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Question 1Insurance Accounting Principles and Practices

What is the primary purpose of statutory accounting principles for insurance companies?

  1. To present a conservative, solvency-oriented financial position to regulators Correct answer.
  2. To report the fair value of all assets and liabilities to shareholders
  3. To compute the insurer's taxable income for federal tax returns
  4. To match revenues with expenses so results can be compared across industries

Explanation

Statutory accounting is prescribed by state insurance regulators and is designed to show whether an insurer can meet its obligations to policyholders. It therefore emphasizes conservative asset valuation, liquidity, and full recognition of liabilities rather than matching or fair presentation for investors.

Question 2Insurance Accounting Principles and Practices

Which of the following is an example of a non-admitted asset for a property-casualty insurer?

  1. A short-term bank certificate of deposit that matures in 60 days and is fully insured
  2. Agent balances receivable that are more than 90 days past due Correct answer.
  3. Cash in a federally insured bank account
  4. U.S. Treasury securities held as investments

Explanation

Non-admitted assets are assets that regulators do not allow to count toward statutory surplus because they are not readily available to pay claims. Receivables from agents that remain unpaid beyond 90 days are the standard example, while cash, Treasury securities, and insured short-term deposits are admitted.

Question 3Insurance Accounting Principles and Practices

Written premium for a period is best described as:

  1. Premium actually collected in cash during the period
  2. Premium remaining after reinsurance ceded
  3. Premium on policies that took effect during the period Correct answer.
  4. The portion of premium applicable to coverage already provided

Explanation

Written premium is recorded when a policy takes effect, regardless of when the coverage is provided or when cash is collected. It is a gross measure reported before ceded reinsurance is deducted.

Question 4Insurance Accounting Principles and Practices

Which statement best describes earned premium?

  1. Premium written after deducting ceded reinsurance
  2. Written premium applicable to coverage already provided Correct answer.
  3. Premium collected from policyholders during the accounting period
  4. Premium on policies that took effect during the period

Explanation

Earned premium is the portion of written premium that applies to coverage already provided, and it is the denominator for the loss ratio. It is recognized as coverage is consumed, typically pro rata over the policy term.

Question 5Insurance Accounting Principles and Practices

How is the loss ratio calculated?

  1. Underwriting expenses divided by written premium
  2. Incurred losses divided by the sum of written premium and policyholders' surplus
  3. Incurred losses divided by written premium
  4. Incurred losses and loss adjustment expenses divided by earned premium Correct answer.

Explanation

The loss ratio compares incurred losses and loss adjustment expenses with the premium earned in the same period. It measures the share of earned premium consumed by claims and claim-handling costs.

Question 6Insurance Accounting Principles and Practices

A case reserve is:

  1. An asset representing reinsurance recoverable on paid losses
  2. A reserve for unearned premium on in-force policies
  3. An estimate of the cost of a reported claim Correct answer.
  4. An estimate of claims that have occurred but not yet been reported

Explanation

A case reserve is set individually by claims staff for a claim that has been reported and is still open. It reflects the estimated ultimate cost of that specific claim, including expected payments and expenses.

Question 7Insurance Accounting Principles and Practices

IBNR reserves represent:

  1. Losses that have been paid but not yet recorded
  2. Estimated costs of claims incurred but not yet reported Correct answer.
  3. Reserves for claims that have been closed without payment
  4. Claims that have been reported but are still being investigated

Explanation

IBNR covers claims that have occurred by the reporting date but have not yet been reported to the insurer. It is an estimate based on historical reporting patterns and development factors and is included in total loss reserves.

Question 8Insurance Accounting Principles and Practices

How does ceded written premium affect the ceding insurer's net written premium?

  1. It has no effect because it is a reinsurer transaction
  2. It reduces net written premium Correct answer.
  3. It increases net written premium
  4. It is recorded as an asset and does not affect premium

Explanation

Ceded written premium is the portion of written premium transferred to the reinsurer, so it is subtracted from direct and assumed premium to arrive at net written premium. The ceding insurer retains only the net portion of the risk.

Question 9Insurance Accounting Principles and Practices

Which statement correctly contrasts statutory accounting and GAAP for policy acquisition costs?

