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AAii 302 Insurance Operations & Finance study materials
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AAii 302 Insurance Operations & Finance practice questions

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Question 1Insurance Operations

In insurance operations, which activity is the primary purpose of the underwriting function?

  1. Investing premium reserves in eligible asset classes
  2. Settling third-party liability claims after a loss occurs
  3. Selecting and classifying risks so that premiums reflect expected loss exposure Correct answer.
  4. Reconciling agent commission statements each month

Explanation

Underwriting evaluates each applicant's hazard, decides whether to accept the risk, and assigns a rating class so the premium matches expected losses. Claims settlement, investment of reserves, and commission reconciliation belong to other operational functions.

Question 2Insurance Operations

A policyholder reports a covered loss. Which sequence best reflects standard claims-handling workflow in an insurer's operations?

  1. Coverage verification, premium audit, reserve release, settlement
  2. Premium billing, reinsurance cession, loss assessment, subrogation
  3. First notice of loss, coverage verification, loss assessment, settlement and payment Correct answer.
  4. Loss assessment, first notice of loss, policy cancellation, payment

Explanation

Claims work begins with notice of loss, then confirms coverage under the policy, assesses the damage or liability, and settles by payment or denial. Billing, reinsurance cession, and premium audit are separate operational cycles.

Question 3Insurance Operations

Which document typically provides the authoritative record of a reinsurance transaction's terms between a ceding insurer and a reinsurer?

  1. The loss run report
  2. The reinsurance treaty or facultative certificate Correct answer.
  3. The agent's certificate of authority
  4. The policyholder's declarations page

Explanation

Treaties and facultative certificates set out the reinsurance terms, including coverage, retention, and limits. The agent's authority certificate, the declarations page, and loss runs serve other purposes in the insurance relationship.

Question 4Insurance Operations

An insurer maintains a claims reserve for reported but not yet settled claims. What is this liability commonly called?

  1. Case reserve Correct answer.
  2. Deferred acquisition cost asset
  3. Contingency surplus
  4. Unearned premium reserve

Explanation

A case reserve is established for each known claim based on the estimated ultimate cost of that claim. Unearned premium, contingency surplus, and deferred acquisition cost are different balance sheet items with unrelated purposes.

Question 5Insurance Operations

Which operational control most directly reduces the risk of paying a claim for a policy that had already lapsed at the date of loss?

  1. Scheduling quarterly premium audits for all commercial policies
  2. Reviewing reinsurance recoverable balances monthly
  3. Verifying policy status and effective dates before authorizing payment Correct answer.
  4. Requiring the adjuster to obtain three repair estimates

Explanation

Confirming coverage status and effective dates at the time of loss prevents payments on policies not in force. Repair estimates, premium audits, and reinsurance recoverable reviews address different operational risks.

Question 6Insurance Operations

Which statement accurately describes the role of a managing general agent (MGA) in insurance operations?

  1. An MGA is an independent adjuster retained solely for catastrophe losses
  2. An MGA is a reinsurer that assumes risk only on a facultative basis
  3. An MGA performs underwriting, binding, and sometimes claims functions delegated by an insurer under a written agreement Correct answer.
  4. An MGA is a state regulator that licenses producers and reviews rate filings

Explanation

An MGA operates under delegated authority from an insurer, often handling underwriting, binding, and claims administration. Regulators, reinsurers, and independent adjusters are distinct roles with different responsibilities.

Question 7Insurance Operations

Which item is normally classified as an operating expense rather than a loss cost in an insurer's financial reporting?

  1. Salaries of claims adjusters processing claims Correct answer.
  2. Medical payments made under a liability policy
  3. Indemnity payments to injured third parties
  4. Defense costs paid to outside counsel for a covered suit

Explanation

Adjuster salaries are internal operating expenses of running the claims function. Indemnity, defense costs, and medical payments are loss costs attributable to covered claims.

Question 8Insurance Operations

Why do insurers maintain a segregation of duties between the individual who approves a claim payment and the individual who disburses funds?

