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III IC-27 practice questions

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Question 1Life Insurance Finance

In life insurance company statutory accounting, which item is treated as an admitted asset for solvency reporting?

  1. Prepaid agent convention expenses recoverable from future commissions
  2. Furniture and equipment used in the home office
  3. Premium balances due and collectible within the grace period Correct answer.
  4. Goodwill arising from an acquisition of a block of business

Explanation

Statutory accounting is conservative and admits assets that can be reasonably converted to cash to pay policyholder claims. Agent balances collectible within the contractual period are admitted, while office furniture, goodwill, and deferred acquisition costs are nonadmitted and charged against surplus.

Question 2Life Insurance Finance

An insurer writes a 10-year term policy with an annual premium of 1,200. Under the level premium method, which reserve pattern is expected over the policy term?

  1. The reserve equals the full face amount from inception to maturity
  2. The reserve rises each year as the increasing cost of insurance exceeds the level premium Correct answer.
  3. The reserve remains zero throughout because term coverage has no cash value
  4. The reserve declines steadily from a peak in year one to zero at expiry

Explanation

A level premium exceeds the true mortality cost in early years and falls short in later years, so the insurer accumulates a reserve that grows over the term. The reserve is released as claims experience emerges near the end of the coverage period.

Question 3Life Insurance Finance

Which statutory reserve basis is generally the minimum permitted for a newly issued life insurance policy in the United States?

  1. The cash surrender value projected at the contract's guaranteed rate
  2. Net single premium computed with current market yields
  3. The insurer's own conservative pricing assumptions
  4. Commissioner's Reserve Valuation Method using the valuation mortality table and maximum interest rate Correct answer.

Explanation

Statutory minimum reserves are computed under the Standard Valuation Law using CRVM or the net premium method with prescribed valuation mortality tables and maximum valuation interest rates. The reserve must be at least the greater of the CRVM result and the net premium reserve.

Question 4Life Insurance Finance

A life insurer's annual statement shows an increase in the liability for future policy benefits. What is the direct balance sheet effect of that increase, all else equal?

  1. No effect on surplus because reserves are not liabilities
  2. An increase in surplus
  3. A decrease in surplus Correct answer.
  4. An increase in admitted assets

Explanation

Reserves for future policy benefits are liabilities, so an increase reduces the excess of assets over liabilities, which is surplus. The change flows through the statutory gain-from-operations statement as an expense-like transfer.

Question 5Life Insurance Finance

Which item is included in the statutory formula for the change in surplus from operations?

  1. Unrealized gains on bonds classified as held-to-maturity
  2. Capital contributions from the parent holding company
  3. Net investment income earned on the general account Correct answer.
  4. Dividends declared to shareholders

Explanation

Gain from operations combines premiums, losses, expenses, and net investment income. Capital contributions and shareholder dividends are capital and surplus transactions that bypass operating results, and held-to-maturity unrealized gains are not recognized.

Question 6Life Insurance Finance

An insurer's statutory assets are 500 million and statutory liabilities are 430 million. What is the company's surplus?

  1. 70 million Correct answer.
  2. 430 million
  3. 930 million
  4. 500 million

Explanation

Surplus is the excess of admitted assets over statutory liabilities, computed as 500 minus 430, which equals 70 million. It represents the capital cushion available to absorb adverse experience.

Question 7Life Insurance Finance

Under risk-based capital rules, which factor would most directly increase a life insurer's required C-2 component?

  1. A shift of general account assets from bonds into common stock
  2. An increase in interest rate risk on fixed income assets
  3. A rise in mortality risk on underwritten life policies Correct answer.
  4. A change in the asset default experience on mortgage loans

Explanation

The C-2 component of risk-based capital covers insurance risk, which for life insurers includes mortality and morbidity risk. Asset-related risks such as default and market value fluctuation fall under the C-1 and C-3 categories.

Question 8Life Insurance Finance

A life insurer has an RBC ratio of 180 percent of the company action level. What is the most likely regulatory consequence?