  1. Both systems defer acquisition costs and amortize them over the policy term
  2. Both systems expense acquisition costs as incurred
  3. Statutory accounting expenses them as incurred, while GAAP defers them Correct answer.
  4. Statutory accounting defers acquisition costs, while GAAP expenses them as incurred

Explanation

Statutory accounting conservatively expenses acquisition costs, such as commissions, as they are incurred. GAAP instead capitalizes these costs as deferred acquisition costs and amortizes them in proportion to premium earned.

Question 10Insurance Accounting Principles and Practices

A one-year policy with an annual premium of $1,200 takes effect on October 1. Using the pro rata method, what is the unearned premium reserve for this policy at December 31 of the same year?

  1. $300
  2. $900 Correct answer.
  3. $600
  4. $1,200

Explanation

Under the pro rata method, premium is earned evenly over the policy term. Three months of coverage have been provided by December 31, so three months are earned ($300) and the remaining nine months ($900) are unearned.

Question 11Insurance Accounting Principles and Practices

Defense and cost containment (DCC) expenses are best described as:

  1. Legal defense costs allocated to specific claims Correct answer.
  2. Unallocated expenses for claims handling that cannot be tied to specific claims
  3. Expenses for acquiring new business
  4. Expenses for general home office administration

Explanation

DCC expenses are loss adjustment expenses that can be attributed to individual claims, most commonly legal defense and cost containment. They are distinguished from unallocated expenses, which support claims handling generally and cannot be tied to specific claims.

Question 12Insurance Accounting Principles and Practices

How are salvage and subrogation recoveries treated in loss accounting?

  1. They are added to incurred losses to reflect gross costs
  2. They reduce incurred losses Correct answer.
  3. They are reported as investment income
  4. They are recorded as a direct reduction of written premium

Explanation

Salvage is the recovery from damaged property, and subrogation is the recovery from a third party responsible for a loss. Both reduce the insurer's net cost of claims, either by offsetting paid losses or by reducing the loss reserve.

Question 13Insurance Accounting Principles and Practices

What is the primary purpose of Schedule P of the NAIC annual statement?

  1. To report the market value of all bond holdings
  2. To list all reinsurance agreements and unauthorized reinsurers
  3. To show loss reserve development by line of business over ten years Correct answer.
  4. To disclose transactions with affiliates

Explanation

Schedule P presents ten years of loss and loss expense development by line, showing how reserves have developed over time. Regulators use it to assess reserve adequacy and to calculate reserve discounting for tax purposes.

Question 14Insurance Accounting Principles and Practices

Schedule F of the NAIC annual statement primarily:

  1. Lists the insurer's premium taxes by state
  2. Reports the insurer's loss reserves separately by accident year and line
  3. Details the insurer's investment portfolio by maturity
  4. Reports ceded reinsurance and collateral for unauthorized reinsurers Correct answer.

Explanation

Schedule F reports ceded reinsurance, including balances due from reinsurers and the collateral supporting cessions to unauthorized reinsurers. It supports the provision for reinsurance, which reduces surplus when credit is not fully collateralized.

Question 15Insurance Accounting Principles and Practices

Policyholders' surplus is calculated as:

  1. Admitted assets minus total liabilities Correct answer.
  2. Earned premium minus incurred losses
  3. Total assets minus total liabilities
  4. Admitted assets plus total liabilities

Explanation

Statutory surplus equals admitted assets minus total liabilities, and it represents the cushion available to absorb unexpected losses. Non-admitted assets are excluded, which makes statutory surplus more conservative than a total-assets measure.

Question 16Insurance Accounting Principles and Practices

An insurer expects losses and expenses on an in-force policy group to exceed the related unearned premium and anticipated premium. Under statutory accounting, the insurer should:

  1. Reduce the unearned premium reserve to zero
  2. Ignore the shortfall until the losses are actually paid
  3. Record a premium deficiency reserve as a liability Correct answer.
  4. Record a deferred acquisition cost asset for the difference

Explanation

When expected losses and expenses exceed the unearned premium plus anticipated premium, a premium deficiency exists. Statutory accounting requires recognition of a liability for the deficiency rather than deferring the loss.

Question 17Insurance Accounting Principles and Practices

Why are agents' balances that are more than 90 days past due treated as non-admitted assets?

