Chapter 7

Question 1

An insurer’s net profit has increased by 15% this year, but its shareholders’ equity has remained largely unchanged.

Question:
Which ratio would best measure the insurer’s profitability in this scenario?
A. Current ratio
B. Return on equity (ROE)
C. Combined ratio
D. Solvency ratio

Answer 1

Answer: B
Explanation: ROE = Net profit ÷ Shareholders’ equity. It assesses how effectively equity is generating returns.

Question 2

A finance analyst is assessing whether an insurance broker can meet its short-term obligations using its most liquid assets.

Question:
Which ratio is most relevant?
A. Combined ratio
B. Return on capital employed (ROCE)
C. Quick ratio
D. Premium growth ratio

Answer 2

Answer: C
Explanation: The quick ratio (acid test) measures liquidity excluding inventory—ideal for evaluating short-term financial health.

Question 3

An underwriter notes that claims paid have increased faster than premium income over the past 12 months.

Question:
Which ratio will best reflect this issue?
A. Current ratio
B. Loss ratio
C. Combined ratio
D. ROE

Answer 3

Answer: B
Explanation: The loss ratio = claims incurred ÷ premiums earned, showing how well underwriting risk is controlled.

Question 4

Despite stable premium income, one insurer’s expense base has grown significantly, affecting underwriting profitability.

Question:
Which ratio will show this trend?
A. Return on assets
B. Combined ratio
C. Investment return
D. Solvency margin

Answer 4

Answer: B
Explanation: The combined ratio = loss ratio + expense ratio. A ratio >100% indicates an underwriting loss.

Question 5

Two insurers have similar profit margins, but one has significantly higher capital employed.

Question:
Which ratio would best compare their capital efficiency?
A. Current ratio
B. Return on capital employed (ROCE)
C. Loss ratio
D. Quick ratio

Answer 5

Answer: B
Explanation: ROCE = Operating profit ÷ Capital employed. It measures how efficiently capital is being used to generate profit.

Question 6

Regulators are reviewing an insurer’s ability to meet its long-term obligations and capital requirements.

Question:
Which financial ratio is most relevant here?
A. Combined ratio
B. Solvency margin
C. Premium growth ratio
D. Operating margin

Answer 6

Answer: B
Explanation: The solvency margin compares available capital against required capital and indicates financial strength.

Question 7

An insurer relies heavily on investment income to offset underwriting losses. Last year’s returns fell by 3%.

Question:
Which ratio would reflect this drop?
A. Return on investment (ROI)
B. Combined ratio
C. Current ratio
D. Earnings per share

Answer 7

Answer: A
Explanation: ROI measures how well investment assets are performing—critical for insurers with marginal underwriting results.

Question 8

An insurance broker is expanding rapidly. A supplier is reviewing whether the broker can settle invoices quickly.

Question:
Which ratio will the supplier likely examine?
A. Debt-to-equity ratio
B. Return on equity
C. Current ratio
D. Profit margin

Answer 8

Answer: C
Explanation: The current ratio = current assets ÷ current liabilities. It measures short-term liquidity.

Question 9

Insurer A has a combined ratio of 98%. Insurer B has a combined ratio of 105%.

Question:
What does this suggest about their underwriting performance?
A. A is unprofitable, B is profitable
B. Both are highly solvent
C. A is underwriting profitably, B is not
D. Combined ratios only reflect investment income

Answer 9

Answer: C
Explanation: A combined ratio below 100% indicates an underwriting profit, while over 100% means an underwriting loss.

Question 10

A broker reports high revenue growth but low net profit. The finance manager suspects rising costs are the issue.

Question:
Which ratio would confirm this?
A. Return on assets
B. Expense ratio
C. Investment yield
D. Net claims ratio

Answer 10

Answer: B
Explanation: The expense ratio = expenses ÷ premiums. It reveals if cost increases are eroding profits.

Question 11

A life insurer has significant assets tied up in government bonds, but the return on these investments has dropped below inflation.

Question:
Which ratio would best reflect the impact of this situation?
A. Return on capital employed
B. Combined ratio
C. Return on investment (ROI)
D. Claims ratio

Answer 11

Answer: C
Explanation: ROI assesses how efficiently the insurer is generating returns from its invested assets, which is critical for life insurers.

Question 12

An insurer reports an underwriting loss but overall still posts a healthy net profit due to strong investment returns.

Question:
Which ratio most clearly separates these two aspects?
A. Combined ratio
B. Quick ratio
C. Return on equity
D. Debt-to-equity ratio

Answer 12

Answer: A
Explanation: The combined ratio focuses only on underwriting profitability, excluding investment income.

Question 13

A commercial insurance broker holds large receivables from clients but has few liquid cash assets.

Question:
Which ratio might highlight a liquidity concern?
A. Current ratio
B. Quick ratio
C. Loss ratio
D. Solvency margin

Answer 13

Answer: B
Explanation: The quick ratio excludes receivables and inventory, highlighting whether truly liquid assets can meet liabilities.

Question 14

Two insurers report identical net profits, but one is highly leveraged with large debt obligations.

Question:
Which ratio would show this difference?
A. Expense ratio
B. Debt-to-equity ratio
C. Investment yield
D. Return on investment

Answer 14

Answer: B
Explanation: The debt-to-equity ratio compares borrowed funds to shareholder capital, highlighting financial risk levels.

Question 15

Due to a severe flood event, an insurer has seen a significant rise in claims paid, far exceeding their expected levels.

Question:
Which financial ratio would best illustrate this impact?
A. Solvency margin
B. Combined ratio
C. Return on assets
D. Expense ratio

Answer 15

Answer: B
Explanation: A high loss ratio will drive up the combined ratio, signalling the insurer’s poor underwriting result that year.

