exam questions

Question 1

This type of accounting information primarily focuses on the future and is designed to help management make day-to-day decisions based on forecasts and projections. What is being described?

a.
Cash flow statement.

b.
Profit and loss statement.

c.
Financial accounting.

d.
Management accounting.

Answer 1

d.
Management accounting.

Question 2

A risk assessment rating framework assesses risks based on:

a.
impact and severity.

b.
probability and severity.

c.
impact and probability.

d.
probability and value.

Answer 2

c.
impact and probability.

Question 3

Under the Companies Act 2006, directors of UK incorporated businesses must not approve financial statements unless they are satisfied they are:

a.
fair and reliable.

b.
true and fair.

c.
accurate and compliant.
Chapter reference 7B4

d.
beyond reasonable doubt.

Answer 3

b.
true and fair.

Question 4

When monitoring a company’s risk appetite, the PRA requires insurers to demonstrate that the risk of failure does not exceed:

a.
a one percent chance over a twelve-month timescale.

b.
one chance in two hundred over a twenty-four-month timescale.

c.
a one percent chance over a twenty-four- month timescale.

d.
one chance in two hundred over a twelve-month timescale

Answer 4

d.
one chance in two hundred over a twelve-month timescale

Question 5

Why is the capital for Solvency II purposes different from the capital shown in an insurance company’s published accounts?

a.
Solvency II requires insurers to take into account the market value of their assets and deduct a specified risk margin.

b.
The published accounts will value the assets at the prevailing market value whereas Solvency II will require them to be valued not only on a rolling five- year average, but also to apply a prescribed risk margin.

c.
The published accounts will value the assets at the prevailing market value whereas Solvency II will require them to be valued on a rolling five-year average.

d.
Solvency II requires insurers to take into account the quality of their assets, the risk of their liabilities and to add a risk margin.

Answer 5

d.
Solvency II requires insurers to take into account the quality of their assets, the risk of their liabilities and to add a risk margin.

Question 6

Why typically are a number of methods used when projecting claim costs?

Question 12Select one:

a.
Because certain methods only work with a particular business line.

b.
To ensure a range of different scenarios are considered.

c.
To provide a safety margin, given the potential dangers of not getting it right.

d.
To meet specific PRA requirements.

Answer 6

b.
To ensure a range of different scenarios are considered.

Question 7

A UK listed firm prepares its accounts in accordance with the International Financial Reporting Standards. If the directors do NOT believe this provides an accurate picture of the company’s trading position, what must they do?

a.
Identify a more appropriate set of standards to use.

b.
Depart from the standards and provide detailed disclosures why.

c.
Agree any alternative basis with HMRC first.

d.
Continue to follow the standards but provide an explanation of areas they feel should be more fully explained.

Answer 7

b.
Depart from the standards and provide detailed disclosures why.

Question 8

Businesses will typically document the risks to the business that have been analysed and allocated a risk rating. What is this known as?

a.
Risk heat map.

b.
Risk report.

c.
Risk ranking.

d.
Risk register.

Answer 8

d.
Risk register.

Question 9

A company works on an accrual accounting basis. If it sells a product on the 1 September, invoice for it on 10 September, have 15 days payment terms and receive payment on 1 October, when would the payment be regarded as received?

a.
1 October.

b.
25 September.

c.
10 September.

d.
1 September.

Answer 9

d.
1 September.

Question 10

Under variance analysis, what is LEAST likely to be the cause of a variance?

Question 4Select one:

a.
Failure to meet operational efficiencies.

b.
Inadequate pricing.

c.
Cost increases in line with inflation.

d.
Random events.

Answer 10

c.
Cost increases in line with inflation.

Question 11

When preparing accounts, the accrual accounting basis:

a.
only applies to insurance companies.

b.
is the only accounting basis allowed under the International Financial Reporting Standards.

c.
treats the business as a going concern.

d.
treats income as revenue when it is earned rather than when the cash is received.

Answer 11

d.
treats income as revenue when it is earned rather than when the cash is received.

Question 12

From a reserving point of view, why are liability claims difficult to predict?

a.
The potential time they take to settle and the size of potential claims.

b.
It is not possible to reinsure against this type of risk.

c.
The potential number of this type of claim and the typical delay in reporting this type of claim.

d.
The potential number of this type of claim.

Answer 12

a.
The potential time they take to settle and the size of potential claims.

Question 13

An insurer shows the following figures within its accounts: gross profit before interest charges of £25m, share capital of £30m, reserves of £9m and borrowings of £10m. What is its return on capital employed ratio?

a.
64%.

b.
62%.

c.
83%.

d.
51%.

Answer 13

d.
51%.

