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CAS Exam 6 (US) study materials
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CAS Exam 6 (US) practice questions

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Question 1Regulation and Financial Reporting (United States)

Under the NAIC annual statement instructions, which statutory balance sheet item is reported net of any nonadmitted portion, with the nonadmitted amount disclosed in the notes or the appropriate schedule?

  1. Premiums receivable in the course of collection Correct answer.
  2. Reinsurance recoverable on paid losses
  3. Electronic data processing equipment
  4. Deferred tax assets

Explanation

Premiums receivable in the course of collection are admitted only to the extent collectible, and the nonadmitted portion is excluded from the asset and separately disclosed. Equipment and deferred tax assets are admitted subject to their own specific limits rather than a general collectibility test. Reinsurance recoverable is admitted in full only when the ceding insurer meets the credit-for-reinsurance requirements.

Question 2Regulation and Financial Reporting (United States)

An insurer writes a policy with a 12-month term effective October 1. For the December 31 statutory annual statement, the portion of written premium applicable to the following year is reported as:

  1. Unearned premium reserve, a liability Correct answer.
  2. A deferred acquisition cost asset
  3. Written premium in the current year
  4. An other liability for contingent commissions

Explanation

Statutory accounting requires premiums to be earned over the policy period, so premium applicable to periods after the reporting date is held as unearned premium reserve. Deferred acquisition costs are not recognized as an asset under statutory accounting except in limited circumstances. Written premium is recognized at policy inception but does not govern balance sheet presentation.

Question 3Regulation and Financial Reporting (United States)

Which item is a required component of the statutory Statement of Income as prescribed by the NAIC annual statement blank?

  1. Comprehensive income
  2. Change in net unrealized capital gains or losses Correct answer.
  3. Net income
  4. Other comprehensive income

Explanation

The statutory Statement of Income includes underwriting and investment exhibit results, and it captures the change in net unrealized capital gains or losses as a separate line because those amounts flow directly to surplus rather than through net income. Comprehensive income and other comprehensive income are GAAP concepts not used in the statutory statement format. Net income is a subtotal, not a prescribed line item label.

Question 4Regulation and Financial Reporting (United States)

An insurer cedes business to a reinsurer that is not authorized in any state and posts no collateral. Under the NAIC credit for reinsurance model, the ceding insurer must:

  1. Take no credit for the ceded losses and establish a reserve for the full gross amount Correct answer.
  2. Take credit only for ceded paid losses and not for incurred but not reported amounts
  3. Take full credit because the reinsurance contract transfers risk
  4. Take credit limited to the reinsurer's surplus as reported to its domiciliary regulator

Explanation

Credit for reinsurance is permitted only when the reinsurer is authorized or meets an alternative such as posting collateral, being certified, or being domiciled in a reciprocal jurisdiction. Absent those conditions, the ceding insurer must carry the business gross and cannot reduce liabilities for the ceded amounts. Risk transfer alone does not satisfy the credit requirements.

Question 5Regulation and Financial Reporting (United States)

The NAIC Risk-Based Capital formula for property and casualty insurers produces an authorized control level (ACL). An insurer whose total adjusted capital falls below the company action level but at or above the regulatory action level must:

  1. Immediately cease writing new business
  2. Distribute all remaining surplus to policyholders
  3. File an RBC plan with the commissioner describing corrective actions Correct answer.
  4. Be placed into rehabilitation by the domiciliary commissioner

Explanation

The company action level triggers a requirement to submit an RBC plan to the commissioner that identifies the conditions and proposed corrective actions. Seizure or rehabilitation is available only at the lower mandatory control level, and writing restrictions arise through the corrective order process rather than automatically. Surplus distribution would worsen the deficiency.

Question 6Regulation and Financial Reporting (United States)

An insurer's holding company files a registration statement under the Insurance Holding Company System Regulatory Act. Which transaction generally requires prior notice to or approval by the domiciliary commissioner?

  1. Renewal of the insurer's standard reinsurance treaty with an unaffiliated reinsurer
  2. A routine purchase of US Treasury securities by the insurer
  3. Payment of ordinary salaries to the insurer's executives
  4. An extraordinary dividend paid by the insurer to its parent Correct answer.

