Chapter 9

Question 1

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 1

Answer: C
Explanation: ROE measures profit after tax as a percentage of shareholders’ equity, showing how effectively capital is being used to generate profit

Question 2

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 2

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

Question 3

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 3

Answer: B
Explanation: A high gearing ratio shows a high level of debt compared to equity, increasing financial risk

Question 4

Q: Which of the following ratios assesses underwriting profitability?
A. Quick ratio
B. Return on capital employed
C. Combined ratio
D. ROE

Answer 4

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

Question 5

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 5

Answer: C
Explanation: A good ROE for insurers is typically between 15% and 20%

Question 6

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 6

Answer: C
Explanation: This ratio shows whether an insurer has sufficient capital to meet regulatory solvency requirements under Solvency II

Question 7

Q: The quick ratio excludes which of the following from current assets?
A. Debtors
B. Investments
C. Stock (inventory)
D. Bank balances

Answer 7

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

Question 8

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 8

Answer: B
Explanation: The debtors turnover ratio = sales ÷ debtors. It indicates how often the amount owed by customers is collected annually

Question 9

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 9

Answer: A
Explanation: Claims ratio = claims incurred (net of reinsurance) ÷ earned premium (net of reinsurance) × 100

Question 10

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 10

Answer: C
Explanation: ROCE measures how efficiently capital is being used before interest and tax are deducted

Question 11

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 11

Answer: B
Explanation: A combined ratio over 100% means claims and expenses exceed earned premiums, indicating an underwriting loss

Question 12

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 12

Answer: B
Explanation: This ratio measures the efficiency of the insurer’s investment portfolio by comparing income to average invested assets

Question 13

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 13

Answer: C
Explanation: The expense ratio shows how much of each premium pound is used to cover expenses—higher ratios suggest inefficiency

Question 14

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 14

Answer: A
Explanation: The combined ratio specifically assesses underwriting performance by comparing claims and expenses to earned premiums

Question 15

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 15

Answer: C
Explanation: Underwriting and investment performance are tracked separately to assess the insurer’s core business profitability independently of market movements

Question 16

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 16

Answer: B
Explanation: This ratio measures the efficiency of the claims department in managing the cost of settling claims

Question 17

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 17

Answer: C
Explanation: Trend analysis tracks a company’s ratios over time; benchmarking compares performance with peers or industry standards

Question 18

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 18

Answer: C
Explanation: Unusual gains or losses can impact capital levels or SCR, temporarily distorting the solvency ratio

Question 19

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 19

Answer: B
Explanation: A current ratio below 1 suggests that liabilities exceed liquid assets, which could indicate a short-term liquidity issue

Question 20

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 20

Answer: C
Explanation: Consistent use of definitions and methods ensures that trends and peer comparisons are valid and useful

Question 21

Question: What is the formula for calculating the gross profit percentage ratio?

a. Grossprofit ÷ Sales(revenue) × 100

b. Sales(revenue) ÷ Grossprofit × 100

c. Grossprofit × Sales(revenue) × 100

d. Grossprofit ÷ Costofpurchases ×100

Answer 21

Answer: a

Explanation: The gross profit percentage ratio is calculated using the formula Grossprofit ÷ Sales(revenue) × 100

. This expresses gross profit as a percentage of sales revenue.

Question 22

What might a decrease in the gross profit percentage ratio indicate?

a. Greater competition in the market causing lower selling prices

b. Higher selling prices due to market exploitation

c. Lower cost of purchases

d. An increase in the volume of high-margin products sold

Answer 22

Answer: a

Explanation: A decrease in the gross profit percentage ratio may indicate greater competition in the market, leading to lower selling prices and a lower gross profit, or an increase in the cost of purchases.

Question 22

What might an increase in the gross profit percentage ratio indicate?

a. Lower selling prices due to competition

b. Higher costs of purchases

c. The ability to charge higher prices or source purchases at a lower cost

d. A decrease in the volume of high-margin products sold

Answer 22

Answer: c

Explanation: An increase in the gross profit percentage ratio may indicate that the company is able to exploit the market and charge higher prices for its products, or that it is able to source its purchases at a lower cost.