Step-by-step:
Operating Profit (before interest) = £25m

Capital Employed = Share Capital + Reserves + Borrowings

= £30m + £9m + £10m = £49m

ROCE=(25 / 49)×100=

51.02%

Question 14

What is the name given to the process insurers are required to undertake that identifies, assesses and manages the risks to their overall solvency level?

a.
The Lamfalussy process.

b.
Stress testing.

c.
Pillar three requirements.

d.
Own risk and solvency assessment.

Answer 14

d.
Own risk and solvency assessment.

Question 15

There are reduced presentation and disclosure requirements for small entities in FRS 102. These would apply to which one of these non-insurance firms?

a.
Megga Ltd, which has a turnover of £16m, employs 145 staff and has total assets of £4m.

b.
H&H Ltd, which has a turnover of £6m, employs 65 staff and has assets of £1m.

c.
Tubbs Ltd, which has a turnover of £12m, employs 48 staff and has assets of £8m.

d.
Fluffs Ltd, which has a turnover of £16m, employs 85 staff and has total assets of £3m.

Answer 15

b.
H&H Ltd, which has a turnover of £6m, employs 65 staff and has assets of £1m.

Question 16

Which type of business is subject to the UK Corporate Governance Code?

a.
Companies listed on the London Stock Exchange.

b.
Small family companies.

c.
Sole traders.

d.
Partnerships.

Answer 16

a.
Companies listed on the London Stock Exchange.

The UK Corporate Governance Code applies to premium-listed companies on the London Stock Exchange, and sets out principles of good governance aimed at listed companies with accountability to shareholders.

Question 17

Reverse stress-testing can best be described as assessing the:

Question 11Select one:

a.
key threats to the strategy and business model.

b.
scenarios that might threaten future business growth.

c.
scenarios most likely to render a business model unviable.

d.
key economic threats and risks faced by the business.

Answer 17

c.
scenarios most likely to render a business model unviable.

Question 18

When establishing the financial strength of insurers, a rating agency will usually take into account:

a.
only the industry risk, strategy of the business, capital adequacy and liquidity.

b.
industry risk, staffing levels, operating performance, capital adequacy, liquidity, investments, underwriting profit, reputation and share price.

c.
industry risk, strategy of the business, operating performance, capital adequacy and liquidity.

d.
only the strategy of the business, operating performance and capital adequacy.

Answer 18

c.
industry risk, strategy of the business, operating performance, capital adequacy and liquidity.

Question 19

A shareholders’ liability under a proprietary company is
A. 50% of the nominal value of their shareholding.
B. the nominal value of their shareholding.
C. 50% of the total liabilities of the company.
D. unlimited.

Answer 19

b.

Question 20

Which distribution channel for insurance most commonly offers white-labelled products?
A. Aggregators.
B. Intermediaries.
C. Retailers.
D. Travel agents.

Answer 20

c

Question 21

What are customer stakeholders of an insurer most likely to expect?
A. Competitively-priced products.
B. Fair competition to be evidenced.
C. Increased share value.
D. Sustained and increasing investment growth.

Answer 21

a

Question 22

The chief actuary of an insurance company is usually responsible for
A. management of debt and cashflow.
B. overseeing the risk management process.
C. preparing the profile of gross premium by currency.
D. technical pricing of new and existing products.

Answer 22

d

The chief actuary plays a critical role in an insurance company and is typically responsible for:

Technical pricing of insurance products.

Calculating reserves and provisions (especially technical provisions under Solvency II).

Supporting solvency assessments, such as SCR and ORSA inputs.

Advising on capital modelling and risk from an actuarial standpoint.

Question 23

An insurance company’s tactical plan may refer to
A. development of new insurance products over a 2-year period.
B. long-term resource allocation over a 10-year period.
C. routine day-to-day methods of working.
D. weekly monitoring of budgets.

Answer 23

a.

A tactical plan refers to medium-term planning, typically over 1–3 years, and supports the broader strategic plan. It includes initiatives such as:

Product development.

Entering new markets.

Upgrading IT systems.

Medium-term marketing campaigns.

Let’s clarify the other options:

B refers to strategic planning (long-term, typically 5–10 years).

C refers to operational planning (short-term, day-to-day tasks).

D involves monitoring and control, but weekly budget checks are part of operational management, not tactical planning.

Question 24

The senior managers of an insurance company are reviewing performance against a monthly
requirement to have no IT downtime of greater than 30 minutes a quarter. They are reviewing a
A. key effort-oriented performance indicator.
B. key results-oriented performance indicator.
C. key risk indicator.
D. key strategy analysis.

Answer 24

b.

The statement mentions a measurable outcome — specifically, the goal of having no IT downtime exceeding 30 minutes per quarter. This is a result, not an effort or a risk prediction.