  1. To accelerate the claim payment cycle by parallel processing
  2. To satisfy reinsurance treaty notice requirements
  3. To prevent a single person from both authorizing and executing a fraudulent payment Correct answer.
  4. To reduce the number of adjusters needed per claim

Explanation

Separating authorization from disbursement is a fundamental internal control that makes concealment of fraud harder. It does not primarily speed processing, satisfy reinsurance notices, or reduce staffing needs.

Question 9Insurance Operations

An insurer writes a policy with a 12-month term on July 1 and collects the full premium at inception. How much of that premium is earned by December 31 of the same year?

  1. Twelve months of premium
  2. Zero, because the policy has not expired
  3. Six months of premium Correct answer.
  4. The entire premium less commission

Explanation

Premium is earned pro rata over the policy period, so six of the twelve months have elapsed by December 31 and half the premium is earned. The remaining half stays in the unearned premium reserve.

Question 10Insurance Operations

A commercial policy is written with a premium based on audited payroll. At inception the insured pays a deposit premium of 40,000 based on estimated payroll. The final audit shows actual premium of 52,000. What additional premium does the insurer bill?

  1. 40,000
  2. 8,000
  3. 12,000 Correct answer.
  4. 52,000

Explanation

The audit adjusts the deposit to the actual earned premium, so the insured owes the difference of 52,000 minus 40,000, which is 12,000. The deposit itself is not refunded or rebilled in full.

Question 11Insurance Operations

An insurer cedes 30 percent of a 200,000 loss to a reinsurer under a quota share treaty. Ignoring reinstatement and expense provisions, what is the ceding insurer's retained loss?

  1. 170,000
  2. 200,000
  3. 140,000 Correct answer.
  4. 60,000

Explanation

Under a 30 percent quota share, the reinsurer bears 60,000 and the ceding insurer retains the remaining 70 percent, or 140,000. Retention equals the complement of the cession percentage applied to the loss.

Question 12Insurance Operations

A claims manager notices that average paid severity in one region has risen sharply while claim counts are flat. Which analytical step best tests whether the increase is driven by a few large claims?

  1. Recalculate the loss ratio using written premium instead of earned premium
  2. Recalculate the unearned premium reserve for that region
  3. Review the severity distribution and identify the largest individual claims in that region Correct answer.
  4. Compare the number of policies in force against the prior year

Explanation

Examining the severity distribution and isolating large claims reveals whether averages are skewed by outliers. Changing the premium basis or counting policies does not test the composition of claim severity.

Question 13Insurance Operations

A policy contains a 5,000 deductible. A covered loss of 18,000 occurs. The insurer pays the loss net of deductible and the insured bears the deductible. What amount does the insurer pay?

  1. 5,000
  2. 23,000
  3. 13,000 Correct answer.
  4. 18,000

Explanation

The deductible is subtracted from the covered loss before payment, so the insurer pays 18,000 minus 5,000, which is 13,000. The insured retains the 5,000 deductible amount.

Question 14Insurance Operations

Why does an insurer monitor its premium-to-surplus ratio as part of operational capacity management?

  1. It reports the share of claims closed without payment
  2. It signals how much net exposure the insurer supports relative to its capital base Correct answer.
  3. It indicates the average tenure of the agency force
  4. It measures the proportion of premium collected in cash versus billed

Explanation

The premium-to-surplus ratio compares net written premium to policyholders' surplus, indicating leverage and capacity to absorb risk. Cash collection, agency tenure, and claim closure rates are unrelated operational metrics.

Question 15Insurance Operations

Which activity belongs to the policy administration function rather than to the underwriting function?

  1. Deciding whether to accept an applicant with a poor loss history
  2. Setting the rating class for a new business submission
  3. Declining a risk that falls outside the insurer's appetite
  4. Issuing endorsements that change coverage mid-term at the insured's request Correct answer.

Explanation

Policy administration handles mid-term changes such as endorsements, renewals, and cancellations after a policy is issued. Accepting, rating, and declining new submissions are underwriting decisions.

Question 16Insurance Operations

An insurer's loss ratio is 68 percent and its expense ratio is 27 percent. What is the combined ratio, and what does it indicate?