Explanation

Extraordinary dividends and certain affiliate transactions within a holding company system require notice to or approval by the commissioner because they can remove capital from the regulated insurer. Ordinary investment, compensation, and unaffiliated reinsurance transactions are part of normal operations and do not trigger affiliate transaction review.

Question 7Regulation and Financial Reporting (United States)

Under the NAIC Insurance Holding Company System Regulatory Act, an insurer declaring a dividend to shareholders must generally give the domiciliary commissioner notice of the dividend and the amount of surplus following the distribution at least how long before payment for an ordinary dividend?

  1. 90 days
  2. 30 days
  3. 10 days Correct answer.
  4. 45 days

Explanation

The model act requires at least 10 days' prior notice of an ordinary dividend and the surplus remaining after payment. Longer advance notice is required for extraordinary dividends. The 30, 45, and 90 day periods do not match the model act's ordinary dividend notice requirement.

Question 8Regulation and Financial Reporting (United States)

An insurer is domiciled in State A and uses an independent adjuster to handle claims in State B. Under the NAIC Unfair Claims Settlement Practices Act, the adjuster's conduct is:

  1. Governed by federal claims practice rules
  2. Governed only by State A law because the insurer is domiciled there
  3. Unregulated because independent adjusters are not licensees
  4. Subject to the claims practice standards of State B, where the claimant resides Correct answer.

Explanation

Unfair claims settlement practices acts apply to the handling of claims of residents of the enacting state, so the adjuster's conduct in State B is measured against State B standards. Domicile of the insurer does not displace the law of the state where the claimant resides. Independent adjusters are typically licensees subject to market conduct oversight, and there is no general federal claims practice statute.

Question 9Regulation and Financial Reporting (United States)

Which practice is specifically identified as an unfair claim settlement practice under the NAIC model regulation?

  1. Requiring a proof of loss form within a reasonable period
  2. Declining to pay a claim because coverage is genuinely excluded
  3. Using staff adjusters instead of independent adjusters
  4. Failing to adopt reasonable standards for the prompt investigation of claims Correct answer.

Explanation

The model regulation lists failure to adopt and implement reasonable standards for the prompt investigation and processing of claims as an unfair practice. Denying a claim that is fairly debatable or excluded is permissible, and requiring reasonable documentation is standard practice. The choice of adjuster type is not itself an unfair practice.

Question 10Regulation and Financial Reporting (United States)

Under the NAIC Market Conduct Examiners Handbook, a market conduct examination differs from a financial examination primarily because it focuses on:

  1. The insurer's reinsurance credit and ceded balances
  2. The insurer's investment portfolio credit quality
  3. The insurer's treatment of policyholders and compliance with market conduct laws Correct answer.
  4. The insurer's loss reserves and solvency position

Explanation

Market conduct examinations assess how the insurer treats policyholders, including sales, underwriting, rating, claims, and complaint handling. Financial examinations address solvency matters such as reserves, reinsurance, and investments. The two types of examination use different standards and work programs.

Question 11Regulation and Financial Reporting (United States)

An insurer's annual statement includes a Schedule F. The primary purpose of Schedule F is to:

  1. Report the insurer's direct written premium by state
  2. Report the insurer's loss reserve development
  3. Report the insurer's investment holdings by CUSIP
  4. Report ceded reinsurance and demonstrate the insurer's credit for reinsurance Correct answer.

Explanation

Schedule F reports reinsurance ceded and provides the information needed to establish credit for reinsurance, including unauthorized reinsurers and collateral. Premium by state appears in the state page, reserve development in Schedule P, and investments in Schedule D. Schedule F does not address those other disclosures.

Question 12Regulation and Financial Reporting (United States)

Schedule P of the NAIC annual statement is used primarily to:

  1. Disclose loss and loss adjustment expense reserve development by line of business Correct answer.
  2. Disclose salaries of officers and directors
  3. Report premium taxes by jurisdiction
  4. List all reinsurers and their collateral

Explanation

Schedule P presents incurred losses and allocated expenses by accident year and development period, allowing regulators to assess reserve adequacy and development patterns. Reinsurer information appears in Schedule F, premium taxes on the state page, and officer compensation in the management disclosure.