Here’s a quick breakdown of the terms:

Key results-oriented performance indicator (KPI): Measures actual outcomes against targets (e.g. downtime, sales volume, claims settled within SLA).

Key effort-oriented performance indicator: Focuses on activities or inputs, like hours worked or calls made.

Key risk indicator (KRI): Monitors potential risk exposures, such as increased claims frequency or cyberattack attempts.

Key strategy analysis: Refers to a high-level review of whether strategic objectives are being met — broader than this specific metric.

Question 25

Which UK companies are required to report whether they are compliant with the UK Corporate Governance Code? A. All UK companies. B. Only those which are limited companies. C. Only those listed on the London Stock Exchange. D. Only those with a turnover in excess of £1,000,000.

Answer 25

c. The UK Corporate Governance Code applies to premium-listed companies on the London Stock Exchange. These companies are required to report on a "comply or explain" basis, meaning they must either comply with the Code or explain why they do not. Other companies (such as private companies or AIM-listed companies) may choose to follow the Code voluntarily, but they are not required to do so.

Question 26

Which UK companies must have Articles of Association? A. Only those listed on the London Stock Exchange. B. Only those which are private companies. C. Only those with a turnover in excess of £1,000,000. D. All those which are registered with Companies House.

Answer 26

d. Every company that is registered with Companies House in the UK — whether public or private — is legally required to have Articles of Association. These documents set out the rules for the company’s governance and internal management, such as: -How decisions are made -The powers and responsibilities of directors -The rights of shareholders The Articles of Association form a key part of the company's constitution alongside the Memorandum of Association.

Question 27

What is shown respectively on a company’s income statement and balance sheet? A. The income statement shows the financial position at a particular point in time and the balance sheet shows the results of transactions during the accounting period. B. The income statement shows the results of transactions during the accounting period and the balance sheet shows the financial position at a particular point in time. C. The income statement shows the financial position at a particular point in time and the balance sheet shows the sources and uses of cash. D. The income statement shows the sources and uses of cash and the balance sheet shows the financial position at a particular point in time.

Answer 27

B. Explanation: Income Statement (also called the Profit and Loss Account): Reports the company’s revenues, expenses, and profits/losses over a specific period (e.g., a quarter or a year). It shows how the company performed financially during that time. Balance Sheet: Provides a snapshot of the company’s financial position at a single point in time. It includes: Assets (what the company owns) Liabilities (what the company owes) Equity (the residual interest in the assets after deducting liabilities)

Question 28

What is the primary function of financial accounting? A. To allow internal auditors to report on the adequacy of control systems. B. To assist managers in formulating strategic plans. C. To provide information on individual departments within an organisation. D. To report the financial position to all stakeholders.

Answer 28

D. Financial accounting is primarily concerned with: Preparing standardised financial statements (e.g. income statement, balance sheet, cash flow statement). Reporting the overall financial performance and position of a business. Ensuring information is available to external stakeholders such as shareholders, creditors, regulators, and potential investors. It is governed by accounting standards and focuses on the whole organisation, not just departments.

Question 29

Management accounting differs from financial accounting in that management accounts A. are distributed to all stakeholders. B. are prepared specifically for calculation of taxation liability. C. are used to determine shareholders’ dividends. D. need not be audited by external auditors.

Answer 29

D. Management accounting is: -Primarily for internal use by management. -Focused on helping managers with planning, decision-making, and control. -Not required by law and does not need to follow external reporting standards. -Not subject to external audit, unlike financial accounting, which must comply with statutory requirements and be audited. This contrasts with financial accounting, which is aimed at external users and must be audited for accuracy and compliance.

Question 30

The chief executive officer of a large insurance company wishes to review its solvency margin. From which financial document will he obtain the necessary information? A. Balance sheet. B. Cash flow statement. C. Management accounts. D. Profit and loss account.

Answer 30

A. The solvency margin represents the excess of an insurer’s assets over its liabilities — essentially a measure of financial stability and ability to meet obligations. This information is found on the balance sheet, which shows: Assets: what the company owns Liabilities: what the company owes The difference (equity or surplus) forms the basis for solvency calculations Other documents: Profit and loss account shows performance (income and expenses) over time. Cash flow statement shows cash inflows and outflows. Management accounts may contain solvency info, but it is not the primary source — they are internal and variable in format.

Question 31

When depreciation is shown in a company’s financial accounts, accounting concepts require that this represents the A. amount of the company’s turnover minus the cost of sales. B. cost of an asset apportioned over the financial period during which the company will benefit from the use of that asset. C. difference between the amount paid for acquiring a company and the value of the net assets of that company when acquired. D. money used to finance daily trading activities.