  1. 95 percent, indicating an underwriting profit before investment income Correct answer.
  2. 95 percent, indicating an underwriting loss before investment income
  3. 105 percent, indicating an underwriting loss
  4. 41 percent, indicating an underwriting profit

Explanation

The combined ratio is the sum of the loss ratio and expense ratio, so 68 plus 27 equals 95 percent. A combined ratio below 100 percent indicates an underwriting profit before investment income is considered.

Question 17Insurance Operations

A regulator examines whether an insurer's rates are adequate, not excessive, and not unfairly discriminatory. Which operational function is most directly responsible for producing the data supporting this review?

  1. Agency licensing and appointment
  2. Actuarial ratemaking and rate filing support Correct answer.
  3. Claims subrogation recovery
  4. Investment portfolio management

Explanation

Actuarial staff develop rates and prepare the supporting loss and expense data submitted in rate filings. Licensing, subrogation, and investment management do not produce rate adequacy evidence.

Question 18Insurance Operations

An insurer discovers that a producer bound coverage outside the authority granted in the agency agreement. Which operational response best addresses the control failure?

  1. Cancel all policies written by that producer retroactively
  2. Review the binding authority terms and reinforce them through producer training and monitoring Correct answer.
  3. Report the matter to the reinsurer as a claim
  4. Increase the producer's commission to encourage compliance

Explanation

Unauthorized binding points to a breakdown in communicating or monitoring delegated authority, so clarifying authority and strengthening training and oversight addresses the cause. Retroactive cancellation, reinsurance reporting, and commission changes do not correct the control weakness.

Question 19Insurance Operations

Which practice best supports data quality in an insurer's policy administration system?

  1. Allowing free-text entry for all coverage fields
  2. Updating policy records annually regardless of changes
  3. Applying validation rules at data entry and reconciling policy counts to financial records Correct answer.
  4. Storing policy data only in individual adjuster spreadsheets

Explanation

Entry validation and periodic reconciliation of policy data to financial records detect and prevent errors. Free-text fields, distributed spreadsheets, and infrequent updates all undermine data integrity.

Question 20Insurance Operations

An insurer's claims department wants to shorten cycle time without increasing leakage. Which measure most directly targets both goals?

  1. Removing supervisory review for claims above 100,000
  2. Setting severity-based authority limits so routine claims are paid quickly while complex claims receive review Correct answer.
  3. Extending payment deadlines for all claims by thirty days
  4. Routing every claim through the same senior adjuster

Explanation

Tiered authority lets low-complexity claims move quickly while concentrating scrutiny on high-severity claims where leakage risk is greatest. Uniform delays, removing review, and single-adjuster routing do not balance speed and control.

Question 21Insurance Operations

An insurer pays 250,000 on a claim and later recovers 90,000 from a liable third party through subrogation. How should the recovery be reflected in net claim cost, ignoring expenses?

  1. Net claim cost of 340,000
  2. Net claim cost of 250,000 with the recovery recorded as premium income
  3. Net claim cost of 160,000 after offsetting the recovery Correct answer.
  4. Net claim cost of zero because a recovery occurred

Explanation

Subrogation recoveries reduce the net cost of the claim, so 250,000 minus 90,000 leaves a net claim cost of 160,000. The recovery is not premium income and does not eliminate the claim.

Question 22Insurance Operations

An insurer has written premium of 500,000, an unearned premium reserve increase of 80,000, incurred losses of 300,000, and underwriting expenses of 120,000. Using earned premium, what is the combined ratio?

  1. 100 percent Correct answer.
  2. 84 percent
  3. 76 percent
  4. 120 percent

Explanation

Earned premium is 500,000 minus the 80,000 reserve increase, or 420,000. Losses plus expenses equal 420,000, so the combined ratio is 420,000 divided by 420,000, or 100 percent.

Question 23Insurance Operations

A ceding insurer retains 100,000 per risk and buys a per-risk excess of loss treaty above that retention. A single risk produces a 350,000 covered loss. Assuming the treaty limit is sufficient, what does the reinsurer pay?

  1. 150,000
  2. 100,000
  3. 350,000
  4. 250,000 Correct answer.

Explanation

Excess of loss responds to the amount above the retention, so the reinsurer pays 350,000 minus 100,000, which is 250,000. The ceding insurer keeps the 100,000 retention.