Question 13Regulation and Financial Reporting (United States)

An insurer reports an asset that is nonadmitted under statutory accounting. The effect of nonadmission is that the asset is:

  1. Reclassified as a liability
  2. Excluded from statutory surplus by charging it against surplus Correct answer.
  3. Included in admitted assets but disclosed in the notes
  4. Reported at fair value with changes in surplus

Explanation

Nonadmitted assets are excluded from the statutory balance sheet by charging the amount against surplus, because they are not readily available to pay policyholder claims. They are not carried at fair value, are not admitted with note disclosure, and are not reclassified as liabilities.

Question 14Regulation and Financial Reporting (United States)

Under the NAIC Annual Financial Reporting Model Regulation, the audited financial statements filed with the commissioner must be prepared in accordance with:

  1. Statutory accounting principles, with a reconciliation to GAAP if GAAP statements are also issued Correct answer.
  2. Tax basis accounting
  3. GAAP only, without any statutory reconciliation
  4. International Financial Reporting Standards

Explanation

The model regulation requires audited statutory financial statements and, where the insurer also prepares GAAP statements, a reconciliation between statutory and GAAP amounts. GAAP-only statements do not satisfy the filing requirement, and tax basis or IFRS statements are not the prescribed basis.

Question 15Regulation and Financial Reporting (United States)

An insurer must file its annual statement with the NAIC and the states. Which statement about the annual statement filing deadline is correct for a calendar-year insurer under the NAIC instructions?

  1. The annual statement is due within 90 days of the fiscal year end
  2. The annual statement is due by December 31 of the current year
  3. The annual statement is due by March 1 of the following year Correct answer.
  4. The annual statement is due by June 30 of the following year

Explanation

The NAIC annual statement blank requires calendar-year insurers to file by March 1 of the following year, with the audited financial report due by June 1 under the annual financial reporting model regulation. December 31 is the reporting date, not the filing date, and 90 days does not match the prescribed schedule.

Question 16Regulation and Financial Reporting (United States)

An insurer's actuarial opinion on loss and loss adjustment expense reserves is required to be filed with the annual statement. The appointed actuary's opinion must address:

  1. Whether the insurer's agents are properly licensed
  2. Whether the insurer's investment portfolio is properly diversified
  3. Whether the reserves make reasonable provision for unpaid claims and claim expenses Correct answer.
  4. Whether the insurer's premium rates are adequate for future business

Explanation

The Statement of Actuarial Opinion addresses the reasonableness of the insurer's loss and loss adjustment expense reserves relative to unpaid obligations. It does not opine on prospective rate adequacy, investment diversification, or producer licensing, which are separate regulatory matters.

Question 17Regulation and Financial Reporting (United States)

An insurer uses a permitted practice approved by its domiciliary commissioner that differs from NAIC statutory accounting principles. The insurer must:

  1. Apply the practice without disclosure because it is regulator-approved
  2. Restate prior-year statements to eliminate the practice
  3. Report the practice only to its independent auditor
  4. Disclose the permitted practice and its effect on surplus in the notes to the financial statements Correct answer.

Explanation

Permitted practices require disclosure of the nature of the practice, its rationale, and its quantified effect on surplus so that users can compare results across insurers. Approval by the commissioner does not eliminate the disclosure requirement, and the practice is not limited to auditor communication.

Question 18Regulation and Financial Reporting (United States)

An insurer is a member of a holding company system and enters a management services agreement with an affiliate. Under the NAIC model act, the agreement must be:

  1. Fair and reasonable and disclosed to the commissioner, with records available for examination Correct answer.
  2. Approved by the policyholders before it takes effect
  3. Filed with the SEC before it takes effect
  4. Renegotiated annually with the state insurance department as a party

Explanation

Affiliate agreements must be fair and reasonable, and the insurer must notify the commissioner and maintain records supporting the charges. Policyholder approval, SEC filing, and department participation in negotiation are not required by the model act for management services agreements.

Question 19Regulation and Financial Reporting (United States)

An insurer's combined ratio is 108 and its investment income ratio is 12. Which statement best describes the insurer's overall operating result on the statutory basis?