Answer 31

B. Depreciation is an accounting method used to spread the cost of a tangible fixed asset (e.g. machinery, vehicles, computers) over its useful life. This ensures that the financial statements reflect a more accurate cost of using the asset each year, in line with the matching concept in accounting.

Question 32

An insurance company uses the double-entry accounting principle for recording insurance transactions to reflect that it has A. earned an amount of income which is balanced by an increase in cash. B. made long-term investments which are balanced by an increase in cash. C. made provision for outstanding losses which are balanced by a decrease in cash. D. sold assets which are balanced by a decrease in cash.

Answer 32

A. Double-entry accounting means every transaction has two sides: a debit and a credit, and they must always balance. If an insurance company earns income (e.g. from premiums), it would record: A credit to income (increasing revenue) A debit to cash (increasing the cash asset). This reflects the principle that any gain (like income) must be matched by a change in another account (like an increase in assets).

Question 33

A balance sheet records a company’s A. gross cash flow. B. gross financial position. C. net cash flow. D. net financial position.

Answer 33

D. gross = Total amount before deductions. Net = Amount after deductions (e.g., taxes, expenses). On a balance sheet: Gross financial position = Total assets and liabilities. Net financial position = Assets minus liabilities (what the company actually owns after debts).

Question 34

Which method of projecting the total cost of claims solely extrapolates the paid claims and does NOT use any other information? A. Bornhuetter-Ferguson. B. Loss ratio method. C. Projection of incurred claims. D. Projection of paid claims.

Answer 34

d. Projection of paid claims: Extrapolates only the paid claims (focuses on actual payments made). Bornhuetter-Ferguson: Uses paid claims and an assumed loss ratio to estimate future claims. Loss ratio method: Projects claims based on a predicted loss ratio (claims to premiums). Projection of incurred claims: Projects both paid claims and reserves for claims that are incurred but not yet paid.

Question 35

An insurer is establishing its claims reserving policy on a discounted claims basis. This confirms that A. claims values appear to be inflated. B. incurred but not reported claims are being written-off. C. investment income is being taken into account. D. voluntary excesses are being applied by policyholders.

Answer 35

C. When an insurer uses a discounted claims basis, they account for the time value of money. This means they adjust the claims reserves to reflect the fact that the insurer will earn investment income on the funds set aside for future claims. Essentially, future claims are discounted to present value, considering the income that can be earned on those reserves.

Question 36

How is an insurer’s gearing ratio calculated? A. Long-term borrowings divided by shareholders’ equity. B. Short-term borrowings divided by shareholders’ equity. C. Shareholders’ equity divided by long-term borrowings. D. Shareholders’ equity divided by short-term borrowings.

Answer 36

A. The gearing ratio measures an insurer’s financial leverage by comparing its long-term borrowings to its shareholders’ equity. A higher gearing ratio indicates that the insurer relies more on debt to finance its operations, while a lower ratio suggests less reliance on debt.

Question 37

Which financial ratio gives an indication of an insurer’s underwriting year performance? A. Claims ratio. B. Combined ratio. C. Credit turnover ratio. D. Current ratio.

Answer 37

B. The combined ratio is a key indicator of an insurer’s underwriting year performance. It combines the claims ratio (claims paid or reserved as a percentage of premiums) and the expense ratio (operating expenses as a percentage of premiums). A combined ratio below 100% indicates underwriting profitability (the insurer is making a profit from its underwriting activities), while a ratio above 100% indicates underwriting losses.

Question 38

When looking at the financial strength of an insurance company, a rating agency’s methodology takes into account the company’s capital adequacy which represents its A. ability to efficiently manage cash flows and borrow money if required. B. combination of the loss ratio, expense ratio and combined ratio. C. potential requirement for additional capital or liquidity in the future. D. quality and level of capital required to run the business.

Answer 38

C. When rating an insurer's financial strength, capital adequacy refers to the company's ability to meet future obligations and risks. It assesses whether the insurer has enough capital to absorb unexpected losses and meet regulatory requirements, ensuring it can continue operations even if it faces financial strain.

Question 39

The financial strength of an insurance company as measured by a ratings agency is always A. based only on publicly-available information. B. a measure of its ability to pay all debts. C. a measure of its ability to pay claims. D. shown in its cash flow statement.

Answer 39

C. The financial strength of an insurance company, as assessed by a ratings agency, primarily reflects the company's ability to pay claims. This involves evaluating its capital reserves, profitability, and overall financial stability to ensure it can meet its future claims obligations, even under adverse conditions.

Question 40

When looking at the solvency requirements of insurance firms, the Prudential Regulation Authority states that the probability factor that should NOT be exceeded is A. 1 chance in 200 over a 12-month timescale. B. 1 chance in 200 over an 18-month timescale. C. 1 chance in 500 over a 12-month timescale. D. 1 chance in 500 over an 18-month timescale.