Question 24Insurance Operations

An operations review finds that claims are being paid before coverage is confirmed because adjusters face a 48-hour payment target. Which redesign best preserves service speed while restoring coverage control?

  1. Remove the payment target so adjusters set their own timelines
  2. Pay all claims within 48 hours and audit coverage afterward
  3. Require manual coverage review for every claim regardless of amount
  4. Allow rapid payment only where automated eligibility checks confirm coverage, routing exceptions to manual review Correct answer.

Explanation

Automated eligibility checks preserve speed for clean claims while exception routing keeps coverage verification for uncertain cases. Removing targets, universal manual review, or pay-then-audit approaches sacrifice either speed or control.

Question 25Insurance Operations

An insurer's ceded reinsurance recoverable on paid losses grows faster than its paid ceded losses over several quarters. Which explanation most warrants investigation?

  1. The insurer has reduced its gross written premium
  2. Reinsurer billing or collection delays are accumulating unrecovered balances Correct answer.
  3. The insurer has shortened its policy term length
  4. The insurer has lowered its deductibles

Explanation

Recoverable balances rising faster than the underlying ceded losses suggests recoveries are being billed slowly or collected late from reinsurers. Premium volume, deductibles, and policy term length do not directly explain a growing recoverable balance.

Question 26Insurance Operations

In insurance operations, which document gives a claims adjuster the authority to settle a loss within a stated dollar limit without further referral?

  1. A binder receipt
  2. A claims authority schedule Correct answer.
  3. A certificate of insurance
  4. A premium audit worksheet

Explanation

A claims authority schedule assigns each adjuster or role a maximum settlement limit and defines when escalation to a supervisor or committee is required. It is the operational control that lets front-line staff settle routine losses while keeping larger payments subject to higher review.

Question 27Insurance Operations

Which control most directly protects an insurer against paying a claim on a policy that was cancelled for nonpayment before the loss date?

  1. Requiring the adjuster to obtain two repair estimates for every property loss
  2. Reconciling the policy status in the administration system against the loss date at claim intake Correct answer.
  3. Reviewing producer commission statements monthly against written premium
  4. Rotating the claims payment approver every quarter

Explanation

Coverage exists only if the policy was in force on the date of loss, so intake must verify status as of that date rather than the date the claim is reported. A cancellation for nonpayment before the loss removes coverage, and this check catches it before any payment is made.

Question 28Insurance Operations

Which output is produced by the underwriting function rather than by the policy administration function?

  1. An acceptance decision with assigned risk classification and terms Correct answer.
  2. An endorsement that changes the named insured
  3. A renewal notice mailed to the insured
  4. A certificate of insurance issued to a lender

Explanation

Underwriting is the risk selection and pricing decision: whether to accept, at what classification, and on what terms. Policy administration then executes that decision by issuing documents, processing endorsements, and generating notices and certificates.

Question 29Insurance Operations

An insurer's written premium for a period is 800,000 and earned premium is 720,000. Which statement about the 80,000 difference is correct?

  1. It represents premium that has been written off as uncollectible
  2. It represents commission expense deferred to later periods
  3. It represents premium written for coverage that extends into future periods and is carried as unearned premium Correct answer.
  4. It represents premium ceded to reinsurers during the period

Explanation

Written premium records the full amount charged when a policy is issued, while earned premium recognizes it over the coverage period. The 80,000 not yet earned is unearned premium, a liability representing coverage still owed.

Question 30Insurance Operations

In an insurer's internal reporting, which measure best indicates how much of each premium dollar is consumed by losses before expenses are considered?

  1. The retention ratio
  2. The premium-to-surplus ratio
  3. The loss ratio Correct answer.
  4. The expense ratio

Explanation

The loss ratio divides incurred losses by earned premium and isolates the cost of losses from operating expenses. Expense ratio and retention ratio address other cost and reinsurance dimensions, while premium-to-surplus measures capacity.

Question 31Insurance Operations

Which party typically performs the independent verification that an insurer's financial statements present its results fairly under applicable accounting standards?

  1. The insurer's in-house claims manager
  2. The state insurance department's market conduct unit
  3. An external audit firm engaged by the insurer Correct answer.
  4. The reinsurer that assumes part of the insurer's risk

Explanation

External auditors provide an independent opinion on whether the financial statements are presented fairly under the applicable framework. Regulators examine the insurer for solvency and compliance but do not issue the audit opinion.