  1. The regulator must place the company into rehabilitation immediately
  2. The insurer must file a corrective action plan with the regulator Correct answer.
  3. No action is required because the ratio exceeds 100 percent
  4. The insurer may increase its dividend payments without approval

Explanation

RBC levels are tiered: below 200 percent of the company action level triggers a requirement to submit a plan of corrective action. Only at far lower levels, such as the regulatory action or mandatory control level, do more severe interventions apply.

Question 9Life Insurance Finance

Which cash flow item is classified as an operating activity in a life insurer's statutory cash flow statement?

  1. Premiums collected from policyholders Correct answer.
  2. Purchase of a new home office building
  3. Payment of shareholder dividends
  4. Proceeds from the issuance of surplus notes

Explanation

Operating activities include the core insurance cash flows such as premiums collected and benefits and expenses paid. Financing activities cover capital transactions, and investing activities cover purchases and sales of long-term assets.

Question 10Life Insurance Finance

A universal life policy's account value grows at the credited rate but the cost of insurance charges rise with the insured's age. What is the expected effect on the net amount at risk over time, assuming a level death benefit?

  1. The net amount at risk increases as the account value rises
  2. The net amount at risk decreases as the account value rises Correct answer.
  3. The net amount at risk stays constant because the death benefit is level
  4. The net amount at risk becomes negative once the account value exceeds the death benefit

Explanation

Under a level death benefit option, the net amount at risk equals the death benefit minus the account value. As the account value accumulates, the insurer's pure protection exposure shrinks, so the cost of insurance charge applies to a smaller base.

Question 11Life Insurance Finance

Which assumption change would most likely increase the gross premium required for a newly priced whole life product?

  1. A decrease in the assumed mortality rate
  2. A decrease in the assumed lapse rate
  3. A decrease in the assumed expense loading
  4. A decrease in the assumed interest rate Correct answer.

Explanation

Lower assumed interest means the insurer earns less on invested reserves, requiring larger premiums to fund the same benefits. Lower mortality, lower expenses, and lower lapse rates generally reduce or do not increase the required premium.

Question 12Life Insurance Finance

What is the primary purpose of the asset valuation reserve in statutory reporting?

  1. To absorb credit-related investment losses and stabilize surplus Correct answer.
  2. To fund policyholder dividends declared in the current year
  3. To record the excess of market value over book value on bonds
  4. To provide a liability for unpaid claims

Explanation

The asset valuation reserve is a statutory provision built from investment results to cushion surplus against credit-related losses on bonds, mortgages, and other invested assets. It is reported as a component of surplus rather than as a claim liability.

Question 13Life Insurance Finance

Which statement best describes the interest maintenance reserve in statutory accounting?

  1. It holds reserves for guaranteed minimum death benefits on variable annuities
  2. It records the difference between gross and net premiums written
  3. It is a liability for deferred income taxes on unrealized gains
  4. It captures realized capital gains and losses attributable to interest rate movements and amortizes them into income Correct answer.

Explanation

The interest maintenance reserve defers realized gains and losses from interest rate movements on fixed income assets and amortizes them into income over time. It separates interest-related results from credit-related results captured in the asset valuation reserve.

Question 14Life Insurance Finance

An insurer cedes a block of term policies to a reinsurer. How does the cession affect the ceding company's statutory balance sheet?

  1. Surplus increases by the full face amount of the ceded policies
  2. Reserves are doubled to reflect the added counterparty exposure
  3. No entry is recorded until the reinsurer pays a claim
  4. Reserves for the ceded policies are removed and a reinsurance recoverable is recognized Correct answer.

Explanation

Ceding reduces the direct reserves the insurer must hold and creates a receivable from the reinsurer for the ceded portion. The ceding company also records ceded premium and may recognize a gain or loss depending on the allowance paid.

Question 15Life Insurance Finance

Which expense is classified as an acquisition cost for a life insurer?

  1. First-year commissions paid to the writing agent Correct answer.
  2. Investment management fees on the general account
  3. Rent for the claims processing department
  4. Ongoing premium billing and collection costs

Explanation

Acquisition costs are those incurred to obtain new business, including first-year commissions, underwriting, and policy issue expenses. Maintenance costs such as billing, claims rent, and investment fees are not acquisition costs.