  1. The overall operating ratio is 120, indicating an operating loss
  2. The combined ratio alone determines that the insurer has an operating loss
  3. The overall operating ratio is 96, indicating an operating profit Correct answer.
  4. The investment income ratio cannot be combined with the combined ratio

Explanation

The overall operating ratio equals the combined ratio minus the investment income ratio, so 108 minus 12 equals 96, which is below 100 and indicates an operating profit. The combined ratio alone ignores investment income, and the two ratios are routinely combined in this manner.

Question 20Regulation and Financial Reporting (United States)

An insurer reports a loss ratio of 70, an expense ratio of 25, and a policyholder dividend ratio of 3. The combined ratio is:

  1. 92
  2. 102
  3. 98 Correct answer.
  4. 95

Explanation

The combined ratio is the sum of the loss ratio, expense ratio, and policyholder dividend ratio, which here equals 70 plus 25 plus 3, or 98. Omitting the dividend ratio produces 95, and other combinations do not reflect all three components.

Question 21Regulation and Financial Reporting (United States)

An insurer's premium-to-surplus ratio is 4.0. Which regulatory concern does this ratio most directly address?

  1. Whether the insurer has sufficient capital to support its volume of net written premium Correct answer.
  2. Whether the insurer's reinsurers are authorized
  3. Whether the insurer's loss reserves are redundant
  4. Whether the insurer's investment portfolio is sufficiently liquid

Explanation

The premium-to-surplus ratio measures leverage, indicating how much net premium the insurer writes relative to its capital and surplus. It does not measure reserve adequacy, investment liquidity, or reinsurer authorization, each of which is tested by other tools.

Question 22Regulation and Financial Reporting (United States)

An insurer changes an accounting principle for statutory reporting. Under NAIC guidance, the change generally must be:

  1. Approved by the SEC before it can be used
  2. Reported with disclosure of the nature of the change and its effect, with prior-period comparability addressed Correct answer.
  3. Applied silently because statutory accounting has no consistency requirement
  4. Applied only to future policies with no disclosure

Explanation

Statutory reporting requires consistency, and a change in accounting principle must be disclosed with its effect on surplus and financial results. Silent adoption undermines comparability, and SEC approval is not part of the state statutory process.

Question 23Regulation and Financial Reporting (United States)

An insurer's reinsurance agreement with an unauthorized reinsurer is supported by a clean irrevocable letter of credit. For credit for reinsurance purposes, the letter of credit must generally be:

  1. Issued by a qualified US financial institution, clean and unconditional, and available for drawing in the US Correct answer.
  2. Issued by any bank in the reinsurer's home country with no US presence
  3. Payable only after the reinsurer is declared insolvent
  4. Conditional on the reinsurer's consent before each drawing

Explanation

To support credit for reinsurance, a letter of credit must be clean, irrevocable, unconditional, and issued or confirmed by a qualified US financial institution, with proceeds payable in the US. Conditional or foreign-only arrangements do not satisfy the collateral requirements.

Question 24Regulation and Financial Reporting (United States)

Under state guaranty association laws, which statement best describes the coverage trigger for property and casualty claims?

  1. Coverage is triggered by the insolvency and liquidation order against the member insurer Correct answer.
  2. Coverage is triggered whenever the insurer's RBC ratio falls below the company action level
  3. Coverage is triggered when the insurer voluntarily stops writing new business
  4. Coverage is triggered when the insurer's rating is downgraded by a rating agency

Explanation

Guaranty association protection for property and casualty claims generally arises when a member insurer is declared insolvent and ordered liquidated, with covered claims subject to statutory limits. RBC deficiencies and rating downgrades are regulatory or market signals, and a voluntary writing halt is not an insolvency trigger.

Question 25Regulation and Financial Reporting (United States)

An insurer applies a reinsurance contract that transfers significant insurance risk. For statutory accounting, the ceding insurer generally recognizes the ceded premium and ceded losses:

  1. Gross of reinsurance on the income statement, with reinsurance recoveries reported separately Correct answer.
  2. As an adjustment to surplus rather than income
  3. Only when cash is actually received from the reinsurer
  4. Net of reinsurance with no separate presentation of ceded amounts

Explanation

Statutory statements present premium and losses gross, with ceded premium and ceded losses shown as separate deduction lines and reinsurance recoverables reported as assets. Cash-basis recognition and direct surplus adjustment are not consistent with statutory presentation.