Question 32Insurance Operations

A policyholder calls to report that a vehicle was damaged in a collision. Which sequence reflects the standard operational flow from first notice of loss onward?

  1. First notice of loss, coverage verification, loss investigation, damage evaluation, settlement and payment Correct answer.
  2. Loss investigation, first notice of loss, coverage verification, payment, recovery
  3. First notice of loss, payment, coverage verification, loss investigation, reserve setting
  4. Coverage verification, first notice of loss, payment, loss investigation, subrogation review

Explanation

The claim lifecycle begins when the loss is reported, then confirms coverage, investigates the facts, evaluates the amount, and settles. Payment before coverage verification or investigation would expose the insurer to paying uncovered or inflated claims.

Question 33Insurance Operations

Which record is the primary source that an insurer uses to confirm the coverage terms in force on a given date for a specific policy?

  1. The reinsurance treaty wording
  2. The policy declaration page together with its forms and endorsements Correct answer.
  3. The producer's commission ledger
  4. The insurer's general ledger trial balance

Explanation

The declarations identify the insured, limits, and period, while the attached forms and endorsements supply the actual terms and any changes. Together they constitute the policy contract that governs coverage on the loss date.

Question 34Insurance Operations

A claims unit sets a case reserve of 40,000 on an open claim. Six months later, medical reports show the injury is less severe than first believed, and the reserve is reduced to 25,000. What is the operational effect of this change?

  1. The unearned premium reserve decreases by 15,000
  2. Paid losses for the period decrease by 15,000
  3. Incurred losses for the period decrease by 15,000 because the reserve reduction is recognized as a favorable development Correct answer.
  4. Written premium for the period increases by 15,000

Explanation

Case reserves are estimates of ultimate cost, and changing them changes incurred losses in the period the change is made. A downward revision of 15,000 reduces incurred losses and appears as favorable reserve development, but it does not affect cash paid or premium.

Question 35Insurance Operations

An insurer's underwriting file lacks documentation of why a commercial property risk was accepted at a rate below the manual rate. Which operational weakness does this most directly represent?

  1. Inadequate reinsurance recoverable monitoring
  2. Failure to reconcile premium receivables
  3. Inadequate documentation of underwriting judgment and pricing exceptions Correct answer.
  4. Insufficient segregation of claims payment duties

Explanation

Underwriting files must record the rationale for exceptions so that pricing decisions can be reviewed, defended to regulators, and audited. Missing documentation of a below-manual rate leaves the insurer unable to demonstrate that the rate was adequate and not unfairly discriminatory.

Question 36Insurance Operations

An insurer wants to measure how quickly it closes claims from the date of report to the date of final payment. Which metric should it use?

  1. Average incurred severity per claim
  2. Reserve adequacy ratio
  3. Average claim cycle time from report to closure Correct answer.
  4. Claim frequency per exposure unit

Explanation

Cycle time measures elapsed days between defined milestones, here report and final payment, and directly reflects operational speed. Severity, frequency, and reserve adequacy describe cost and estimation accuracy rather than timeliness.

Question 37Insurance Operations

A producer accepts a risk that exceeds the maximum limit stated in the agency agreement and issues a binder. What is the insurer's most appropriate operational response?

  1. Void the binder automatically because the producer lacked actual authority
  2. Refer the matter to the reinsurer to decide whether coverage exists
  3. Evaluate the binding under the doctrine of apparent authority and decide whether to affirm or rescind coverage while correcting the agreement and training Correct answer.
  4. Ignore the binder because binders are not binding until a policy is issued

Explanation

When an insurer places a producer before the public with apparent authority, it may be bound even when the producer exceeded actual authority. Operations should assess the exposure, decide whether to honor or rescind, and fix the authority limits and training to prevent recurrence.

Question 38Insurance Operations

An insurer pays a claim of 60,000 and records a deductible recovery of 5,000 from the insured. How should the deductible be reflected in the claim records?

  1. As a reduction of written premium
  2. As additional paid loss on the claim
  3. As an increase to the case reserve
  4. As a recovery that reduces the net incurred loss on the claim Correct answer.