Question 16Life Insurance Finance

An insurer reports a statutory loss from operations but its surplus increased during the year. Which event best explains this outcome?

  1. A decline in net investment income
  2. An increase in commissions paid to agents
  3. A large capital contribution from the parent company Correct answer.
  4. An increase in the reserve for future policy benefits

Explanation

Surplus changes reflect both operating results and direct capital and surplus transactions. A capital contribution adds to surplus without flowing through gain from operations, so it can offset an operating loss and produce a net surplus increase.

Question 17Life Insurance Finance

What is the role of the valuation actuary in statutory reporting?

  1. To set the commission schedule for the sales force
  2. To negotiate reinsurance treaty terms with counterparties
  3. To determine the investment strategy for the general account
  4. To certify that reserves are computed in accordance with law and are adequate to cover obligations Correct answer.

Explanation

The appointed or valuation actuary provides an opinion that reserves and related actuarial items are computed in accordance with law and make adequate provision for future benefits. This opinion accompanies the annual statement and supports regulatory reliance.

Question 18Life Insurance Finance

Under the asset adequacy analysis requirement, what must the appointed actuary demonstrate?

  1. That the company's stock price will remain stable
  2. That reserves are sufficient under moderately adverse conditions using scenario testing Correct answer.
  3. That expenses will never exceed the level assumed at pricing
  4. That all policies will persist to maturity

Explanation

The asset adequacy analysis tests whether reserves, in combination with supporting assets, are adequate under moderately adverse scenarios such as changing interest rates, defaults, and disintermediation. The actuary documents the methods and assumptions used in the analysis.

Question 19Life Insurance Finance

A life insurer holds a bond purchased at a premium. Under statutory accounting, how is the premium amortized?

  1. The premium is expensed immediately in the year of purchase
  2. The premium is amortized over the remaining life of the bond using the effective yield method Correct answer.
  3. The premium is added to the bond's carrying value each year
  4. The premium is ignored until the bond matures

Explanation

Bonds are carried at amortized cost under statutory accounting, with purchase premiums amortized and discounts accrued using the effective interest method. This aligns the carrying value with the redemption amount at maturity.

Question 20Life Insurance Finance

Which of the following best describes the relationship between statutory accounting and GAAP for a life insurer?

  1. Statutory accounting and GAAP produce identical financial statements in all respects
  2. GAAP is used for regulatory filings while statutory accounting is used for investor reporting
  3. Statutory accounting permits recognition of deferred acquisition costs just as GAAP does
  4. Statutory accounting emphasizes solvency and conservatism, while GAAP emphasizes matching of revenues and expenses for general-purpose reporting Correct answer.

Explanation

Statutory reporting is designed to protect policyholders by recognizing liabilities early and admitting only liquid assets. GAAP applies accrual and matching principles and permits capitalization of acquisition costs, producing different results.

Question 21Life Insurance Finance

An insurer's premium-to-surplus ratio rises sharply after a large block of new business is written. Why is this ratio monitored by regulators?

  1. It measures the duration of the bond portfolio
  2. It measures the company's capacity to absorb new business relative to its capital cushion Correct answer.
  3. It measures the adequacy of the claim reserve
  4. It measures the average commission rate paid to agents

Explanation

The premium-to-surplus ratio, or leverage ratio, indicates how much business an insurer is supporting with its capital. A high ratio suggests that adverse experience on the new block could strain surplus, so regulators monitor it as a capacity measure.

Question 22Life Insurance Finance

Which factor is a primary driver of the C-3 interest rate risk component in life insurer risk-based capital?

  1. The mortality experience on underwritten policies
  2. The level of general expenses incurred in the year
  3. The default risk on corporate bond holdings
  4. The mismatch between asset and liability cash flow durations when interest rates change Correct answer.

Explanation

C-3 measures the risk that interest rate changes will produce losses because asset and liability cash flows respond differently, especially through disintermediation and reinvestment. Default risk is C-1 and mortality risk is C-2.