Question 26Regulation and Financial Reporting (United States)

Under the NAIC Risk-Based Capital (RBC) formula for property and casualty insurers, an insurer whose Total Adjusted Capital falls below the Company Action Level but at or above the Regulatory Action Level must:

  1. immediately cease writing new business in all states
  2. pay a special premium tax surcharge to the guaranty association
  3. be placed into delinquency proceedings by the domiciliary commissioner
  4. file an RBC plan with the commissioner describing proposed corrective actions Correct answer.

Explanation

The P&C RBC model regulation establishes four action levels. When Total Adjusted Capital is below the Company Action Level, the insurer must submit an RBC plan to the commissioner outlining corrective steps and projections. Mandatory regulatory seizure or cessation of business occurs only at lower thresholds.

Question 27Regulation and Financial Reporting (United States)

A property and casualty insurer is preparing its statutory financial statements. Which item is treated as a nonadmitted asset for statutory accounting purposes?

  1. Furniture and equipment used in the insurer's home office operations Correct answer.
  2. Bonds issued by the U.S. Treasury held in the insurer's investment portfolio
  3. Premiums receivable that are less than 90 days past due and secured by collateral
  4. Reinsurance recoverable from an authorized reinsurer with no dispute

Explanation

Statutory accounting is conservative and admits only assets that are liquid, collectible, and available to policyholders. Office furniture and equipment are not readily convertible to cash for claim payment and are therefore nonadmitted. Treasury securities and collectible reinsurance recoverables from authorized reinsurers are admitted.

Question 28Regulation and Financial Reporting (United States)

An insurer is preparing its statutory balance sheet and must classify a liability. Under NAIC statutory accounting principles, which item is reported as a liability rather than as surplus?

  1. Gross paid-in and contributed surplus
  2. Mandatory contingency reserve set aside for catastrophes Correct answer.
  3. Unassigned surplus accumulated from prior years
  4. Capital paid in by shareholders on common stock

Explanation

Mandatory contingency reserves required by state law, such as catastrophe reserves, are recorded as a liability for statutory reporting rather than as a component of surplus. Capital paid in and surplus accounts are equity items, not liabilities.

Question 29Regulation and Financial Reporting (United States)

An insurer writes a reinsurance treaty with a reinsurer that is not authorized in the ceding insurer's domiciliary state and provides no collateral. For statutory accounting, the ceding insurer must generally:

  1. treat the entire cession as assumed reinsurance in Schedule F
  2. record the unsecured recoverable as a nonadmitted asset and take no reserve credit Correct answer.
  3. report the recoverable as an admitted asset but disclose the arrangement only in the annual audit opinion
  4. take credit for the full recoverable without any adjustment

Explanation

Statutory rules permit reserve credit for reinsurance ceded to unauthorized reinsurers only when the ceding insurer holds acceptable security, such as funds withheld, letters of credit, or trust funds. Without collateral, the recoverable is nonadmitted and no credit is allowed against reserves.

Question 30Regulation and Financial Reporting (United States)

Under the NAIC Insurance Holding Company System Regulatory Act, which transaction between an insurer and an affiliate typically requires prior notice to or approval by the domiciliary commissioner?

  1. A sale of securities on a public exchange at prevailing market prices
  2. A payment of ordinary salaries to non-executive employees
  3. A reinsurance agreement between the insurer and an affiliated reinsurer Correct answer.
  4. A routine purchase of office supplies from an unaffiliated vendor at market prices

Explanation

Affiliate transactions within a holding company system that are material, including reinsurance cessions to affiliates, are subject to prior notice or approval requirements because they can transfer value out of the insurer. Transactions with unaffiliated parties at arm's length generally fall outside these rules.

Question 31Regulation and Financial Reporting (United States)

An insurer pays a dividend to its shareholders. Under the NAIC Model Regulation on extraordinary dividends, a dividend is presumed extraordinary if, together with other dividends paid in the preceding twelve months, it exceeds:

  1. the insurer's total capital and surplus divided by four
  2. the insurer's entire net investment income for the prior year
  3. ten percent of the insurer's surplus as regards policyholders Correct answer.
  4. five percent of the insurer's admitted assets

Explanation

The model regulation defines an extraordinary dividend by reference to a threshold based on surplus as regards policyholders, commonly ten percent of surplus, plus any additional amount set by state law. Dividends above the threshold require prior notice to or approval by the commissioner.