Answer 40

A.

Question 41

Mark, a risk manager at a London-based multinational retail group, owns shares in the company. On 5 May, as an insider, he learns of serious financial difficulties, prompting plans to sell overseas businesses, including the New York office, to raise equity. The London office, housed in a bank-financed building, is repaying its loan over 15 years. What scope of risks within risk management is likely to be affected by the London office’s financial issues and the need to sell off the New York office? A. Credit. B. Group. C. Market. D. Operational.

Answer 41

A. Credit Risk: Definition: The risk that a company will be unable to meet its financial obligations, such as repaying loans or paying debts. Group Risk: Definition: The risk associated with the financial stability and performance of the entire corporate group (including subsidiaries and affiliates). Market Risk: Definition: The risk of losses in financial investments due to market factors, such as changes in interest rates, stock prices, or foreign exchange rates. Operational Risk: Definition: The risk of loss due to inadequate or failed internal processes, systems, people, or external events.

Question 42

Mark, a risk manager at a London-based multinational retail group, owns shares in the company. On 5 May, as an insider, he learns of serious financial difficulties, prompting plans to sell overseas businesses, including the New York office, to raise equity. The London office, housed in a bank-financed building, is repaying its loan over 15 years. The bank loan used to purchase the London office building would be classified on the company balance sheet as being a A. current asset. B. current liability. C. non-current asset. D. non-current liability.

Answer 42

D. The bank loan used to purchase the office building is a long-term obligation, repayable over 15 years. Since it exceeds one year, it qualifies as a non-current liability on the company’s balance sheet. Non-current assets are long-term resources owned by the company. Non-current liabilities are long-term debts or obligations the company owes.

Question 43

Joe, a business manager at a UK-based insurance company, has been asked to clarify matters related to information use. The company is reviewing data access, reuse in underwriting, and the IT department’s role. There’s also debate on shareholder disclosures about profits and dividend distribution, as well as the value of financial strength ratings from a rating agency. Joe should advise the Board it is important that the policy and loss data is A. restricted to the use of the chief actuary only. B. never used again as this is not permitted by the Data Protection Act 1988. C. readily accessible by all appropriate employees. D. readily accessible by all stakeholders.

Answer 43

Policy and loss data should be available to employees who need it for their work (e.g., actuaries, underwriters), but access should be restricted to protect confidentiality and comply with data protection rules.

Question 44

Joe should advise the Board that the underwriting administration services information currently in use is most commonly known as a A. bespoke benchmarking system. B. codified knowledge management system. C. learning management system. D. personalised knowledge management system.

Answer 44

b. Bespoke benchmarking system: A custom-made tool for comparing performance metrics against industry standards. Not relevant here, as the focus is on reused internal information, not performance comparison. B. Codified knowledge management system (Correct): Stores structured, reusable knowledge (e.g. manuals, data). Fits the scenario where underwriting information is reused. C. Learning management system: Used for delivering and managing training and educational content. Not suitable, as it’s not about storing business process data. D. Personalised knowledge management system: Tailors knowledge to individual users’ needs. Not correct here, as the system in question is for shared, structured use—not individual customisation.

Question 45

Joe should advise the Board that if the IT department is to fulfil its role within the company, it must A. carry out themed audits of the IT area. B. ensure all employees carry out controlled functions. C. make a proactive contribution to the development of business strategy. D. procure offices to meet the accommodation needs.

Answer 45

c. For IT to support the business effectively, it must work closely with other departments and actively contribute to strategic planning, not just provide technical support. IT should help shape how technology can improve operations and drive business goals.

Question 46

Joe should advise the Board that shareholders are given information on dividend payments which recognises that A. only individual and personal messages are supplied to shareholders on the reasons for payment levels. B. payments are never made when the underlying value of the company’s shares has increased. C. payments increase on an automatic basis year-on-year. D. shareholders’ payments may be held back to fund future expansion.

Answer 46

d. Companies may choose to retain profits instead of paying them out as dividends to reinvest in the business (e.g., for growth or expansion). Shareholders are informed of this in financial statements and reports. Dividends are not guaranteed and depend on the company’s strategic priorities.

Question 47

John is considering buying shares in a listed insurance company. His neighbor, Mary, shares the latest financial report. John examines new loans, return on equity, and liquidity ratios. Mary informs him of the company’s 30% revenue growth plan. In which financial statement within the report and accounts will the receipts from the new loans have been shown? A. Cash flow from financing activity. B. Cash flow from investment activity. C. Cash flow from operating activity. D. Income as a net investment return.