Question 23

How can a change in the mix of products sold affect the gross profit percentage ratio?

a. It has no effect on the ratio.

b. An increasing volume of a product with a high gross margin will increase the ratio.

c. An increasing volume of a product with a low gross margin will increase the ratio.

d. A decreasing volume of a product with a high gross margin will increase the ratio.

Answer 23

Answer: b

Explanation: A change in the mix of products sold can affect the gross profit percentage ratio. Specifically, an increasing volume of a product with a high gross margin will increase the overall ratio.

Question 24

Which of the following factors can cause changes in the gross profit percentage ratio? a. Changes in the company's net profit b. Changes in selling prices, cost of purchases, or product mix c. Changes in the company's operating expenses d. Changes in the company's tax rate

Answer 24

Answer: b Explanation: Changes in the gross profit percentage ratio can be caused by changes in selling prices, cost of purchases, or the mix of products sold.

Question 25

What is the formula for calculating the return on capital employed (ROCE) ratio? a.Profitbefore interest charges and tax ÷ ( Share capital + Reserves + Borrowings ) × 100 b. Profit after tax ÷ ( Share capital + Reserves ) × 100 c. Net profit ÷ ( Borrowings + Reserves) × 100 d. Gross profit ÷ (Share capital + Reserves + Borrowings) × 100

Answer 25

Answer: a Explanation: The ROCE ratio is calculated using the formula Profit before interest charges and tax ÷ ( Share capital + Reserves + Borrowings) × 100 . This measures the efficiency of capital utilization.

Question 26

What does the return on capital employed (ROCE) ratio measure? a. The relationship between profit and revenue b. The relationship between profit and total capital employed c. The relationship between revenue and expenses d. The relationship between borrowings and reserves

Answer 26

Answer: b Explanation: The ROCE ratio measures the relationship between profit and the total capital employed, providing an indication of how efficiently and effectively management has deployed resources.

Question 27

Why is the ROCE ratio important for investors? a. It shows how much profit is reinvested into the company. b. It enables investors to see if the company is making money for them and compare it with other companies. c. It measures the company's ability to reduce costs. d. It indicates the company's market share.

Answer 27

Answer: b Explanation: The ROCE ratio helps investors determine if the company is generating returns for them and allows for comparisons between companies.

Question 28

Why might shareholders expect a higher ROCE from a start-up company? a. Start-ups have lower risks compared to established companies. b. Start-ups typically have higher risks, so a higher return is required to justify the investment. c. Start-ups have more capital employed. d. Start-ups have lower operating costs.

Answer 28

Answer: b Explanation: Shareholders expect a higher ROCE from start-ups because they involve higher risks, and higher returns are needed to compensate for these risks.

Question 29

What could a persistently low ROCE in a business division indicate? a. The division is highly profitable. b. The division is performing well in a recession. c. It may be time to dispose of the division. d. The division has high financial efficiency.

Answer 29

Answer: c Explanation: A persistently low ROCE in a business division may signal that it is underperforming and could be a candidate for disposal.

Question 30

Why is a high ROCE important when acquiring other businesses or entering new markets? a. It ensures the company has a high market share. b. It makes the investment worthwhile for capital providers. c. It reduces the company's borrowing costs. d. It guarantees higher revenue.

Answer 30

Answer: b Explanation: A high ROCE is important when acquiring businesses or entering new markets because it ensures the investment is worthwhile for those providing the capital.

Question 31

What does a low ROCE indicate during a recession? a. The company is resilient to economic downturns. b. The company is at risk of having its returns wiped out. c. The company has high financial efficiency. d. The company is outperforming competitors.

Answer 31

Answer: b Explanation: A low ROCE during a recession indicates that the company's returns could easily be wiped out, highlighting financial vulnerability.

Question 32

How does the ROCE ratio help assess financial productivity? a. It measures the company's revenue growth. b. It evaluates how well the business is being run. c. It determines the company's tax efficiency. d. It calculates the company's market value.

Answer 32

Answer: b Explanation: The ROCE ratio is an important measure of financial productivity and efficiency, showing how well the business is being managed.

Question 33

What is the primary cause of most bankruptcies? a. Lack of profitability b. Inability to pay creditors on time c. High operating costs d. Poor market share

Answer 33

Answer: b Explanation: Most bankruptcies are caused by a lack of liquidity, which is the inability to pay creditors on time, rather than a lack of profitability.