  1. Because reinsurers have already paid the amounts to the insurer
  2. Because they are too small to be material
  3. Because the related policies have not yet been issued to the insureds
  4. Because their collectibility is doubtful Correct answer.

Explanation

Statutory accounting admits assets only when they are available to pay policyholder claims. Receivables whose collection is doubtful, including agents' balances over 90 days past due, are therefore excluded from admitted assets and charged against surplus.

Question 18Insurance Accounting Principles and Practices

Under statutory accounting, investment-grade bonds with NAIC designations 1 and 2 are generally valued at:

  1. Lower of cost or market
  2. Market value
  3. Face value
  4. Amortized cost Correct answer.

Explanation

Investment-grade bonds (NAIC designations 1 and 2) are carried at amortized cost under statutory accounting, which limits volatility in surplus. Bonds of lower designation are generally carried at the lower of amortized cost or fair value.

Question 19Insurance Accounting Principles and Practices

Under a retrospectively rated policy, premium is:

  1. Fixed at inception and never changed
  2. Adjusted after the policy period based on actual losses Correct answer.
  3. Calculated as a percentage of the insured's payroll only
  4. Determined solely by the insurer's investment results

Explanation

A retrospectively rated policy adjusts premium after the policy period based on the insured's actual loss experience, subject to minimum and maximum premium limits. The insurer records the expected adjustment as premium as experience develops.

Question 20Insurance Accounting Principles and Practices

How should an insurer record premium taxes on its statutory financial statements?

  1. As an expense accrued as the related premium is written Correct answer.
  2. As an asset until the tax is refunded
  3. As a liability only when the tax is paid
  4. As a reduction of written premium when the tax return is filed

Explanation

Premium taxes are an expense of writing business, so they are accrued over the period in which the related premium is written. This matches the tax cost with the premium that generates it.

Question 21Insurance Accounting Principles and Practices

Under IFRS 17, the contractual service margin (CSM) represents:

  1. The reserve for claims that have been incurred but not reported
  2. The statutory liability for unearned premium
  3. The amount of premium receivable from policyholders
  4. Unearned profit recognized over the coverage period Correct answer.

Explanation

The CSM is the unearned profit in a group of insurance contracts under IFRS 17. It is recognized in profit or loss as coverage is provided, reflecting the service delivered in each period.

Question 22Insurance Accounting Principles and Practices

When a ceding insurer retains a portion of the premium due to the reinsurer as collateral, the ceding insurer records:

  1. A direct reduction of policyholders' surplus
  2. A liability for the funds held Correct answer.
  3. No entry until the funds are returned
  4. An asset for the funds held

Explanation

Funds held is premium or claim money retained by the ceding insurer that is owed to the reinsurer. Because the ceding insurer owes the amount, it records a liability, while the reinsurer records a corresponding receivable.

Question 23Insurance Accounting Principles and Practices

For federal income tax purposes, property-casualty loss reserves are generally:

  1. Valued on the same undiscounted basis used for statutory reporting
  2. Ignored until the claims are paid
  3. Valued at fair value using market interest rates
  4. Discounted to present value using prescribed interest rates Correct answer.

Explanation

For federal income tax purposes, property-casualty loss reserves are discounted to present value using prescribed interest rates. Statutory reporting generally does not discount reserves, so the tax and statutory balances differ.

Question 24Insurance Accounting Principles and Practices

Under an intercompany pooling agreement, each participating affiliate generally:

  1. Records all pool results in proportion to its ownership of the pool leader
  2. Records only the premium it directly writes
  3. Eliminates all intercompany transactions without recording pool results
  4. Records its allocated share of pool results Correct answer.

Explanation

Under an intercompany pooling agreement, participants cede their business to the pool and receive an allocated share of the pooled results. Each affiliate records its share of pooled premium, losses, and expenses based on the pooling percentages.

Question 25Insurance Accounting Principles and Practices

To take full statutory credit for reinsurance ceded to an unauthorized reinsurer, the ceding insurer generally must:

  1. Report the cession in Schedule P only
  2. Pay the reinsurer's premium tax
  3. Hold collateral equal to the ceded reserves Correct answer.
  4. Obtain approval from the reinsurer's home-country regulator

Explanation

Statutory credit for reinsurance ceded to an unauthorized reinsurer requires security, typically funds held, letters of credit, or a trust. Without adequate collateral, the ceding insurer must establish a provision for reinsurance that reduces surplus.