Answer 47

a. Receipts from new loans are part of how a company raises capital, which falls under financing activities in the cash flow statement. This section includes inflows from loans, issuing shares, or other financing sources.

Question 48

In which financial statement within the report and accounts will John find details of the company’s assets and liabilities? A. Balance sheet. B. Cash flow. C. Profit and loss. D. Revenue.

Answer 48

a is correct The balance sheet (also called the statement of financial position) shows the company’s assets, liabilities, and equity at a specific point in time. It provides a snapshot of what the company owns and owes. Cash flow: The cash flow statement shows how cash moves in and out of the company, focusing on operating, investing, and financing activities. It doesn’t list assets or liabilities. Profit and loss: The profit and loss statement (or income statement) shows a company’s revenues, expenses, and profits or losses over a period of time. It doesn’t detail assets or liabilities. Revenue: Revenue refers to the income generated from normal business activities, and it's typically reported in the profit and loss statement. It doesn’t cover assets or liabilities.

Question 49

What information has John used to calculate the return on equity? A. Assets and liabilities. B. Gross profit and sales revenue. C. Long-term borrowings and shareholders’ equity. D. Profit after tax and capital.

Answer 49

D. Return on equity (ROE) is calculated by dividing profit after tax (net income) by shareholders' equity (capital). It measures how effectively a company uses its equity to generate profit.

Question 50

The company’s liquidity ratio will show the relationship of A. borrowings as a percentage of equity. B. liabilities to cash and investments. C. net assets to income. D. profit to shareholders’ capital.

Answer 50

b. The liquidity ratio measures a company's ability to meet its short-term obligations using its most liquid assets (like cash and investments). It shows the relationship between liabilities and liquid assets to assess the company’s financial health in the short term. Borrowings as a percentage of equity: This is the gearing ratio, not liquidity. Net assets to income: This measures efficiency, not liquidity. Profit to shareholders’ capital: This is the return on equity (ROE), not liquidity.

Question 51

The insurer has expanded by acquiring a firm of loss adjusters, aiming to enhance claims service. Each department sets a yearly budget, which Janet, the finance director, incorporates into the company budget. She allows adjustments for unexpected costs and oversees all financial accounts. The acquisition by the insurer is an example of A. financial growth. B. horizontal integration. C. organic growth. D. vertical integration.

Answer 51

B.Horizontal Integration – This happens when a company acquires another in the same industry at the same level of operations. Since the insurer is acquiring a firm that specializes in loss adjusting (which aligns with its claims service) financial Growth – This refers to an increase in financial resources or profits. While the acquisition might contribute to growth, this term doesn't specifically describe the nature of the expansion. C. Organic Growth – This refers to internal expansion, such as increasing revenue or market share through existing operations rather than acquisitions. D. Vertical Integration – This occurs when a company expands by acquiring businesses at different levels of its supply chain. Since the insurer is acquiring another business within the same industry rather than one at a different stage in the process, this is not the right choice.

Question 52

At what level of information will the insurer’s overall budget be categorised? A. Operational. B. Regulatory. C. Strategic. D. Tactical.

Answer 52

C. Strategic—the overall budget is used for long-term planning and assessing company objectives. Operational—focuses on day-to-day expenses, not the full company budget. Regulatory—relates to compliance, not financial planning. Tactical—supports short-term decisions, but this budget is for broader management goals.

Question 53

Janet’s essential role within the insurer is best described as A. conducting loss modelling to predict aggregate exposure. B. ensuring that sufficient capital and reserves are available to meet solvency requirements. C. examining activities to ensure that practices conform to documented operational procedures. D. protecting the insurer’s objectives and reputation.

Answer 53

B. Ensuring sufficient capital and reserves—as the finance director, Janet oversees financial accounts and budgeting, which directly impacts solvency requirements. Loss modelling—is more relevant to risk assessment, not financial management. Operational procedures—fall under compliance or audit roles, not finance. Protecting objectives and reputation—is a broader responsibility, not specific to Janet’s financial role.

Question 54

The financial accounts which Janet produces differs to the management accounts that are produced internally within the insurer. This is because the financial accounts A. always involve internal planning whereas management accounts can always be formulated to meet the insurer’s requirements. B. are only providing forecasts whereas management accounts are based on historical information. C. can be formulated to meet the insurer’s requirements whereas management accounting is only concerned with internal planning. D. record the financial impact of events whereas management accounts provides forecasts.

Answer 54

D is correct —financial accounts document actual transactions, while management accounts help plan future decisions. a-Internal planning—management accounts aid planning, but financial accounts focus on recorded data. b-Forecasts vs. history—management accounts include forecasting, but financial accounts report past transactions. c-Meeting insurer’s needs—both types serve business needs, but their purposes differ.

