Chapter 9 Flashcards
(20 cards)
Q: What does the return on equity (ROE) ratio measure?
A. The ability to collect premiums
B. The efficiency of reinsurance recoveries
C. The profit generated relative to shareholders’ capital
D. The solvency margin of an insurer
Answer: C
Explanation: ROE measures profit after tax as a percentage of shareholders’ equity, showing how effectively capital is being used to generate profit
Q: What is the formula for the current ratio in liquidity analysis?
A. Current liabilities ÷ current assets
B. Cash + investments ÷ total liabilities
C. Current assets ÷ current liabilities
D. Sales ÷ cost of goods sold
Answer: C
Explanation: The current ratio = current assets ÷ current liabilities. It assesses short-term financial health and ability to pay debts as they fall due
Q: What does a high gearing ratio indicate about a company?
A. It has strong equity reserves
B. It relies more heavily on debt financing
C. It has high underwriting profits
D. It pays dividends frequently
Answer: B
Explanation: A high gearing ratio shows a high level of debt compared to equity, increasing financial risk
Q: Which of the following ratios assesses underwriting profitability?
A. Quick ratio
B. Return on capital employed
C. Combined ratio
D. ROE
Answer: C
Explanation: The combined ratio includes claims, expenses, and commission costs as a percentage of earned premium. A ratio below 100% indicates underwriting profit
Q: What would typically be considered a “good” return on equity (ROE) for insurers?
A. 1–5%
B. 5–10%
C. 15–20%
D. Over 30%
Answer: C
Explanation: A good ROE for insurers is typically between 15% and 20%
Q: The solvency coverage ratio compares which two elements?
A. Earned premium and net profit
B. Total liabilities and shareholder equity
C. Total eligible capital and solvency capital requirement
D. Cash flow and total expenses
Answer: C
Explanation: This ratio shows whether an insurer has sufficient capital to meet regulatory solvency requirements under Solvency II
Q: The quick ratio excludes which of the following from current assets?
A. Debtors
B. Investments
C. Stock (inventory)
D. Bank balances
Answer: C
Explanation: The quick ratio excludes inventory/stock from current assets to assess the ability to pay liabilities using only the most liquid assets
Q: Which ratio best reflects how frequently a company collects debts during the year?
A. Gearing ratio
B. Debtors turnover ratio
C. Expense ratio
D. Current ratio
Answer: B
Explanation: The debtors turnover ratio = sales ÷ debtors. It indicates how often the amount owed by customers is collected annually
Q: What does the claims ratio measure in an insurance company?
A. Claims incurred as a percentage of earned premium
B. Claims paid as a percentage of net profit
C. Number of claims per customer
D. Claims recoveries from reinsurers
Answer: A
Explanation: Claims ratio = claims incurred (net of reinsurance) ÷ earned premium (net of reinsurance) × 100
Q: A company’s ROCE (return on capital employed) is calculated using:
A. Profit after tax ÷ shareholders’ equity
B. Net income ÷ total assets
C. Profit before interest and tax ÷ (share capital + reserves + borrowings)
D. Gross profit ÷ sales
Answer: C
Explanation: ROCE measures how efficiently capital is being used before interest and tax are deducted
Q: What is indicated by a combined ratio of over 100%?
A. Underwriting profit
B. Underwriting loss
C. Exceptional investment return
D. High return on equity
Answer: B
Explanation: A combined ratio over 100% means claims and expenses exceed earned premiums, indicating an underwriting loss
Q: The investment return ratio is typically expressed as:
A. Investment income ÷ total premium
B. Investment income ÷ average invested assets
C. Profit before tax ÷ gross written premium
D. Investment income ÷ claims paid
Answer: B
Explanation: This ratio measures the efficiency of the insurer’s investment portfolio by comparing income to average invested assets
Q: What does a high expense ratio suggest about an insurance company?
A. High profitability
B. Efficient cost control
C. High operating costs relative to earned premiums
D. Good claims handling
Answer: C
Explanation: The expense ratio shows how much of each premium pound is used to cover expenses—higher ratios suggest inefficiency
Q: Which of the following ratios best reflects an insurer’s core underwriting performance?
A. Combined ratio
B. Return on equity
C. Net profit margin
D. Gearing ratio
Answer: A
Explanation: The combined ratio specifically assesses underwriting performance by comparing claims and expenses to earned premiums
Q: Why do insurers separate underwriting results from investment results in analysis?
A. To compare to non-insurance sectors
B. To hide underwriting losses
C. To measure operational vs financial performance
D. Because investments are tax-free
Answer: C
Explanation: Underwriting and investment performance are tracked separately to assess the insurer’s core business profitability independently of market movements
Q: What is the claims handling expense ratio?
A. Total claims ÷ number of staff
B. Cost of settling claims ÷ net claims incurred
C. Commission paid ÷ gross premium
D. Claims incurred ÷ investment income
Answer: B
Explanation: This ratio measures the efficiency of the claims department in managing the cost of settling claims
Q: What role do trend analysis and benchmarking play in ratio analysis?
A. Predict customer behaviour
B. Help design insurance products
C. Identify performance changes over time or vs peers
D. Calculate solvency capital requirements
Answer: C
Explanation: Trend analysis tracks a company’s ratios over time; benchmarking compares performance with peers or industry standards
Q: What can distort a solvency coverage ratio temporarily?
A. Change in investment strategy
B. Seasonality in claim payments
C. One-off gains or losses
D. Changes in board structure
Answer: C
Explanation: Unusual gains or losses can impact capital levels or SCR, temporarily distorting the solvency ratio
Q: What does a low current ratio suggest about an insurer’s liquidity?
A. It has too much equity
B. It may struggle to meet short-term obligations
C. It overuses reinsurance
D. It pays too many dividends
Answer: B
Explanation: A current ratio below 1 suggests that liabilities exceed liquid assets, which could indicate a short-term liquidity issue
Q: Why is consistency important when using financial ratios for performance evaluation?
A. It ensures compliance with Solvency II
B. It helps avoid tax penalties
C. It allows meaningful comparison over time and with peers
D. It is required by the PRA
Answer: C
Explanation: Consistent use of definitions and methods ensures that trends and peer comparisons are valid and useful