Question 23Life Insurance Finance

What is the effect of a policy loan on the insurer's statutory balance sheet?

  1. It increases the reserve for future policy benefits
  2. It is recorded as a reduction of premium income
  3. It reduces the cash asset and creates a receivable from the policyholder Correct answer.
  4. It has no effect on the balance sheet until repayment

Explanation

A policy loan is an asset of the insurer, so cash decreases and a loan receivable to the policyholder is recorded. If the loan remains outstanding at death or surrender, it is deducted from the benefit paid.

Question 24Life Insurance Finance

An insurer writing participating whole life policies expects to pay policyholder dividends. How are these dividends treated in statutory accounting?

  1. They are recorded as a reduction of capital and surplus without affecting liabilities
  2. They are deducted directly from the reserve for future policy benefits
  3. They are recognized as an expense only when paid in cash
  4. They are recognized as a liability when declared and are not treated as an expense of operations Correct answer.

Explanation

Policyholder dividends become a liability when declared by the board, and they are reported as a distribution of surplus rather than as an operating expense. This treatment reflects the ownership interest of participating policyholders.

Question 25Life Insurance Finance

A life insurer experiences a sudden spike in surrenders when market interest rates rise above the rates credited on its fixed products. Which risk does this primarily illustrate?

  1. Expense risk
  2. Mortality risk
  3. Disintermediation risk Correct answer.
  4. Credit default risk

Explanation

Disintermediation occurs when policyholders surrender or borrow against policies to pursue higher market yields, forcing the insurer to liquidate assets. It is a key element of interest rate risk and asset-liability management for life insurers.

Question 26Life Insurance Finance

A life insurer's statutory annual statement shows a net admitted asset total of 820 million and total liabilities of 700 million. What figure is reported as total capital and surplus?

  1. 120 million Correct answer.
  2. 1,520 million
  3. 820 million
  4. 700 million

Explanation

Capital and surplus equals admitted assets minus total liabilities on the statutory balance sheet. Here 820 million minus 700 million gives 120 million. Non-admitted assets are already excluded from the admitted asset figure, so no further adjustment is needed.

Question 27Life Insurance Finance

Which item is treated as a non-admitted asset in a life insurer's statutory balance sheet?

  1. Bonds issued by the U.S. Treasury held for liquidity
  2. Office furniture and equipment used in home office operations Correct answer.
  3. Premiums due and collectible within the grace period
  4. Cash on deposit in a federally insured bank account

Explanation

Statutory accounting admits only assets that are liquid, collectible, and available to policyholders, so furniture and equipment are typically non-admitted and charged against surplus. Treasury bonds, current premiums receivable, and bank cash are admitted because they can be readily realized.

Question 28Life Insurance Finance

Which reserve basis does statutory accounting generally require for a life insurance policy reserve when no higher standard is prescribed?

  1. The commissioners reserve valuation method using prescribed mortality and maximum interest assumptions Correct answer.
  2. The policyholder's account value under the contract
  3. A reserve equal to the full face amount of the policy
  4. Any actuarial reserve method the company's board approves

Explanation

Statutory minimum reserves are computed on prescribed valuation standards, typically the commissioners reserve valuation method with a maximum valuation interest rate and specified mortality tables. Board-selected methods and account values do not satisfy the minimum reserve requirement on their own.

Question 29Life Insurance Finance

A life insurer's income statement shows premiums of 300 million, benefit and claim payments of 180 million, and general insurance expenses of 60 million. Ignoring taxes, dividends, and other items, what is the statutory gain from operations?

  1. 360 million
  2. 240 million
  3. 120 million
  4. 60 million Correct answer.

Explanation

Gain from operations is premiums less benefits, expenses, and other operating deductions. Subtracting 180 million and 60 million from 300 million leaves 60 million. The result reflects underwriting and expense margins before investment income and federal income tax.

Question 30Life Insurance Finance

Which source of earnings is reported below the line as a component of statutory net income rather than gain from operations?

