CFP India - independent subject foundations common mistakes
CFP India - independent subject foundations · Understand the traps and how to avoid them.
Assuming any loss is covered because a premium was paid
Protection depends on the actual insured event, scope, exclusions and conditions.
What to do instead
Read the wording and evidence, identify the relevant coverage and distinguish a covered loss from a payment request.
Applying a deductible without reading its convention
Deductibles, limits and aggregation can be arranged in different contractual orders.
What to do instead
Write the supplied calculation sequence and apply the stated cap or layer without importing an unstated policy rule.
Treating insurance as physical loss prevention
A financing arrangement does not automatically remove a physical or operational hazard.
What to do instead
Compare prevention, reduction, retention and transfer as different tools and explain the residual exposure.
Calling an inconsistency proof of fraud
Incomplete records or an unusual pattern can have several explanations.
What to do instead
Preserve evidence and investigate through the authorized process, distinguishing a risk signal from a substantiated finding.
Equating a reserve with cash
A recognized liability or estimated obligation does not establish a matching liquid asset.
What to do instead
Review assets, payment timing and uncertainty separately from the estimate of the obligation.
Treating all premium receipts as earned profit
Coverage, claims and expenses occur across different periods.
What to do instead
Distinguish written, earned and unearned amounts within the specified model before evaluating the result.
Ignoring reinsurance counterparty risk
Transferring exposure under a contract does not guarantee collection from the reinsurer.
What to do instead
Review the actual terms, retained exposure, recovery assumptions and concentration rather than removing every risk from analysis.
Using a combined ratio as a complete solvency test
An underwriting performance measure does not incorporate every asset, capital or liquidity consideration.
What to do instead
State the component denominators, then evaluate investment results, reserves, assets and capital separately.
When answering budgeting or decision-making questions, the candidate prepares a budget without identifying the limiting factor, or makes a make-or-buy or accept-or-reject decision on total cost per unit instead of relevant (incremental) cost, treating fixed costs and sunk costs as relevant.
Candidates default to absorption costing figures because that is what appears in the accounts, and they have not practised ranking products by contribution per unit of scarce resource. They also include apportioned fixed overheads in decisions where those costs do not change.
What to do instead
For any scarce-resource question, compute contribution per unit, then contribution per unit of the limiting factor, then rank. For make-or-buy and special-order decisions, list only future cash flows that differ between alternatives, exclude sunk costs and apportioned fixed overheads, and include opportunity costs of using scarce capacity. State the decision rule and the resulting recommendation explicitly.
Treating allocated costs as automatically avoidable
An accounting allocation can remain even after an activity is discontinued.
What to do instead
Compare future cash flows with and without the decision, documenting which capacity or contract payments actually change.
Confusing margin and markup
One uses selling price as its denominator while the other uses cost.
What to do instead
Write the denominator explicitly and check the relation between price, cost and profit before calculating the percentage.
Ranking investments without stating constraints
Different scale, risk, lives and funding limits can alter the relevant comparison.
What to do instead
Use a consistent cash-flow timeline and decision objective, then test the feasible alternatives under the actual constraints.