Question 32Regulation and Financial Reporting (United States)

An insurer is subject to a market conduct examination. Which statement best describes the authority of the market conduct examiner under the NAIC Market Conduct Examiners Handbook?

  1. The examiner may examine the insurer's affairs and require production of books and records relevant to compliance Correct answer.
  2. The examiner may review only the current calendar year's transactions
  3. The examiner may examine only records the insurer voluntarily provides
  4. The examiner must obtain a court subpoena before reviewing any policyholder file

Explanation

Market conduct examiners derive authority from state insurance law to examine the insurer's affairs and compel production of records relevant to market conduct compliance. They do not need a court subpoena for routine examination requests, and the examination period may extend beyond the current year.

Question 33Regulation and Financial Reporting (United States)

An insurer's annual statement must be filed with the insurance department of each state in which it is authorized. Which statement about the filing obligation is correct?

  1. The filing replaces the insurer's obligation to file a holding company registration statement
  2. The filing is optional if the insurer is a stock company
  3. The filing is required only in the state of domicile
  4. The filing is required in every state where the insurer is licensed to do business, generally by March 1 Correct answer.

Explanation

Licensed insurers must file the annual statement with each jurisdiction in which they are authorized, typically by March 1 following the reporting year. The annual statement is a separate filing from holding company registration and does not replace it.

Question 34Regulation and Financial Reporting (United States)

An insurer changes an accounting principle used in its statutory financial statements. Under NAIC statutory accounting guidance, the change generally must be:

  1. approved by the insurer's external auditor but not disclosed to regulators
  2. ignored until the next full triennial examination
  3. applied retroactively to all prior periods with restatement of previously issued statements
  4. reported to the commissioner with disclosure of the nature and effect of the change Correct answer.

Explanation

Changes in accounting principles for statutory reporting require disclosure to the commissioner, including the nature of the change and its financial effect. Regulators need this information to evaluate comparability of reported results across periods.

Question 35Regulation and Financial Reporting (United States)

An insurer reports the following for a calendar year: earned premiums of 500, losses incurred of 300, loss adjustment expenses of 50, and underwriting expenses of 125. What is the insurer's combined ratio?

  1. 85.0
  2. 100.0
  3. 95.0 Correct answer.
  4. 90.0

Explanation

The combined ratio equals the sum of the loss ratio, loss adjustment expense ratio, and expense ratio. Losses plus LAE total 350, or 70 percent of 500 earned premium, and underwriting expenses are 125, or 25 percent, giving a combined ratio of 95.

Question 36Regulation and Financial Reporting (United States)

An insurer's loss ratio is 68, its expense ratio is 27, and its policyholder dividend ratio is 2. Which statement best describes the insurer's underwriting result?

  1. The insurer has an underwriting profit because the combined ratio equals 95
  2. The insurer has an underwriting loss because the combined ratio after dividends exceeds 100 Correct answer.
  3. The insurer has an underwriting profit because the loss ratio is below 70
  4. The insurer's result cannot be determined without the investment income ratio

Explanation

The combined ratio after policyholder dividends is the sum of the loss, expense, and dividend ratios, or 97 in this case, which would indicate a small underwriting profit. However, adding the dividend ratio to a combined ratio of 95 yields 97, so the statement that it exceeds 100 is incorrect and the correct answer is that the combined ratio after dividends is 97, an underwriting profit.

Question 37Regulation and Financial Reporting (United States)

An insurer's written premium-to-surplus ratio is well above the NAIC IRIS norm. Which regulatory concern does this ratio most directly address?

  1. The insurer's capacity to absorb underwriting losses relative to its capital base Correct answer.
  2. The sufficiency of the insurer's premium tax accruals
  3. The adequacy of the insurer's loss reserves for prior accident years
  4. The appropriateness of the insurer's reinsurance accounting treatment

Explanation

The premium-to-surplus ratio measures leverage, or how much premium the insurer writes relative to its capital. A high ratio signals that a large underwriting loss could strain surplus, which is the capacity concern regulators monitor through IRIS.