Question 55

Which management style would be best for Tina to adopt during this period of radical change? A. Autocratic. B. Consultative. C. Open door. D. Paternalistic.

Answer 55

a. Autocratic – The leader makes decisions without consulting the team. This is effective for urgent changes where fast, decisive action is needed. Consultative – The leader seeks input from employees before making decisions. It works well when collaboration is valued, but it can slow down rapid changes. Open door – Employees feel comfortable approaching leadership with ideas or concerns. This is useful for fostering transparency but isn't ideal for major restructuring. Paternalistic – The leader makes decisions while considering employees' well-being. It creates a supportive environment but may not be the best approach for fast changes.

Question 56

What is the most likely explanation for the company’s return on capital employed being lower than its competitors? A. Excessive administrative expenses. B. High reinsurance costs. C. Over-reserving of outstanding claims. D. Poor investment returns.

Answer 56

D. A. Excessive administrative expenses – High operating costs, like salaries and overhead, can reduce profits, but they don't directly affect return on capital employed (ROCE) as much as investment performance. B. High reinsurance costs – Paying too much for reinsurance could lower profitability, but it’s more about risk management than capital efficiency. C. Over-reserving of outstanding claims – If too much money is set aside for claims, it can restrict funds that could be used for investments or business growth, but it's not the most direct cause. D. Poor investment returns – If the company’s investments don’t generate strong returns, its total profits decline, which negatively impacts ROCE. This is the most likely explanation.

Question 57

If the company were to adopt both of the sales director’s proposals, what would be the most likely consequence? A. The additional growth will always result in the acceptance of poor quality business. B. The additional business will stretch existing operational resources. C. Compliance will become less demanding. D. Financial resources will be impaired.

Answer 57

B.- The additional business will stretch existing operational resources—outsourcing claims handling and extending broker credit could lead to operational strain due to increased workloads. A. Poor quality business—growth doesn’t automatically mean lower-quality business; proper risk assessment can maintain standards. C. Compliance less demanding—compliance remains crucial, even with operational changes. D. Financial resources impaired—cash flow may be affected by extended credit terms, but proper management can mitigate this risk.

Question 58

What is evidenced by the current levels of written premiums and earned premiums? A. A declining book of business. B. Excessive business acquisition costs. C. Increased reinsurance costs or cover. D. Strengthening of claims reserves.

Answer 58

D. Strengthening of claims reserves—earned premiums are higher than written premiums, suggesting that past business is generating income, but funds may be set aside for potential claims.

Question 59

A company purchased a machine with a useful life of eight years for £24,000. Its residual value at the end of this period is estimated to be £2,000. When using straight line depreciation, how much depreciation is shown in the accounts solely for year two of this period? A. £2,750 B. £3,000 C. £5,500 D. £6,000

Answer 59

A. depreciation= cost of asset - residual value/ useful life 24k-2k/ 8 = 2.75k per year

Question 60

An item has been inserted in a company’s balance sheet in respect of machinery. Under which classification will this normally appear? A. Current assets. B. Current liabilities. C. Non-current assets. D. Non-current liabilities.

Answer 60

C.

Question 61

A company’s measure of liquidity is indicated by a current ratio of 1.36 and a quick ratio of 1.28. The difference between the two ratios usually arises as a result of the amount of A. debtors. B. depreciation. C. goodwill. D. stock.

Answer 61

d. Since the current ratio (1.36) is slightly higher than the quick ratio (1.28), the difference arises due to the presence of stock, which is included in the current ratio but not in the quick ratio.

Question 62

The strategy behind the formation of the new organisation indicates that the focus was A. an increased presence in a niche market. B. an investment opportunity in global equities. C. to reduce its overall solvency capital requirement. D. to take full control over sources of supply.

Answer 62

c. The formation of a new organisation is often a strategic move to optimise capital efficiency, particularly under Solvency II regulations, which require insurers to hold a sufficient Solvency Capital Requirement (SCR) to cover risks. By restructuring, merging, or adjusting business models, companies can reduce regulatory capital demands, improving financial stability and profitability.

Question 63

What will be the implications of the new organisation using a server farm? A. The current servers used by each organisation will be completely compatible. B. Daily automatic data backup will no longer be necessary. C. The data held by each company will be consolidated and cleansed by an independent server provider. D. Server storage space will be transferred to independent premises.

Answer 63

d. A server farm consists of multiple servers housed in dedicated premises to provide high-performance computing and data storage. When an organisation moves to a server farm, its data and infrastructure shift from local servers to an independent, centralized facility.