Question 26Insurance Accounting Principles and Practices

Under statutory accounting, written premium is recognized when:

  1. The policy becomes effective. Correct answer.
  2. Cash is collected from the policyholder.
  3. A covered loss is reported.
  4. Coverage has been provided for the full policy term.

Explanation

Written premium records the premium charged for policies whose coverage period has begun. It is recognized when coverage attaches, not when cash is received or when losses occur, and it is earned over the policy term.

Question 27Insurance Accounting Principles and Practices

On a statutory balance sheet, the unearned premium reserve is classified as:

  1. Surplus.
  2. A liability. Correct answer.
  3. An asset.
  4. A contra-revenue account.

Explanation

The unearned premium reserve represents premium received or receivable for coverage not yet provided. Because it reflects an obligation to provide future coverage or refund premium, it is reported as a liability.

Question 28Insurance Accounting Principles and Practices

The combined ratio is calculated by dividing the sum of incurred losses, loss adjustment expenses, and underwriting expenses by:

  1. Net written premium.
  2. Policyholders' surplus.
  3. Gross investment income.
  4. Earned premium. Correct answer.

Explanation

The combined ratio measures underwriting performance by comparing incurred losses and expenses with premium earned during the period. Using earned premium matches the cost of coverage with the revenue recognized for that coverage.

Question 29Insurance Accounting Principles and Practices

Schedule T of the NAIC annual statement is used to report:

  1. Premiums by jurisdiction. Correct answer.
  2. Loss reserve development by line.
  3. Reinsurance ceded by reinsurer.
  4. Investments at year-end.

Explanation

Schedule T reports premiums written by state or territory, supporting regulatory assessment and premium tax analysis. It is not the reserve development schedule or the investment schedule.

Question 30Insurance Accounting Principles and Practices

Unallocated loss adjustment expenses (ULAE) are best described as:

  1. Legal fees billed to a specific claim file.
  2. Indirect claim handling costs. Correct answer.
  3. Court costs awarded in a declared catastrophe.
  4. Payments made to independent adjusters for specific claims.

Explanation

ULAE are claim-handling costs that cannot be assigned directly to individual claims, such as general claims department salaries and overhead. They are distinguished from allocated expenses that are charged to specific claim files.

Question 31Insurance Accounting Principles and Practices

Under statutory accounting, furniture, equipment, and prepaid expenses are generally:

  1. Admitted assets at amortized cost.
  2. Admitted assets at fair value.
  3. Non-admitted assets. Correct answer.
  4. Reported as surplus rather than assets.

Explanation

Statutory accounting emphasizes assets that are available to pay policyholder claims. Furniture, equipment, and prepaid expenses are generally not readily available for that purpose and are therefore non-admitted.

Question 32Insurance Accounting Principles and Practices

In the statutory statement of cash flows, claim payments to policyholders are classified as:

  1. Investing activities.
  2. Operating activities. Correct answer.
  3. Financing activities.
  4. Noncash activities.

Explanation

Claim payments arise from the insurer's primary business of providing insurance coverage and are therefore operating cash flows. Investing activities relate to investment purchases and sales, while financing activities relate to capital and borrowings.

Question 33Insurance Accounting Principles and Practices

A paid loss is recorded in the insurer's accounting records when:

  1. A claim is first reported by the insured.
  2. A claim payment is made. Correct answer.
  3. The claim is closed without payment.
  4. A case reserve is established.

Explanation

Paid losses represent actual claim payments made by the insurer. Reporting a claim or establishing a case reserve affects incurred losses and reserves, but not paid losses until cash is disbursed.

Question 34Insurance Accounting Principles and Practices

When an insured cancels a policy midterm on a short-rate basis, the return premium is:

  1. Less than the pro rata unearned premium. Correct answer.
  2. Equal to the pro rata unearned premium.
  3. Always zero because the insured initiated cancellation.
  4. Greater than the pro rata unearned premium.

Explanation

Short-rate cancellation retains an expense charge or penalty, so the refund is less than the unearned premium calculated on a pro rata basis. Pro rata cancellation returns premium strictly in proportion to the unused policy term.