Question 34

What are liquid assets? a. Assets that are difficult to sell b. Assets that can be turned into money at short notice c. Assets that are only in the form of cash d. Assets that are long-term investments

Answer 34

Answer: b Explanation: Liquid assets are those that are either cash or can be converted into cash quickly, such as short-term deposits or securities.

Question 35

What is the formula for the current ratio? A. Current assets÷Current liabilities B. Current liabilities÷Current assets c. Current assets excluding stock ÷ Current liabilities d. Current liabilities excluding stock÷ Current assets

Answer 35

Answer: a Explanation: The current ratio is calculated as Current assets ÷ Current liabilities, which measures a company's ability to cover its short-term liabilities with its short-term assets.

Question 36

What is the formula for the quick ratio? a. Current liabilities ÷ Current assets excluding stock b. Current assets excluding stock ÷ Current liabilities c. Current assets ÷ Current liabilities excluding stock d. Current liabilities excluding stock ÷ Current assets excluding stock

Answer 36

Answer: b Explanation: The quick ratio is calculated as Current assets excluding stock ÷ Current liabilities, which measures a company's ability to meet short-term obligations with its most liquid assets.

Question 37

What is considered a prudent current ratio to maintain creditworthiness? a. Less than 1 b. Exactly 1 c. More than 2 d. Between 1 and 1.5

Answer 37

Answer: c Explanation: A current ratio of more than 2 is traditionally seen as prudent to maintain creditworthiness, though a ratio of 1.5 has become more common in recent years.

Question 38

What does a quick ratio of 1 indicate? a. The company has more liabilities than assets. b. The company can exactly pay off its current liabilities with its current assets. c. The company has no liquid assets. d. The company is in financial trouble.

Answer 38

Answer: b Explanation: A quick ratio of 1 means that the company can exactly meet its current liabilities with its most liquid assets.

Question 39

What does a quick ratio below 1 imply? a. The company has excess liquid assets. b. The company is unable to satisfy its current liabilities. c. The company has no liabilities. d. The company is highly profitable.

Answer 39

Answer: b Explanation: A quick ratio below 1 implies that the company cannot fully satisfy its current liabilities with its liquid assets and may need to arrange additional financing.

Question 40

What does a low current ratio indicate about a company's financial position? a. The company has strong creditworthiness. b. The company may struggle to meet its short-term obligations. c. The company has no liabilities. d. The company is highly liquid.

Answer 40

Answer: b Explanation: A low current ratio indicates that the company may have difficulty meeting its short-term obligations, which could affect its creditworthiness.

Question 41

What does the gearing ratio measure? a. The profitability of a company b. The liquidity of a company c. The extent to which a company finances its activities through borrowings versus shareholders' equity d. The market share of a company

Answer 41

Answer: c Explanation: The gearing ratio measures financial leverage, showing the extent to which a company finances its activities through borrowings compared to shareholders' equity.

Question 42

What is the formula for calculating the gearing ratio? a. Shareholders’ equity ÷ Long term borrowings × 100 b. Total debt ÷ Shareholders’ equity × 100 c. Short-term borrowings ÷ Shareholders’ equity × 100 d. Long-term borrowings ÷ Shareholders’ equity × 100

Answer 42

Answer: d Explanation: The gearing ratio is calculated as Long-term borrowings ÷ Shareholders’ equity × 100, indicating the proportion of debt financing.

Question 43

Why is it risky for a company to rely heavily on debt financing? a. Debt financing reduces profitability. b. Interest on debt must be paid regardless of the company's performance. c. Debt financing eliminates shareholder dividends. d. Debt financing increases liquidity.

Answer 43

Answer: b Explanation: Debt financing is risky because interest payments must be made regardless of the company's financial performance, increasing the risk during economic downturns.

Question 44

Why might a company choose to borrow money instead of issuing more shares? a. Borrowing may be more profitable for shareholders if it leads to higher returns after paying interest. b. Borrowing reduces the company's gearing ratio. c. Borrowing eliminates the need for dividends. d. Borrowing is always less risky than issuing shares.