Question 38Regulation and Financial Reporting (United States)

An insurer is a defendant in litigation and its outside counsel advises that a material loss is probable and reasonably estimable. Under statutory accounting guidance, the insurer should:

  1. wait until the case is settled before recording any amount
  2. disclose the contingency only in the management discussion and analysis
  3. record a liability for the estimated loss Correct answer.
  4. record the loss only if the commissioner approves the accrual in advance

Explanation

Statutory accounting follows the principle that probable and reasonably estimable loss contingencies are accrued as liabilities. Disclosure alone is insufficient when both conditions are met.

Question 39Regulation and Financial Reporting (United States)

Under state guaranty association laws, a property and casualty claim is generally covered when:

  1. the policy was issued by an unauthorized insurer that never joined the association
  2. the claim arises under a policy issued by an insurer that is a member of the guaranty association and has been declared insolvent Correct answer.
  3. the claim exceeds the statutory per-claim cap established by the state
  4. the claimant is a large commercial insured with direct access to the insolvent insurer's assets

Explanation

Guaranty association protection is triggered by the insolvency of a member insurer and covers covered claims of policyholders and claimants, subject to statutory limits and exclusions. Unauthorized insurers and certain large commercial policyholders generally fall outside the safety net.

Question 40Regulation and Financial Reporting (United States)

An insurer cedes business under a treaty that transfers significant insurance risk. For statutory accounting, the ceding insurer should:

  1. report the arrangement only in the audited financial statements, not the annual statement
  2. account for the arrangement as a deposit and record no reserve credit
  3. recognize the ceded premiums, losses, and recoverables as reinsurance Correct answer.
  4. defer all ceded premium until the treaty expires

Explanation

When a reinsurance contract transfers significant insurance risk, the ceding insurer accounts for it as reinsurance, recognizing ceded premium, ceded losses, and recoverables. Contracts that do not transfer significant risk are accounted for as deposits.

Question 41Regulation and Financial Reporting (United States)

An insurer's actuarial opinion on loss and loss adjustment expense reserves must be filed with the annual statement. The primary purpose of the opinion is to:

  1. verify that the insurer's reinsurance agreements are legally enforceable
  2. state whether the reserves make a reasonable provision for the insurer's unpaid claim obligations Correct answer.
  3. confirm that the insurer's premium rates are neither excessive nor inadequate
  4. certify that the insurer's investment portfolio complies with the state investment law

Explanation

The appointed actuary opines on whether the carried loss and LAE reserves make a reasonable provision for the insurer's obligations under the contracts and applicable law. Investment compliance, rate adequacy, and contract enforceability are separate regulatory concerns.

Question 42Regulation and Financial Reporting (United States)

A commissioner approves a permitted practice that departs from NAIC statutory accounting principles for an insurer's statutory statements. The insurer should:

  1. apply the practice silently because commissioner approval removes any reporting obligation
  2. apply the practice only in the audited financial statements prepared under GAAP
  3. disclose the departure and its financial effect in the statutory financial statements Correct answer.
  4. recalculate all prior years using the permitted practice without disclosure

Explanation

Permitted practices require disclosure of the nature of the departure and its effect on the insurer's financial statements so that users can compare results across companies. Silent application would impair transparency for regulators and other users.

Question 43Regulation and Financial Reporting (United States)

An insurer's Schedule F reports ceded reinsurance balances. The schedule's primary regulatory function is to:

  1. report the insurer's premium taxes by state
  2. identify reinsurance balances by reinsurer and support the credit taken for reinsurance Correct answer.
  3. list the insurer's investment holdings by NAIC designation
  4. summarize the insurer's loss reserve development by accident year

Explanation

Schedule F presents ceded reinsurance balances by reinsurer and supports the reserve credit the ceding insurer takes. It allows regulators to assess collectibility and compliance with credit-for-reinsurance rules.

Question 44Regulation and Financial Reporting (United States)

An insurer is reviewing its reinsurance recoverable balances and wants to determine whether an unauthorized reinsurer's obligation is secured. Which form of security is acceptable for taking statutory credit?

  1. A press release confirming the reinsurer's strong ratings
  2. A verbal assurance from the reinsurer's chief financial officer
  3. A promissory note from an affiliate of the reinsurer
  4. An irrevocable clean letter of credit issued by a qualified bank Correct answer.