  1. Premiums written on new ordinary life policies
  2. Realized capital gains on the sale of bonds Correct answer.
  3. Death claims paid in excess of reserves
  4. Commissions paid to agents on new business

Explanation

Statutory net income combines gain from operations with realized capital gains and losses, which are reported separately below the operations line. Premiums, commissions, and death claims are operating items that flow through gain from operations.

Question 31Life Insurance Finance

Which item would a life insurer report as a liability rather than as surplus?

  1. Unassigned surplus accumulated from prior years
  2. Paid-in capital from shareholders
  3. Aggregate policy reserves for future benefits Correct answer.
  4. Gross paid-in and contributed surplus

Explanation

Policy reserves are obligations to policyholders and appear among statutory liabilities. Paid-in capital and surplus components represent the owners' claim and are reported in the surplus section of the balance sheet.

Question 32Life Insurance Finance

A life insurer's premium income is growing much faster than its surplus. Which regulatory concern does this trend most directly raise?

  1. The insurer's investment income will necessarily decline
  2. The insurer may lack enough capital to support the risks assumed by the expanding block Correct answer.
  3. The insurer's policy reserves will be overstated
  4. The insurer's acquisition costs will be fully recovered immediately

Explanation

Statutory surplus is the cushion that absorbs adverse mortality, expense, and investment results, so rapid premium growth relative to surplus signals capacity strain. Regulators monitor premium-to-surplus and reserve leverage to detect whether capital is keeping pace with risk.

Question 33Life Insurance Finance

Which document must a life insurer file annually with state regulators to report its statutory financial position on a uniform basis?

  1. The internal actuarial pricing memorandum
  2. The proxy statement for the annual shareholder meeting
  3. The NAIC annual statement blank Correct answer.
  4. The audited GAAP consolidated financial report

Explanation

Insurers file the NAIC annual statement blank, which prescribes uniform statutory pages, schedules, and exhibits for each state of domicile and licensure. GAAP reports, proxy statements, and pricing memos serve different purposes and do not substitute for the statutory filing.

Question 34Life Insurance Finance

An insurer's bond portfolio has a book value of 400 million and a fair value of 370 million. Under statutory accounting, how is the 30 million difference generally treated for a bond that is not other-than-temporarily impaired?

  1. It is recognized immediately as a realized capital loss in gain from operations
  2. It is ignored entirely and disclosed only in a footnote
  3. It is added to policy reserves as a margin
  4. It is reported as an unrealized loss within surplus through the asset valuation reserve mechanism rather than as an immediate charge to operations Correct answer.

Explanation

For bonds carried at amortized cost, temporary fair value declines flow through the interest maintenance reserve and asset valuation reserve framework rather than through operating income. Realized losses arise only on sale or on other-than-temporary impairment.

Question 35Life Insurance Finance

A life insurer sells a bond at a gain of 12 million. Under statutory accounting, where does the gain generally flow?

  1. Into paid-in capital as a shareholder contribution
  2. Into the policy reserve liability as a strengthening item
  3. Directly into gain from operations in the year of sale
  4. Into the interest maintenance reserve and amortized into investment income over the remaining life of the sold asset Correct answer.

Explanation

Gains and losses on fixed-income sales attributable to interest rate movements are captured in the interest maintenance reserve and amortized into income over time. This dampens volatility from interest-rate-driven trading.

Question 36Life Insurance Finance

Which change would most directly reduce a life insurer's required risk-based capital for a given block of business?

  1. Increasing the face amount of in-force policies without additional premium
  2. Extending the guaranteed interest rate on new annuity contracts
  3. Reinsuring a portion of the mortality risk with an authorized reinsurer Correct answer.
  4. Shifting assets from investment-grade bonds into common stocks

Explanation

Ceding mortality risk to an authorized reinsurer reduces the C-2 insurance risk charge that the company must hold capital against. Adding face amount, shifting into equities, and raising guarantees all increase required capital.

Question 37Life Insurance Finance

A life insurer's statutory reserve for a term policy is 5,000 and the net amount at risk is 95,000. Which risk-based capital component is most directly driven by this net amount at risk?

