Chapter 6 Flashcards
(45 cards)
An insurance company is preparing its year-end accounts. These will be reviewed by investors, regulators, and external auditors to assess performance and compliance with solvency rules.
Question:
What is the main purpose of the financial accounting process in this scenario?
A. To assist internal management with budgeting
B. To provide external stakeholders with accurate and standardised information
C. To create financial forecasts for next year
D. To ensure that pricing models are aligned with the risk appetite
Answer: B
Explanation: Financial accounting is primarily aimed at external users such as investors and regulators. It ensures transparency and compliance with standards.
Sara works in the finance team at an insurance broker. She creates monthly reports for senior managers to help them understand claim trends and reduce costs.
Question:
Which type of accounting is Sara involved in?
A. Financial accounting
B. Tax accounting
C. Management accounting
D. Bookkeeping
Answer: C
Explanation: Management accounting is focused on internal decision-making, such as cost control and operational efficiency.
A reinsurer is reviewing the financial statements of a smaller insurance partner before agreeing to a new treaty.
Question:
Which financial statement would most help the reinsurer assess the insurer’s ability to meet future liabilities?
A. Cash flow statement
B. Income statement
C. Statement of financial position
D. Broker account summary
Answer: C
Explanation: The statement of financial position shows assets and liabilities, helping the reinsurer evaluate solvency and reserves.
An insurer reports total assets of £800m and liabilities of £500m.
Question:
What is the value of shareholders’ equity?
A. £300m
B. £500m
C. £800m
D. £1.3bn
Answer: A
Explanation: Using the accounting equation: Assets – Liabilities = Equity → £800m – £500m = £300m.
An insurance broker collects a premium of £10,000 from a client and deducts their commission before forwarding £9,000 to the insurer.
Question:
How should this transaction be recorded in the broker’s accounts?
A. £10,000 income, £9,000 expense
B. £1,000 income, £9,000 client liability
C. £10,000 asset, £10,000 revenue
D. £9,000 income, £1,000 expense
Answer: B
Explanation: The broker earns £1,000 commission (income). The remaining £9,000 is a liability until passed to the insurer.
A motor insurer has total premium income of £100m, claims of £70m, and expenses of £20m.
Question:
What is the net profit before tax?
A. £10m
B. £20m
C. £30m
D. £50m
Answer: A
Explanation: Net profit = Premiums – Claims – Expenses = £100m – £70m – £20m = £10m.
A life insurance firm shows strong profits but is struggling to pay staff on time due to a delay in collecting investment returns.
Question:
Which financial statement best highlights this issue?
A. Statement of financial position
B. Income statement
C. Broker ledger
D. Cash flow statement
Answer: D
Explanation: Cash flow statements track actual inflows and outflows, highlighting liquidity challenges despite profitability.
A general insurer has to prepare its year-end financial report. It needs to show the performance of its underwriting and investments.
Question:
Which two components are essential in this report?
A. Statement of underwriting ratios and broker commissions
B. Statement of financial position and profit or loss
C. IBNR estimates and statutory returns
D. FCA returns and solvency assessment
Answer: B
Explanation: These are the standard financial statements used to assess performance and position.
The underwriting team at ABC Insurance uses internal reports to adjust rates for fleet policies based on historical loss data.
Question:
This is an example of using:
A. Management accounting
B. Financial accounting
C. Actuarial modelling
D. Broker MI reporting
Answer: A
Explanation: Internal cost and performance data used to guide pricing is management accounting.
A medium-sized insurer adopts AI to automate invoice matching and reduce errors in its financial system.
Question:
Which benefit of AI is being applied in this scenario?
A. Pricing optimisation
B. Investment allocation
C. Financial process efficiency
D. Risk modelling
Answer: C
Explanation: AI enhances financial processing accuracy and reduces manual errors.
A finance analyst prepares detailed quarterly reports for the PRA that show solvency margins and reserving strength.
Question:
What type of accounting information is primarily used in these reports?
A. Management accounting
B. Financial accounting
C. Tax accounting
D. Investment accounting
Answer: B
Explanation: Reports prepared for the regulator are based on financial accounting principles, using externally reported figures.
An insurance broker receives £50,000 in client premiums and deposits it into the client money account.
Question:
In double-entry bookkeeping, how would this be recorded?