Answer 44

Answer: a Explanation: Borrowing can be more profitable for shareholders if the funds are used effectively to generate higher returns, even after accounting for interest payments.

Question 45

What is considered a low gearing ratio? a. Below 25% b. Between 25% and 50% c. Above 50% d. Below 10%

Answer 45

Answer: a Explanation: A low gearing ratio is defined as anything below 25%, indicating minimal reliance on debt financing.

Question 46

What is considered a high gearing ratio? a. Above 25% b. Above 50% c. Below 25% d. Between 25% and 50%

Answer 46

Answer: b Explanation: A high gearing ratio is defined as anything above 50%, indicating significant reliance on debt financing.

Question 47

What range of gearing ratios is typically considered optimal for well-established companies? a. Above 50% b. Below 25% c. Between 25% and 50% d. Between 10% and 25%

Answer 47

Answer: c Explanation: A gearing ratio between 25% and 50% is typically considered optimal or normal for well-established companies.

Question 48

Why might companies with high levels of fixed assets have higher gearing ratios? a. Fixed assets often require significant debt financing for acquisition. b. Fixed assets eliminate financial risk. c. Fixed assets increase profitability. d. Fixed assets reduce the need for debt financing.

Answer 48

Answer: a Explanation: Companies with high levels of fixed assets, such as plant and machinery, often have higher gearing ratios because these assets require significant debt financing.

Question 49

What is leverage in the context of gearing ratios? a. The profitability of a company b. The amount of debt a company has in its mix of debt and equity c. The liquidity of a company d. The amount of equity a company has in its capital structure

Answer 49

Answer: b Explanation: Leverage refers to the amount of debt a company has in its mix of debt and equity, used as a funding source for investment and expansion.

Question 50

What is a potential benefit of high financial leverage? a. Lower interest payments b. Higher return on investment (ROI) for shareholders c. Reduced financial risk d. Increased liquidity

Answer 50

Answer: b Explanation: High financial leverage can lead to a higher return on investment (ROI), appealing to shareholders who may see an increase in their initial investment.

Question 51

Why is it important to use a consistent definition of gearing ratios? a. To eliminate debt financing b. To ensure accurate comparisons between years or companies c. To increase profitability d. To reduce the gearing ratio

Answer 51

Answer: b Explanation: Using a consistent definition of gearing ratios ensures accurate comparisons between different years or companies within the same industry.

Question 52

Why might private equity companies use higher gearing ratios? a. To reduce financial risk b. To generate high returns for their investors c. To increase liquidity d. To eliminate debt financing

Answer 52

Answer: b Explanation: Private equity companies often use higher gearing ratios to acquire companies and generate high returns for their investors.

Question 53

What does it mean for a company to be highly leveraged? a. It has more debt than the average in its industry. b. It has eliminated all debt. c. It has more equity than debt. d. It has reduced its gearing ratio.

Answer 53

Answer: a Explanation: A company is said to be highly leveraged when it has more debt than the average in its industry, increasing financial risk.

Question 54

What does the return on equity (ROE) measure? a. The relationship between profit and shareholders' capital b. The liquidity of a company c. The market share of a company d. The company's total liabilities

Answer 54

Answer: a Explanation: ROE measures the relationship between profit and shareholders' capital, indicating the efficiency with which the capital is employed.

Question 55

What is the formula for calculating ROE? a. Profit before tax÷Shareholders’ equity×100 b. Profit after tax ÷ Shareholders’ equity × 100 c. Assets ÷ Liabilities × 100 d. Shareholders’ equity ÷ Profit after tax × 100

Answer 55

Answer: b Explanation: The formula for ROE is Profit after tax ÷ Shareholders’ equity × 100, which shows the return generated on shareholders' capital.

Question 56

What is considered a good ROE ratio? a. Between 5% and 10% b. Between 10% and 15% c. Between 15% and 20% d. Above 25%

Answer 56

Answer: c Explanation: A good ROE ratio is typically considered to be between 15% and 20%, indicating a strong return on shareholders' equity.

Question 57

Why is ROE important for investors? a. It shows the company's liquidity position. b. It enables investors to see if the company is making money for them and compare it with other companies. c. It measures the company's market share. d. It calculates the company's liabilities.