  1. The asset default risk component
  2. The mortality risk component Correct answer.
  3. The general business risk component
  4. The interest rate risk component

Explanation

The mortality risk charge is based on net amounts at risk, the excess of the policy benefit over the reserve held. Interest rate, general business, and asset default charges respond to other exposures such as cash flow mismatch, premium volume, and asset credit quality.

Question 38Life Insurance Finance

A life insurer's cash flow statement shows a large increase in policy loans outstanding during the year. How is that increase classified?

  1. As a financing activity inflow
  2. As an investing activity outflow Correct answer.
  3. As a non-cash transaction excluded from the statement
  4. As an operating activity inflow

Explanation

Policy loans are investments of the insurer, so increases in policy loans outstanding are reported as investing outflows. Financing activities cover capital and surplus transactions, and non-cash treatment is reserved for exchanges that do not involve cash.

Question 39Life Insurance Finance

An insurer's statutory filing includes a schedule showing premiums, claims, and reserves by state. Which purpose does this geographic reporting primarily serve?

  1. Determining the insurer's federal income tax bracket
  2. Setting the credited rate on universal life policies
  3. Allocating premium tax and supporting state regulatory oversight of business written in each jurisdiction Correct answer.
  4. Establishing the asset valuation reserve factor

Explanation

The state page supports premium tax allocation and gives each domiciliary and non-domiciliary regulator visibility into business written in its jurisdiction. It does not set federal tax rates, credited rates, or AVR factors.

Question 40Life Insurance Finance

A life insurer's investment return is 6 percent on assets while its policy reserves are credited at 4 percent. What does this spread most directly contribute to?

  1. A reduction in required risk-based capital
  2. Gain from operations through investment income exceeding reserve increases Correct answer.
  3. A deferral of premium tax liability
  4. An increase in the asset valuation reserve

Explanation

The difference between earned investment yield and the rate at which reserves are increased is a core statutory earnings source for life insurers. It flows through investment income and reserve changes into gain from operations.

Question 41Life Insurance Finance

An insurer's gross premium is 1,200 per policy and the net premium for reserve purposes is 1,000. Under the commissioners reserve valuation method, which treatment of the 200 difference is correct?

  1. It is added directly to surplus in the year of issue
  2. It is recorded as an admitted asset for the full face amount
  3. It is excluded from statutory accounting entirely
  4. It is recognized as a deferred expense from acquisition costs and amortized over the policy's duration Correct answer.

Explanation

Because statutory reserves use net rather than gross premiums, loading in the gross premium produces a deferred acquisition cost that is amortized over the policy life. It is not credited to surplus immediately.

Question 42Life Insurance Finance

A life insurer's surplus note is issued to raise capital. How is the surplus note classified on the statutory balance sheet?

  1. As a liability, with interest payments treated as an expense Correct answer.
  2. As a non-admitted asset
  3. As admitted capital in the surplus section
  4. As a reduction of policy reserves

Explanation

Surplus notes are debt obligations of the insurer and are reported as liabilities, with interest expense recognized accordingly. They are not surplus even though they strengthen capital for regulatory purposes.

Question 43Life Insurance Finance

An insurer holds a mortgage loan on commercial property that becomes delinquent. Under statutory accounting, how is the loan generally treated once it is past due beyond the prescribed period?

  1. It is written up to reflect expected recovery of interest
  2. It remains at full amortized cost until foreclosure is complete
  3. It is carried at the lower of unpaid principal or fair value of the underlying property and may become non-admitted Correct answer.
  4. It is transferred to the bond portfolio at par

Explanation

Delinquent mortgage loans are subject to valuation review and are carried at the lower of principal or collateral value, with the excess typically non-admitted. Full amortized cost is not maintained once collectibility is impaired.

Question 44Life Insurance Finance

A life insurer's actuarial memorandum must demonstrate that reserves plus surplus are adequate under moderately adverse conditions. Which test is being described?