A. Debit income, credit bank
B. Debit bank, credit liabilities
C. Debit bank, credit equity
D. Debit assets, credit expenses
Answer: B
Explanation: The broker receives cash (debit bank), but owes it to the insurer (credit liability).
A commercial insurer writes £120m in premiums. It pays £85m in claims and incurs £25m in expenses.
Question:
What is its underwriting result?
A. £10m loss
B. £15m profit
C. £20m loss
D. £35m profit
Answer: A
Explanation: Underwriting result = Premium – Claims – Expenses = £120m – £85m – £25m = £10m loss.
A broker wants to understand how much their business is worth today in terms of assets and debts.
Question:
Which financial statement should they consult?
A. Statement of cash flow
B. Statement of financial position
C. Statement of retained earnings
D. Income statement
Answer: B
Explanation: The statement of financial position (balance sheet) shows current assets and liabilities, revealing net worth.
A small insurer reports a £2m profit but had to take out a short-term loan to pay a reinsurance premium.
Question:
This suggests a weakness in which area?
A. Profitability
B. Capital adequacy
C. Liquidity
D. Reserving
Answer: C
Explanation: The issue is not profitability, but cash flow—the company lacks available funds (liquidity).
The PRA reviews an insurer’s solvency figures, investment income, and liabilities before approving its annual return.
Question:
This is an example of scrutiny of which accounting output?
A. Management reporting
B. Regulatory capital model
C. Financial statements
D. Budget planning reports
Answer: C
Explanation: The PRA uses statutory financial statements to assess compliance and financial health.
A company analyses quarterly claim frequency data to adjust policy wordings and deductible levels.
Question:
What is this an example of?
A. Internal controls
B. Strategic planning
C. Management accounting
D. Financial forecasting
Answer: C
Explanation: This is internal data used for operational decisions, which is characteristic of management accounting.
An insurer holds government bonds to fund future claims.
Question:
How are these bonds recorded on the balance sheet?
A. As liabilities
B. As equity
C. As assets
D. As expenses
Answer: C
Explanation: Bonds are an investment and therefore an asset.
Unlike insurers, brokers typically do not have to declare technical reserves on their balance sheets.
Question:
Why is this the case?
A. Brokers are exempt from accounting regulations
B. Brokers earn commission and do not carry insurance risk
C. Brokers are not regulated by the FCA
D. Brokers use reinsurance to cover reserves
Answer: B
Explanation: Brokers act as intermediaries and do not carry underwriting risk, so they don’t hold claims reserves.
An insurer uses predictive analytics to monitor policyholder behaviour and flag anomalies in expense trends.
Question:
Which accounting area is most likely being enhanced by this technology?
A. Cash flow forecasting
B. Tax reporting
C. Management accounting
D. Financial auditing
Answer: C
Explanation: Predictive analytics supports internal decision-making—a core function of management accounting.
Jessica is a compliance officer reviewing the insurer’s annual report. She’s particularly interested in long-term obligations that could impact future solvency.
Question:
Which section of the statement of financial position is Jessica most likely focused on?
A. Non-current assets
B. Equity
C. Non-current liabilities
D. Retained earnings
Answer: C
Explanation: Non-current liabilities include long-term obligations such as claims reserves and reinsurance payables.
A broker earns 20% commission on a £5,000 premium. The rest is paid to the insurer.
Question:
How much income will the broker record in its profit and loss account?
A. £5,000
B. £4,000
C. £1,000
D. £0
Answer: C
Explanation: The broker’s income is its commission, which is 20% of £5,000 = £1,000.
A claims manager reviews the insurer’s income statement to check if the claims paid have been consistent with past trends.
Question:
Which financial ratio would be most relevant in this context?
A. Expense ratio
B. Return on equity
C. Loss ratio
D. Quick ratio
Answer: C
Explanation: The loss ratio compares claims paid to premiums earned, and is essential for claims trend analysis.
The CEO of an insurance company wants to compare performance this year versus last year. He’s reviewing the income statement and balance sheet.
Question:
Which additional document would best support this review?
A. Statement of cash flows
B. Five-year business plan
C. Broker commission reports
D. Statement of changes in equity
Answer: A
Explanation: The cash flow statement helps identify how cash inflows and outflows differ year-on-year, beyond profits.
