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CPCU 540: CONTRIBUTING TO FINANCIAL PERFORMANCE EXAM
2025 WITH 100% ACCURATE SOLUTIONS
In the claim function, how is supporting the insurer's profit goal accomplished? - correct answers ✔✔through controlling expenses What is an insurer's line influenced by? - correct answers ✔✔the maximum amount of insurance or limit of liability allowed by insurance regulations Loss Ratio Formula - correct answers ✔✔ What do line underwriters do - correct answers ✔✔· Select insureds · Classify and price accounts · Recommend coverage · Manage a book of business · Support producers and insureds · Support marketing What do staff underwriters do - correct answers ✔✔· Research market · Formulate underwriting policy · Revise underwriting guidelines · Evaluate loss experience · Research and develop coverage forms · Review rates · Arrange reinsurance
· Assist others · Conduct audits · Educate and train Am I a line or staff underwriter - correct answers ✔✔line What are the three specific ratios use to measure an insurer's underwriting performance - correct answers ✔✔loss ratio expense ratio combined ratio What are unfair underwriting practices - correct answers ✔✔o Discriminating unfairly when selecting loss exposure o Misclassifying loss exposures o Cancelling or nonrenewing policies contrary to statutes, rules, and policy provisions o Using underwriting rules or rates that are not state approved o Failing to apply newly implemented underwriting and rating factors to renewals What are unfair claim and settlement practices - correct answers ✔✔o Knowingly misrepresenting important facts or policy provisions o Failing to properly investigate and settle claims o Failing to make good-faith effort to pay claims when liability is reasonably clear o Settling a claim for less than what a reasonable person expects, based on advertising
What factors can gauge how well insurers are meeting customer expectations - correct answers ✔✔reviews customer satisfaction data retention ratio and lapse ratio insurer-producer relationships What are some unfair underwriting practices - correct answers ✔✔discriminating unfairly when selecting loss exposures misclassifying loss exposures cancelling or nonrenewing policies contrary to statutes, rules, and policy provisions failing to apply newly implemented underwriting and rating factors to renewals What are some unfair claims settlement practices - correct answers ✔✔knowingly misrepresenting important facts or policy provisions failing to properly investigate and settle claims failing to make a good-faith effort to pay claims when liability is reasonably clear settling a claim for less than what a reasonable person expects, based on advertising
failing to approve or deny coverage within a reasonable period When estimating profitability, an insurer should consider whether growth resulted from: - correct answers ✔✔a competitive advantage relaxed underwriting inadequate insurance rates combination of above factors What are two economic trends that are particularly relevant to insurers - correct answers ✔✔inflation and the availability of capital What factors effect inflation - correct answers ✔✔supply chain efficiency consumer demand public perceptions of the economy Reinsurance helps insurers achieve several business goals: - correct answers ✔✔increase large- line capacity provide catastrophe protection stabilize loss experience
requests from consumer advocates or insurers catastrophic events societal shifts What are the components of the combined ratio - correct answers ✔✔losses due to claims loss adjustment expenses operating expenses What do nonfinancial measures link together - correct answers ✔✔an organization's business strategy and outputs to the actions it takes What nonfinancial measures apply to both commercial and personal lines - correct answers ✔✔account selection product (or line of business) mix pricing accommodated accounts service to producers
premium to underwriter retention ratio hit ratio What could a low hit ratio indicate - correct answers ✔✔competition is tight rates are higher than competitors' underwriting criteria is too stringent other potential issues In extreme cases, what can inaccurate reserves cause - correct answers ✔✔insolvency What are the t common methods of setting case reserves - correct answers ✔✔individual case method roundtable average value method formula method expert system method
Data analytics and predictive models can combine traditional claims data with data obtained from telematics and Internet of Things (IoT) devices to determine what - correct answers ✔✔how likely claims are to be fraudulent What are the two main goals of the claims department - correct answers ✔✔comply with contractual promises support the insurer's financial goals What do insurer finance departments do - correct answers ✔✔manage working capital manage capital structure perform capital budgeting and accounting What is an insurer's primary source of internal capital - correct answers ✔✔business operations What are the two most significant liabilities that arise from the sale of insurance policies - correct answers ✔✔unearned premium reserves loss reserves, including LAE reserves Small adjustments in the estimated value of loss reserves can have significant effect on what - correct answers ✔✔policyholders' surplus business activities
options What is the main advantage and disadvantage of raising equity capital as opposed to long-term debt - correct answers ✔✔advantage: doesn't increase an insurer's financial stress disadvantage: more expensive What are the two forms debt can be issued by insurers - correct answers ✔✔bonds surplus notes What is the main method mutual insurers use to raise surplus or equity - correct answers ✔✔surplus notes In what ways can obtaining reinsurance help insurers manage their capital - correct answers ✔✔Loss portfolio transfer (LTP) surplus relief reduced exposure to risk How are LTPs most often used - correct answers ✔✔more often as a way for an insurer to withdraw from a segment of business than as a source of capital What does the ability to meet day-to-day financial obligations rely on - correct answers ✔✔adequate working capital