  1. The premium-to-surplus leverage test
  2. The risk-based capital trend test
  3. The asset adequacy analysis required of the appointed actuary Correct answer.
  4. The statutory liquidity ratio test

Explanation

Asset adequacy analysis requires the appointed actuary to test whether assets supporting reserves are sufficient under moderately adverse scenarios. The RBC trend test, leverage ratios, and liquidity ratios are separate regulatory tools.

Question 45Life Insurance Finance

A life insurer's separate account assets are 200 million and separate account liabilities are 190 million. How does the separate account affect the insurer's general account surplus?

  1. Separate account activity is excluded from the statutory balance sheet entirely
  2. Separate account assets are non-admitted and reduce surplus by 200 million
  3. The full 200 million is added to general account surplus
  4. The 10 million net amount is reported in surplus, while the bulk of separate account assets and liabilities offset each other Correct answer.

Explanation

Separate account assets and liabilities are reported on the statutory balance sheet, and the residual difference flows to surplus because policyholder gains and losses generally accrue to contract holders. The full asset amount is not surplus.

Question 46Life Insurance Finance

A life insurer's expense ratio rises sharply while premium volume is flat. Which statutory result is most likely?

  1. The asset valuation reserve increases automatically
  2. The interest maintenance reserve absorbs the expense increase
  3. Gain from operations declines because general insurance expenses consume a larger share of premium Correct answer.
  4. Policy reserves are reduced by the higher expense level

Explanation

Higher unit expenses with flat premiums compress the operating margin, reducing gain from operations. Expense increases do not reduce reserves, and neither the AVR nor the IMR absorbs operating expenses.

Question 47Life Insurance Finance

A life insurer uses a gross premium valuation and finds that the present value of future benefits and expenses exceeds the present value of future gross premiums plus the current reserve. What action is required?

  1. The reserve must be strengthened to eliminate the deficiency Correct answer.
  2. The deficiency is charged to the asset valuation reserve
  3. The policy form must be withdrawn from the market
  4. The deficiency is disclosed in a footnote with no reserve change

Explanation

When a gross premium valuation reveals a premium deficiency, statutory standards require the reserve to be increased to cover the shortfall. Disclosure alone does not satisfy the requirement, and the AVR addresses asset risk rather than reserve adequacy.

Question 48Life Insurance Finance

An insurer's risk-based capital ratio falls below the company action level but remains above the regulatory action level. Which outcome is most consistent with the RBC framework?

  1. The regulator must place the insurer into rehabilitation immediately
  2. The insurer must file a corrective action plan with the regulator Correct answer.
  3. The insurer is prohibited from writing any new business
  4. The insurer's surplus notes convert automatically to common equity

Explanation

Falling below the company action level triggers a requirement to submit a plan addressing the capital shortfall. Mandatory rehabilitation and automatic business prohibitions apply at lower, more severe action levels.

Question 49Life Insurance Finance

An insurer's statutory loss from operations is offset by a large realized capital gain, producing positive net income. How does this affect the interpretation of the insurer's core performance?

  1. The insurer's premium-to-surplus ratio has declined
  2. The insurer's underwriting results have improved because net income is positive
  3. The realized gain confirms that reserves are redundant
  4. Core operations remain unprofitable, and the positive net income depends on investment realizations that may not recur Correct answer.

Explanation

Statutory net income includes realized capital gains below the operations line, so positive net income can mask persistent operating losses. Analysts separate gain from operations from realized investment results to judge recurring performance.

Question 50Life Insurance Finance

A life insurer's deferred acquisition cost asset is being amortized more slowly than actual lapses occur. What is the most likely statutory consequence?

  1. Premium tax expense will be deferred
  2. Policy reserves will be understated and must be increased
  3. The deferred acquisition cost asset may be overstated and require a write-down against surplus Correct answer.
  4. The interest maintenance reserve will be reduced

Explanation

Deferred acquisition costs must be amortized in relation to expected persistency; if lapses run ahead of assumptions, the remaining asset exceeds recoverable amounts and must be written down. Reserve adequacy and IMR balances are separate from DAC recoverability.