Answer 57

Answer: b Explanation: ROE is important because it helps investors determine if the company is generating returns for them and allows for comparisons with other companies.

Question 58

What does a higher ROE indicate? a. Lower profitability b. Higher efficiency in employing shareholders' capital c. Higher liabilities d. Lower return on investment

Answer 58

Answer: b Explanation: A higher ROE indicates greater efficiency in employing shareholders' capital to generate profits.

Question 59

How does the hard and soft market cycle affect ROE? a. It eliminates the need for ROE calculations. b. It distorts the ROE figures over time. c. It increases the ROE ratio permanently. d. It reduces the importance of ROE.

Answer 59

Answer: b Explanation: The hard and soft market cycle can distort ROE figures over a five-year period, affecting the interpretation of the ratio.

Question 60

What does shareholders' equity represent in the ROE formula? a. The company's total liabilities b. The company's total assets c. The capital provided by shareholders d. The company's net profit

Answer 60

Answer: c Explanation: Shareholders' equity represents the capital provided by shareholders, which is used in the ROE formula to measure returns.

Question 61

Why might a low ROE be concerning for investors? a. It indicates high profitability. b. It suggests inefficiency in using shareholders' capital. c. It shows the company has no liabilities. d. It means the company has no assets.

Answer 61

Answer: b Explanation: A low ROE suggests that the company is not efficiently using shareholders' capital to generate profits, which may concern investors.

Question 62

How can investors use ROE to compare companies? a. By comparing the companies' liabilities b. By comparing the companies' market shares c. By comparing the efficiency of capital utilization d. By comparing the companies' liquidity ratios

Answer 62

Answer: c Explanation: Investors use ROE to compare how efficiently different companies utilize shareholders' capital to generate profits.

Question 63

What does a very high ROE potentially indicate? a. Excessive reliance on debt financing b. Low profitability c. High liquidity d. Low shareholder returns

Answer 63

Answer: a Explanation: A very high ROE may indicate excessive reliance on debt financing, which can artificially inflate the ratio.

Question 64

How does ROE help assess a company's financial performance? a. It measures the company's liquidity. b. It evaluates the company's ability to generate returns on shareholders' capital. c. It calculates the company's total liabilities. d. It determines the company's market share.

Answer 64

Answer: b Explanation: ROE helps assess a company's financial performance by evaluating its ability to generate returns on shareholders' capital.

Question 65

What is the primary focus of ROE as a financial ratio? a. The company's total assets b. The company's liabilities c. The relationship between profit and shareholders' equity d. The company's market share

Answer 65

Answer: c Explanation: ROE focuses on the relationship between profit and shareholders' equity, providing insight into the efficiency of capital utilization.

Question 66

Why is ROE considered a primary measure for investors? a. It shows the company's liquidity position. b. It enables investors to see if the company is making money for them. c. It calculates the company's liabilities. d. It measures the company's market share.

Answer 66

Answer: b Explanation: ROE is a primary measure because it allows investors to determine if the company is generating returns for them and compare it with other companies.

Question 67

What does the combined ratio measure? a. The profitability of an insurance company b. The underwriting performance by combining claims, expense, and commission ratios c. The investment income of an insurance company d. The market share of an insurance company

Answer 67

Answer: b Explanation: The combined ratio measures underwriting performance by combining the claims ratio, expense ratio, and commission ratio to determine if premiums are sufficient to cover claims and expenses.

Question 68

What does a combined ratio below 100% generally indicate? a. Poor underwriting performance b. Good underwriting performance c. High investment income d. Catastrophe losses

Answer 68

Answer: b Explanation: A combined ratio below 100% generally indicates good underwriting performance, as premiums are sufficient to cover claims and expenses.

Question 69

What does a combined ratio above 110% generally indicate? a. Excellent underwriting performance b. Poor underwriting or catastrophe losses c. High profitability d. Low claims ratio

Answer 69

Answer: b Explanation: A combined ratio above 110% generally indicates poor underwriting performance or significant catastrophe losses.

Question 70

Which of the following is NOT included in the combined ratio? a. Claims ratio b. Expense ratio c. Commission ratio d. Investment income

Answer 70

Answer: d Explanation: The combined ratio does not take investment income into account; it focuses solely on underwriting performance.