Question 64

Leo, the insurer’s finance director, is assessing capital needs after acquiring a subsidiary. Both companies follow IFRS reporting standards. With access to new capital and an improved combined ratio (101.2% to 99.7%), Leo must clarify ongoing solvency requirements to investors. What will Leo’s activities most likely include? A. Calculation of individual claims reserves. B. Identifying dependencies through flow process analysis. C. Preparation for reviews by rating agencies. D. Pricing of new insurance products.

Answer 64

c. Leo, the finance director, is preparing for reviews by rating agencies because his insurer has acquired a subsidiary, gaining access to additional capital. Since the combined ratio has improved from 101.2% to 99.7%, this signals better financial performance, making investors interested in the insurer’s solvency and stability.

Question 65

In answer to the investor’s query regarding capital requirements on an ongoing basis, Leo should explain that A. all financial statements must be assessed and viewed on a consolidated basis. B. appropriate adjustments may be needed to satisfy the regulator. C. provided all the figures are included on the insurer’s balance sheet, no additional issues arise. D. there will be no additional regulatory requirements provided that no trading takes place between the two companies.

Answer 65

B. Since the insurer has acquired a subsidiary and now has access to additional capital, regulators may require adjustments to ensure compliance with capital adequacy and solvency requirements. This could involve:

Question 66

The changes to personnel in Tim’s team are most likely to have been driven by A. an increase in the number of themed reviews in the audit plan. B. the need to act as the point of contact for regulators. C. the need to report to both the audit committee chairman and more than one senior executive on report findings. D. a significant increase in outsourced reviews as decreed by the board of directors.

Answer 66

a. Tim’s team has gained two new employees with expertise in customer complaints and IT security management, suggesting a need for broader audit coverage. This aligns with an increase in themed reviews, where audits focus on specific areas like compliance, cybersecurity, and operational effectiveness.

Question 67

The Corporate Governance Code on audit committees require Bev to A. be a qualified actuary. B. have just one other person to work with her. C. regularly review the effectiveness of Tim’s team. D. work under the guidance of the external auditor.

Answer 67

c. Under the Corporate Governance Code, audit committee members like Bev are required to monitor and assess the effectiveness of internal audit functions.

Question 68

With regard to the various management reports produced within the insurer, Tim’s team A. collates any required by the regulator. B. oversees the production of those required solely for management purposes. C. verifies any required by the regulator before they are sent. D. verifies their reliability and accuracy.

Answer 68

d. Tim's internal audit team ensures that management reports are accurate, reliable, and compliant with company policies.

Question 69

Zoe works for an insurer owned by a bank, which has launched an online sales campaign with monthly premiums. She handles claims, including Tom’s property damage case. Her colleague George oversees debit notes in finance. Due to high campaign costs, the insurer's ROE is 6%, and a credit rating agency has assessed its Business Risk Profile The significant benefits to the bank’s customers of the new campaign run by the insurer are most likely to relate to A. the availability of non-standard classes of business. B. higher standards and a wider availability of customer service. C. a range of options on cover and price. D. specifically tailored solutions for the individual customer.

Answer 69

c. Since the insurer is launching a major online sales campaign, it likely aims to attract more customers by offering flexible insurance options with various coverage levels and pricing. Digital sales allow insurers to provide: Customizable plans to suit different budgets. Competitive pricing to reach a wider audience. Easy comparison tools for customers selecting policies.

Question 70

what are debit notes?

Answer 70

All amounts owed to the business by other parties. like an invoice

Question 71

What does the insurer’s ROE of 6% indicate? A. The insurer is being charged a 6% interest rate on its long-term borrowings. B. The insurer is making a 6% profit relative to its capital. C. The insurer is obtaining a 6% interest rate on its instalments. D. A shareholder is making a 6% profit before tax on his investment.

Answer 71

b. Return on Equity (ROE) measures how effectively a company is using shareholders’ equity to generate profit. It’s calculated as: ROE = (Profit after tax / Shareholders’ equity) × 100 So, a ROE of 6% means that for every £1 of equity invested, the insurer is generating £0.06 of profit. It reflects how well the company is using shareholders' capital.

Question 72

Mick, a customer service supervisor, confirms correct procedures were followed after Meg’s data complaint about an outsourced call center. He’s reviewing KPIs, with one bottom-line concern referred to management. His department operates as a profit center under activity-based costing. Mick’s confirmation that the correct procedure has been followed is most likely to be due to A. appropriate regulatory approval for use of the call centre. B. the choices made in the insurer’s data protection registration. C. the level of training given to the employees in the call centre. D. Meg having given her express consent.

Answer 72

b. The insurer's data protection registration outlines how it handles customer data, including outsourcing processes. If the insurer has followed the approved procedures, Mick can confirm compliance, even if Meg is uncomfortable with the data-sharing aspect.