Question 35Insurance Accounting Principles and Practices

An insurer reports earned premium of $4,000,000, incurred losses of $2,100,000, and loss adjustment expenses of $300,000. Its loss and LAE ratio is:

  1. 75.0%
  2. 52.5%
  3. 67.5%
  4. 60.0% Correct answer.

Explanation

The loss and LAE ratio equals incurred losses plus loss adjustment expenses divided by earned premium. Adding $2,100,000 and $300,000 gives $2,400,000; dividing by $4,000,000 produces 60.0%.

Question 36Insurance Accounting Principles and Practices

A ceding commission received from a reinsurer is intended primarily to:

  1. Fund the ceding insurer's statutory reserve.
  2. Compensate the reinsurer for assuming risk.
  3. Pay the reinsurer's loss adjustment expenses.
  4. Reimburse acquisition costs. Correct answer.

Explanation

A ceding commission reimburses the ceding insurer for the cost of acquiring the business that is being reinsured. It is a common feature of pro rata reinsurance, where the reinsurer shares premium and expenses.

Question 37Insurance Accounting Principles and Practices

A ceding insurer records a gain from a retroactive reinsurance transaction that transfers adverse loss development. Under statutory accounting, the gain is generally:

  1. Deferred and amortized. Correct answer.
  2. Recognized immediately in income.
  3. Ignored until all claims are paid.
  4. Recorded directly to policyholders' surplus.

Explanation

Retroactive reinsurance transfers liabilities for losses that have already occurred, so any gain is deferred and amortized rather than recognized immediately. This treatment avoids overstating income from a transaction that primarily addresses existing reserves.

Question 38Insurance Accounting Principles and Practices

If a reinsurance contract does not transfer significant insurance risk, the ceding insurer should account for the arrangement as:

  1. A deposit liability. Correct answer.
  2. Assumed reinsurance.
  3. Retroactive reinsurance with immediate gain.
  4. A policy acquisition cost.

Explanation

A contract that does not transfer significant insurance risk is not reinsurance for accounting purposes. The ceding insurer records the consideration as a deposit liability rather than as ceded premium with reinsurance recoverables.

Question 39Insurance Accounting Principles and Practices

Under IFRS 17, the risk adjustment for non-financial risk represents:

  1. The difference between ceded and assumed premium.
  2. The unearned profit released as coverage is provided.
  3. The amount charged for investment management.
  4. Compensation for uncertainty in cash flows. Correct answer.

Explanation

The risk adjustment reflects the compensation the insurer requires for bearing uncertainty about the amount and timing of non-financial risk cash flows. It is distinct from the contractual service margin, which represents unearned profit.

Question 40Insurance Accounting Principles and Practices

Under statutory accounting, guaranty fund assessments are generally recognized as:

  1. Expenses only when paid in cash.
  2. Expenses when levied, with a recoverable offset asset. Correct answer.
  3. Direct charges to surplus when the insolvency is announced.
  4. Deferred assets until all affected policies expire.

Explanation

Guaranty fund assessments are recognized as expenses when the assessment is levied. If premium tax offsets are probable and estimable, the insurer records an admitted asset for the expected recovery.

Question 41Insurance Accounting Principles and Practices

Common stocks held by a property-casualty insurer are generally reported on the statutory balance sheet at:

  1. Fair value. Correct answer.
  2. Amortized cost.
  3. Lower of cost or market.
  4. Par value.

Explanation

Common stocks are generally reported at fair value on the statutory balance sheet because they have readily determinable market values. Bonds use a designation-based valuation approach, but common equity holdings do not use amortized cost.

Question 42Insurance Accounting Principles and Practices

A bond with NAIC designation 4 is generally reported on the statutory balance sheet at:

  1. Par value adjusted for issuance expenses.
  2. Amortized cost regardless of market value.
  3. Fair value without regard to amortized cost.
  4. Lower of amortized cost or fair value. Correct answer.

Explanation

NAIC designations 3 through 6 are generally valued at the lower of amortized cost or fair value. Designations 1 and 2 are generally carried at amortized cost.