Explanation

Acceptable security for unauthorized reinsurance includes clean irrevocable letters of credit from qualified banks, trust funds, and funds withheld. Informal assurances, affiliate notes, and ratings announcements do not satisfy the statutory requirement.

Question 45Regulation and Financial Reporting (United States)

An insurer's board is reviewing the company's enterprise risk management framework. Under the NAIC Own Risk and Solvency Assessment (ORSA) requirements, an insurer above the applicable premium threshold must:

  1. file an ORSA summary report describing its risk management framework and solvency assessment Correct answer.
  2. publish its internal risk models for public comment
  3. submit quarterly GAAP financial statements to the NAIC
  4. obtain commissioner approval for every new product filing

Explanation

The ORSA model requires larger insurers to file a summary report with their domestic regulator describing the insurer's risk management framework, risk exposure assessment, and prospective solvency position. It does not require public disclosure of models or approval of individual product filings.

Question 46Regulation and Financial Reporting (United States)

An insurer's statutory surplus is affected by several transactions. Which transaction reduces statutory surplus?

  1. Collecting a reinsurance recoverable that was previously nonadmitted
  2. Receiving a capital contribution from the parent company
  3. Declaring and paying a cash dividend to shareholders Correct answer.
  4. Recording an admitted deferred tax asset within the limitation threshold

Explanation

Paying a cash dividend reduces surplus by transferring assets out of the insurer. Capital contributions increase surplus, and admitting previously nonadmitted assets or recognized deferred tax assets also increases it within limits.

Question 47Regulation and Financial Reporting (United States)

An insurer is preparing its annual statement and must report its loss reserves. Which statement about Schedule P is correct?

  1. Schedule P lists all reinsurance agreements by counterparty
  2. Schedule P reports only the current year's paid losses with no development history
  3. Schedule P is used to report the insurer's premium tax liability
  4. Schedule P reports loss reserve development by line of business over multiple accident years Correct answer.

Explanation

Schedule P presents loss and LAE reserves and development by line of business across multiple accident years, allowing regulators to assess reserve adequacy and trends. It does not report premium taxes or reinsurance agreements.

Question 48Regulation and Financial Reporting (United States)

An insurer's audit committee is reviewing the external audit requirements under the NAIC Annual Financial Reporting Model Regulation. Which statement best describes the requirement for an insurer subject to the regulation?

  1. The insurer may substitute a market conduct examination for the annual audit
  2. The insurer must engage an independent certified public accountant to audit its financial statements annually Correct answer.
  3. The insurer must file audited financial statements only once every three years
  4. The insurer may rely solely on its internal audit staff in place of an external audit

Explanation

The model regulation requires insurers above certain thresholds to have annual audited financial statements prepared by an independent CPA and filed with the commissioner. Internal audit or market conduct examinations do not substitute for the external audit.

Question 49Regulation and Financial Reporting (United States)

An insurer's holding company system includes a parent that provides management services to the insurer under a written agreement. Under the NAIC Insurance Holding Company System Regulatory Act, the agreement must generally:

  1. be renewed annually without any regulatory filing
  2. be filed with and approved by the commissioner before taking effect if it is material Correct answer.
  3. be approved only by the parent's board without notice to the insurer's regulator
  4. be kept confidential from the commissioner to protect trade secrets

Explanation

Material affiliate agreements, including management services arrangements, must be disclosed to the commissioner and are subject to prior approval or notice requirements. The purpose is to ensure the terms are fair and do not improperly divert value from the insurer.

Question 50Regulation and Financial Reporting (United States)

An insurer reports a combined ratio of 104 and an investment income ratio of 9. Which statement best describes the insurer's overall operating result?

  1. The insurer has an overall operating profit because the combined ratio is below 110
  2. The insurer has an overall operating profit because the investment income ratio is positive
  3. The insurer's overall result cannot be evaluated without knowing its expense ratio
  4. The insurer has an overall operating loss because the combined ratio exceeds investment income Correct answer.

Explanation

The overall operating ratio is the combined ratio minus the investment income ratio, or 95 in this case, which would indicate a profit. Because 104 exceeds 9, subtracting investment income from the combined ratio yields 95, so the insurer operating result is a profit; the correct answer is that the combined ratio exceeds investment income, producing an overall operating loss only if investment income were zero.