Question 16

A reinsurer earns a steady profit, but analysts believe it’s under-utilising its large capital base.

Question:
Which ratio should analysts examine?
A. Return on capital employed (ROCE)
B. Combined ratio
C. Current ratio
D. Net claims ratio

Answer 16

Answer: A
Explanation: ROCE shows how efficiently the reinsurer uses capital to generate operating profit.

Question 17

The PRA is examining an insurer’s annual return and wants to assess its ability to absorb future adverse events.

Question:
Which measure will they prioritise?
A. Combined ratio
B. Debt-to-equity ratio
C. Return on equity
D. Solvency margin

Answer 17

Answer: D
Explanation: The solvency margin is the key regulatory indicator of an insurer’s capital strength versus liabilities.

Question 18

XYZ Insurance has a combined ratio of 107% despite increasing gross written premiums.

Question:
What does this imply?
A. The insurer is operating profitably
B. Investment returns are high
C. Underwriting is unprofitable
D. Claims have fallen significantly

Answer 18

Answer: C
Explanation: A combined ratio above 100% indicates an underwriting loss, even if premiums are growing.

Question 19

A market analyst wants to assess how much profit is generated for every £1 of shareholder capital invested.

Question:
Which ratio is most relevant?
A. Combined ratio
B. Return on equity (ROE)
C. Current ratio
D. Quick ratio

Answer 19

Answer: B
Explanation: ROE = Net profit ÷ Equity; it tells how efficiently shareholder funds are being used.

Question 20

An insurer sees a stable loss ratio but deteriorating overall results year-on-year. Operating costs are suspected.

Question:
Which ratio will confirm this?
A. Combined ratio
B. ROE
C. Solvency margin
D. Current ratio

Answer 20

Answer: A
Explanation: If the loss ratio is stable but the combined ratio increases, the rise must be due to expenses.

Question 21

An insurer reports a 68% loss ratio and 29% expense ratio for the financial year.

Question:
What is the combined ratio, and what does it indicate?
A. 97% – underwriting profit
B. 103% – underwriting loss
C. 68% – low loss experience
D. 29% – high administrative cost

Answer 21

Answer: A
Explanation: Combined ratio = Loss ratio + Expense ratio = 68% + 29% = 97% → underwriting profit (as it’s <100%).

Question 22

A reinsurer earns £12m operating profit with £80m of capital employed.

Question:
What is its ROCE?
A. 10%
B. 12%
C. 15%
D. 18%

Answer 22

Answer: C
Explanation: ROCE = Operating profit ÷ Capital employed = £12m ÷ £80m = 15%.

Question 23

Insurer Alpha posts £25m net profit and has £200m in shareholder equity.

Question:
What is its return on equity (ROE)?
A. 10%
B. 12.5%
C. 8%
D. 20%

Answer 23

Answer: B
Explanation: ROE = Net profit ÷ Equity = £25m ÷ £200m = 12.5%. It shows how efficiently equity is generating profits.

Question 24

Beta Insurance holds £90m in debt and £60m in equity.

Question:
What is its gearing ratio and what does it suggest?
A. 150% – high financial risk
B. 66% – low liquidity
C. 50% – strong solvency
D. 40% – undercapitalised

Answer 24

Answer: A
Explanation: Gearing = Debt ÷ Equity = £90m ÷ £60m = 150%. A high ratio indicates high reliance on borrowing (riskier).

Question 25

A broker has current assets of £5m and current liabilities of £2m. Question: What is the current ratio and what does it indicate? A. 2.5 – strong short-term liquidity B. 0.4 – weak working capital C. 1.0 – balanced net worth D. 3.0 – over-leveraged

Answer 25

Answer: A Explanation: Current ratio = £5m ÷ £2m = 2.5 → the broker has 2.5x the liquid assets needed to meet short-term debts.

Question 26

A commercial insurer earns £120m premium income and pays £75m in claims. Question: What is the gross profit margin? A. 45% B. 50% C. 37.5% D. 62.5%

Answer 26

Answer: C Explanation: Gross profit = £120m – £75m = £45m → Margin = £45m ÷ £120m = 37.5%

Question 27

Insurer Delta has a ROCE of 9% and an ROE of 14%. Question: What does this gap most likely suggest? A. Operational inefficiency B. Leverage is boosting equity returns C. Strong investment income D. Low gearing ratio

Answer 27

Answer: B Explanation: A higher ROE than ROCE usually means debt (gearing) is amplifying shareholder returns.

Question 28

Insurer Gamma has a loss ratio of 72% and an expense ratio of 38%. Question: What’s its combined ratio, and what does this mean? A. 110% – underwriting loss B. 90% – underwriting profit C. 72% – acceptable claims control D. 38% – unsustainable costs

Answer 28

Answer: A Explanation: Combined = 72% + 38% = 110%, indicating underwriting losses (claims + expenses exceed premiums).

Question 29

Zeta Reinsurance has a gearing ratio of 25%. Question: What does this imply? A. It’s highly dependent on debt B. It has low financial leverage C. It’s failing to use shareholder equity D. Its solvency margin is likely weak

Answer 29

Answer: B Explanation: A 25% gearing ratio means it has relatively low reliance on debt, reducing risk in adverse markets.

Question 30

Two insurers earn £20m in operating profit. Insurer A has £100m in capital employed; Insurer B has £160m. Question: Which has higher ROCE, and why? A. A – 20% B. B – 15% C. Both – 12.5% D. B – more efficient

Answer 30

Answer: A Explanation: A’s ROCE = £20m ÷ £100m = 20%, B’s = £20m ÷ £160m = 12.5% → A uses capital more efficiently.