Question 43Insurance Accounting Principles and Practices

For statutory reporting, an insurer may discount unpaid loss reserves only when:

  1. Fixed payment pattern and prescribed rate. Correct answer.
  2. Reported claims only.
  3. Reserves below unearned premium.
  4. No reinsurance receivable.

Explanation

Statutory discounting of loss reserves is permitted only for certain reserves with a fixed and determinable payment pattern and using a prescribed interest rate. This limits discretion and keeps the valuation consistent across insurers.

Question 44Insurance Accounting Principles and Practices

A ceding insurer may take statutory credit for reinsurance ceded to an unauthorized reinsurer when the reinsurer provides:

  1. A clean, irrevocable letter of credit. Correct answer.
  2. An unaudited financial statement.
  3. A verbal promise to pay claims.
  4. A commission schedule approved by the ceding insurer.

Explanation

To take credit for reinsurance ceded to an unauthorized reinsurer, the ceding insurer generally must hold acceptable collateral. A clean, irrevocable letter of credit for the required amount is one permitted form of collateral.

Question 45Insurance Accounting Principles and Practices

After a ceding insurer pays a loss and bills the reinsurer for its share, the amount due from the reinsurer is reported as:

  1. A reinsurance recoverable asset. Correct answer.
  2. A reduction of written premium.
  3. An unearned premium reserve.
  4. A ceding commission expense.

Explanation

Once the ceding insurer has paid a loss, the reinsurer's share becomes a receivable from the reinsurer. It is reported as a reinsurance recoverable on paid losses, subject to any allowance for uncollectible amounts.

Question 46Insurance Accounting Principles and Practices

Under IFRS 17, when a group of insurance contracts is onerous at initial recognition, the insurer:

  1. Recognizes the loss immediately in profit or loss. Correct answer.
  2. Amortizes the loss over the coverage period.
  3. Defers the loss in the contractual service margin.
  4. Records the loss as an adjustment to surplus.

Explanation

An onerous group of contracts is expected to generate a loss, so IFRS 17 requires immediate recognition of that loss in profit or loss. The contractual service margin cannot be negative, so the loss is not deferred.

Question 47Insurance Accounting Principles and Practices

In the NAIC risk-based capital formula, the covariance adjustment generally:

  1. Eliminates the need for a company action level.
  2. Increases required capital by summing all risk charges.
  3. Reduces required capital for imperfect correlation. Correct answer.
  4. Applies only to investment risk.

Explanation

The covariance adjustment recognizes that different risk categories are not perfectly correlated. Because the risks are unlikely to peak simultaneously, the formula reduces the simple sum of individual risk charges.

Question 48Insurance Accounting Principles and Practices

A reinsurance treaty provides a sliding scale ceding commission that increases as the loss ratio decreases. At a reporting date before all losses are known, the ceding insurer should:

  1. Recognize the maximum commission immediately.
  2. Estimate and adjust as losses develop. Correct answer.
  3. Recognize the minimum until the treaty closes.
  4. Defer all commission until final settlement.

Explanation

A sliding scale commission depends on ultimate loss experience, so the ceding insurer should estimate the expected commission and revise it as loss experience emerges. Recognizing either extreme without regard to expected experience would misstate underwriting results.

Question 49Insurance Accounting Principles and Practices

When a ceding insurer commutes a reinsurance treaty, it settles all present and future obligations with the reinsurer. The accounting effect is to:

  1. Continue reporting the recoverable.
  2. Transfer the difference to written premium.
  3. Remove related balances and record any gain or loss. Correct answer.
  4. Record the settlement as unearned premium.

Explanation

A commutation extinguishes the reinsurance relationship for the covered obligations, so the related reinsurance receivables and payables are removed. Any difference between the settlement amount and the recorded balances is recognized as a gain or loss.

Question 50Insurance Accounting Principles and Practices

Under statutory accounting, a deferred tax asset is admitted only to the extent that it is:

  1. Approved by the state insurance commissioner.
  2. Realizable from future taxable income or reversals. Correct answer.
  3. Expected to reverse within one year.
  4. Supported by certain tax planning strategies.

Explanation

A deferred tax asset is admitted only if it is probable that it will be realized through future taxable income or the reversal of deferred tax liabilities. This admissibility test prevents insurers from recognizing tax benefits that may not be usable.