Explain the function of increasing large-line capacity - correct answers ✔✔To assume a loss exposure with potential financial consequences that are higher than its financial condition would otherwise permit What effect, if any, will a reduction in an insurer's loss reserves have on net income and policyholders' surplus in the year that any such adjustment is made? - correct answers ✔✔It will increase both net income and policyholders' surplus What do accounting activities include - correct answers ✔✔accumulating and reporting financial data In the insurance industry, a hard market is characterized by Select one: A. Abundant marketplace capital. B. Decreased competition. C. Lower premiums. D. Decreased insurers' profitability. - correct answers ✔✔B. Decreased competition. What is the primary demand for technology in marketing applications - correct answers ✔✔ease of use What market conduct areas are regulated - correct answers ✔✔producer practices, claim practices, and underwriting practices How is a primary insurers able to obtain surplus relief through reinsurance - correct answers ✔✔by receiving ceding commissions to offset policy acquisition expenses
State insurance department market conduct regulatory actions are a good indication of an insurer's success or failure in meeting which one of the following major goals? Select one: A. Establish a good customer service experience. B. Achieve environmental, social, and governance targets. C. Earn a fair profit. D. Comply with regulations. - correct answers ✔✔D. Comply with regulations. What are the main ways growth places a strain on policyholders' surplus and its capacity - correct answers ✔✔regulators require a greater amount of surplus as a cushion against adverse operating results statutory accounting requires the immediate recognition of policy acquisition expenses, but deferred recognition of the associated premium revenue Which one of the following is used by A.M. Best to determine an insurer's financial size category (FSC)? Select one: A. Earned premium B. Written premium C. Total operating earnings D. Adjusted surplus - correct answers ✔✔D. Adjusted surplus A staff member of Gibsoncrest Insurance Company collected data to be used to analyze the homeowners portfolio results for the first six months of the current year. The loss count is at 53 percent of the year's planned goal. The average loss has steadily increased each month, and is now 10 percent above the average loss goal. Which one of the following statements correctly identifies a conclusion that the staff member should make, given this information? Select one:
What does the gross premiums written to policyholders surplus ratio measure what is an acceptable ratio - correct answers ✔✔an insurer's ability to absorb losses before the effects of reinsurance transactions are considered < 900% What does the net premiums to policyholders' surplus ratio gauge What is an acceptable ratio - correct answers ✔✔insurers' retained insurance exposure after reinsurance transactions < 300% What does the surplus aid to policyholders' surplus ratio measure what is an acceptable value - correct answers ✔✔the amount of surplus aid an insurer has assumed < 15% What is the change in net premiums written ratio what is an acceptable ratio - correct answers ✔✔the percentage change in the insurer's net written premiums over the past year compared with the previous year
What are the four IRIS ratios to test profitability - correct answers ✔✔1. Two-year overall operating ratio
- Investment yield ratio
- Gross change in policyholders' surplus ratio
- Change in adjusted policyholders' surplus ratio What are the four IRIS ratios that measure an insurers'' overall exposure to adverse underwriting results - correct answers ✔✔gross premiums written to policyholders' surplus net premiums written to policyholders' surplus surplus aid to policyholders' surplus change in net premiums writen What are the two IRIS ratios that measure liquidity - correct answers ✔✔adjusted liabilities to liquid assets gross agents' balances to policyholders' surplus What does the adjusted liabilities to liquid assets ratio measure what is an acceptable ratio - correct answers ✔✔an insurer's ability to meet short-term obligations
What does a negative one-year reserve development to policyholders' surplus ratio mean - correct answers ✔✔reserves are redundant because some were released throughout the year What is an acceptable ratio doe the two-year reserve development to policyholders' surplus ratio - correct answers ✔✔< 20% What does the estimated current reserve deficiency to policyholders' surplus ratio provide what is an acceptable ratio - correct answers ✔✔insight into the adequacy of the current available reserves < 25% What does the AM Best's Financial Strength (FRS) process begin wtih - correct answers ✔✔a detailed review of an insurer's balance sheet strength, operating performance, business profile, enterprise risk management (ERM) approach, and lift/drag (when applicable) What factors should an insurer assess if they want to improve their FSR by improving its business profile - correct answers ✔✔the quality of management team diversification of business mix strength and competitiveness of the market in which it operates geographic reach ability to innovate
distribution channels data quality pricing quality product risk regulatory risk What is the required rate of return usually set to - correct answers ✔✔cost of capital What does the modifier r indicate - correct answers ✔✔rating includes consideration of reinsurance What do insurer capacity ratios measure - correct answers ✔✔the extent to which an insurer can underwrite additional risks What makes a liquidity position satisfactory - correct answers ✔✔if the combined value of its high-grade marketable securities and cash exceeds its unearned premium reserve and loss reserve What are the 4 primary types of financial statements - correct answers ✔✔balance sheet income statement
