ratio formula

A

Combined ratio - investment income ratio

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16
Q

Investment income ratio formula

A

Net investment income / ep

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18
Q

How does return on policyholder surplus assist in comparison of insurers?

A

Eliminates issues related to premium volume, underwriting results, and investment gains.

Summarizes overall operating success relative to resources.

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19
Q

This rating is an opinion of an insurer’s financial strength and ability to meet insurance obligations. It rates insurers with quantitative and qualitative measures.

A

Financial Strength Rating (FSR)

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20
Q

WHat does the FSC (Financial Size Category) indicate?

A

The size of the insurer based on ph surplus, adjusted for reserves and contingencies.

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21
Q

What are the categories of AM Best’s ratios?

A

Profitability
Liquidity
Capital and leverage
Loss Reserves

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22
Q

What do the FSR qualitative tests evaluat?

A

Capital structure
Reinsurance agreements
Loss Reserves

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23
Q

What are the FSR qualitative tests?

A 
Investment diversity (liquidity and diversity)
Management (integrity, capability, experience)
Market position (ability to increase market share)
Event risk (exposure to risk)
Surplus adequacy
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24
Q

What are the secure FSR ratings?

A

A++ through B+

25
Q

What are the vulnerable FSR ratings?

A

B-F

26
Q

What does a “u” DSR rating modifier mean?

A

under review

27
Q

What does a “g” DSR rating modifier mean?

A

group affiliation

28
Q

What does a “p” DSR rating modifier mean?

A

pooling affiliation

29
Q

What does a “r” DSR rating modifier mean?

A

reinsurance affiliation

30
Q

What does the FSC measure?

A

Size and ability to handle insurance or investment risks.

31
Q

What does a FSR rating of “s” mean?

A

Suspended

32
Q

What does IRIS identify?

A

Insurers that may be impaired or need regulatory review.

33
Q

What happens when an insurer falls outside the appropriate IRIS range?

A

No specific rules. State examiners would have to review.

34
Q

What are the four overall IRIS tests?

A

1) gross premiums written to surplus (insurance exposure)
2) net premiums written to surplus (exposure after reinsurance)
3) change in net writings (% chg in year)
4) surplus aid to surplus

35
Q

What does a large difference between gross premiums written to surplus and net premiums written to surplus mean?

A

Over-reliance on reinsurance

36
Q

What is the acceptable percentage of change in net writings?

A

+- 33%

37
Q

What could a large increase in net writings be a sign of?

A

Poor pricing

38
Q

What could a large amount of surplus aid be a sign of?

A

Insufficient capitalization for direct insurance written

39
Q

What are the four IRIS profitability tests?

A
  1. Two year overall operating (combined - investment)
  2. Investment yield
  3. Gross change in surplus
  4. Change in adjusted surplus
40
Q

What is the formula for calculating investment yield?

A

Investment income / cash + invested assets

41
Q

What could decreases in surplus be the result of?

A

Poor underwriting? Investment results, dividends, etc.

42
Q

What are the two IRIS liquidity tests?

A
  1. Adjusted liabilities to liquid assets

10. Gross agents’ balances to surplus

43
Q

What does adjusted liabilities to liquid assets measure?

A

Ability to meet obligations with liquid assets.

44
Q

What does a rate over 100% on adjusted liabilities to liquid assets indicate?

A

Liquidity issues

45
Q

What does gross agents’ balances to surplus indicate?

A

Dependence of surplus on assets of questionable liquidity.

46
Q

What are the 3 IRIS reserve tests?

A
  1. One year reserve development to surplus
  2. Two year reserve development to surplus
  3. Estimated current reserve deficiency to surplus.
47
Q

What does One year reserve development to surplus measure?

A

Change in surplus attributable to loss development of prior year reserves.

48
Q

What does two year reserve development to surplus measure?

A

If reserves have been understated to inflate surplus.

49
Q

Ratio widely used to determine insurance leverage?

A

Reserves to surplus ratio

50
Q

List quantitative measures looked at by AM Best.

A

Profit margins, financial leverage, liquidity, and capital

51
Q

Adjusted policyholders surplus changes to these are omitted under IRIS ratio 8; adjusted policyholders’ surplus profitability test.

A

Surplus notes
Capital changes
Surplus adjustments

52
Q

A big difference in ratios 1 and 2 (gross and net premiums written to policholders surplus) indicates?

A

Heavy reliance on reinsurance

53
Q

Which IRIS ratio measures liquidity?

A
  1. Gross agents balances to policyholders surplus.
54
Q

If an insurer is too aggressive in valuing it’s reserves for losses and lae, the liquidity ratio me be overstated/understated?

A

Overstated

55
Q

How is the FSR determined?

A

A proprietary model is used to calculate an insurer’s economic loss reserve, which is compared to reported reserves.

56
Q

What is the purpose of BCAR?

A

Evaluate an insurer’s capital strength above minimum requirements.

57
Q

Wharves the level given the highest priority for comprehensive review under IRIS?

A

A

58
Q

An insurer looking into a reinsurer rejects the reinsurer after seeing that the reinsurer failed 7 of 14 financial ratio tests. The decision was made after looking at

A

IRIS

CPCU 540 (11 decks)

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