Question 71

What is the formula for the claims ratio? a. Claims incurred net of reinsurance ÷ Earned premium net of reinsurance × 100 b. Administrative expenses ÷ Earned premium net of reinsurance × 100 c. Acquisition costs ÷ Earned premium net of reinsurance × 100 d. Claims incurred net of reinsurance ÷ Acquisition costs × 100

Answer 71

Answer: a Explanation: The claims ratio is calculated as Claims incurred net of reinsurance ÷ Earned premium net of reinsurance × 100.

Question 72

What is the formula for the expense ratio? a. Administrative expenses ÷ Earned premium net of reinsurance × 100 b. Claims incurred net of reinsurance ÷ Earned premium net of reinsurance × 100 c. Acquisition costs ÷ Earned premium net of reinsurance × 100 d. Administrative expenses ÷ Acquisition costs × 100

Answer 72

Answer: a Explanation: The expense ratio is calculated as Administrative expenses ÷ Earned premium net of reinsurance × 100.

Question 73

What is the formula for the combined ratio? a. Claims incurred net of reinsurance ÷ Earned premium net of reinsurance × 100 b. Claims + Expenses + Acquisition costs ÷ Earned premium net of reinsurance × 100 c. Administrative expenses ÷ Earned premium net of reinsurance × 100 d. Acquisition costs ÷ Earned premium net of reinsurance × 100

Answer 73

Answer: b Explanation: The combined ratio is calculated as Claims + Expenses + Acquisition costs ÷ Earned premium net of reinsurance × 100.

Question 74

What does a combined ratio of 105% indicate? a. Good underwriting performance b. Poor underwriting performance or catastrophe losses c. High investment income d. Low claims ratio

Answer 74

Answer: b Explanation: A combined ratio above 100% (e.g., 105%) indicates poor underwriting performance or potential catastrophe losses.

Question 75

How does the combined ratio differ from profitability measures? a. It includes investment income. b. It tracks underwriting performance rather than overall profitability. c. It measures market share. d. It calculates total liabilities.

Answer 75

Answer: b Explanation: The combined ratio differs from profitability measures because it tracks underwriting performance without considering investment income.

Question 76

What is the primary purpose of the combined ratio? a. To measure the profitability of an insurance company b. To assess underwriting performance c. To calculate investment income d. To determine market share

Answer 76

Answer: b Explanation: The primary purpose of the combined ratio is to assess underwriting performance by evaluating whether premiums are sufficient to cover claims and expenses.

Question 77

An insurer reports: Profit before interest and tax: £75,000k Share capital: £200,000k Reserves: £100,000k Borrowings: £50,000k What is the ROCE? a. 21.4% b. 22.7% c. 25.0% d. 26.8%

Answer 77

Answer: a 21.4% Explanation: Capital employed = £200k + £100k + £50k = £350k ROCE = 75,000 ÷ 350,000 × 100 = 21.4%

Question 78

An insurer reports: Operating profit: £65,000k Investment income: £10,000k Interest expense: £3,000k Profit before interest and tax: £75,000k Share capital: £150,000k Reserves: £100,000k Borrowings: £50,000k Total assets: £600,000k Current liabilities: £120,000k What is the ROCE? a. 25.0% b. 30.0% c. 20.0% d. 15.5%

Answer 78

Answer: a. 25.0% Explanation: Ignore total assets and current liabilities. Capital employed = £150k + £100k + £50k = £300k ROCE = 75,000 ÷ 300,000 × 100 = 25.0%

Question 79

What is the ROCE Ratio

Answer 79

Profits before interest and tax / shareholders + reserves + borrowings x100

Question 80

What is the ROE Ratio?

Answer 80

Profits after tax / shareholders equity x100

Question 81

What is the gearing ratios ?

Answer 81

Long term borrowings /shareholders equity x100

Question 82

Gross profit ratio ?

Answer 82

Gross profit / sales x100 (Premium income - claims paid = ….) { …. / sales/ revenue x100} = the answer

Question 83

What is the liquidity ratio ?

Answer 83

Current assets / current liability x100

Question 84

What is the combined ratio ?

Answer 84

Claims + expenses + acquisition /earned prem (nor) x100