Explanation

The deductible is the insured's share of the loss, so the insurer's net cost is the gross loss less the amount collected from the insured. Recording it as a recovery keeps gross and net loss figures accurate for reporting and reinsurance.

Question 39Insurance Operations

Which operational practice best reduces the risk that an insurer pays a fraudulent claim while preserving timely service for legitimate claimants?

  1. Requiring every claimant to submit to an examination under oath
  2. Paying all claims within 24 hours to avoid complaints
  3. Assigning all claims to a single senior adjuster
  4. Applying special investigation triggers at intake and routing flagged claims to a dedicated unit Correct answer.

Explanation

Fraud controls work best when indicators such as claim timing, prior history, or inconsistent facts trigger escalation to specialists. This targets scrutiny where risk is highest instead of delaying every claimant or imposing burdens uniformly.

Question 40Insurance Operations

An insurer's expense ratio rises from 26 percent to 31 percent while premium volume is flat. Which explanation is most consistent with this result?

  1. Reinsurance cessions have increased
  2. Loss frequency has increased in the period
  3. Fixed operating costs are being spread over the same premium base while variable costs have increased Correct answer.
  4. The unearned premium reserve has grown

Explanation

The expense ratio compares operating expenses to premium, so with flat premium any rise in absolute expenses raises the ratio. Growth in fixed or variable operating costs fits, whereas loss activity and reserve movements do not enter the expense ratio.

Question 41Insurance Operations

A claims supervisor wants a control that detects duplicate payments to the same claimant and loss before the payment run. Which control is most effective?

  1. A monthly manual review of paid claim files after disbursement
  2. An annual review of adjuster licensing records
  3. An automated duplicate-payment edit that matches claimant, loss date, and amount before disbursement Correct answer.
  4. A quarterly audit of the claims authority schedule

Explanation

Preventive controls applied before disbursement stop the error from becoming a recovery problem. An automated match on claimant, loss date, and amount catches duplicates at the point of payment rather than after funds have left.

Question 42Insurance Operations

An insurer's claims department receives a high volume of small property claims after a storm. Which operational approach best balances service and cost?

  1. Suspend payments until all field inspections are complete
  2. Require a manager to approve every payment regardless of amount
  3. Assign every claim to the catastrophic investigation unit
  4. Use a fast-track process with simplified documentation and authority for low-severity claims Correct answer.

Explanation

Segmentation by severity lets routine, low-complexity claims move quickly under simplified rules while complex claims receive full investigation. This preserves accuracy where it matters and prevents bottlenecks during surge events.

Question 43Insurance Operations

A policy is endorsed midterm to increase coverage limits, and the insurer collects an additional premium. How should the additional premium be earned?

  1. Over the remaining portion of the policy term from the endorsement effective date Correct answer.
  2. Over the full original policy term from inception
  3. At the next renewal date in full
  4. Immediately in full on the endorsement effective date

Explanation

Additional premium for a midterm increase buys coverage only for the remaining term, so it is earned over that remaining period. Recognizing it immediately or over the full term would misstate earned premium and the unearned premium reserve.

Question 44Insurance Operations

An insurer's operational dashboard shows that notices of cancellation are being mailed later than the statutory minimum period before the effective date. Which function should own the corrective action?

  1. Policy administration, which generates and controls the notice process Correct answer.
  2. Underwriting, which selects the risk
  3. Investments, which manages the asset portfolio
  4. Actuarial, which sets the rate level

Explanation

Statutory cancellation notice timing is an administrative processing requirement owned by the function that issues the notices. Corrective action involves system timing rules, mail controls, and monitoring of mailing dates against the effective date.

Question 45Insurance Operations

An insurer's operations team is mapping a process and finds that the same individual can issue a refund check to a policyholder and reconcile the bank account. Which action best addresses the exposure?

  1. Require the individual to sign an annual conflict of interest statement
  2. Increase the dollar threshold at which refunds require approval
  3. Separate the check issuance and reconciliation duties between different individuals Correct answer.
  4. Shorten the reconciliation cycle to weekly

Explanation

Allowing one person to both disburse funds and reconcile the account lets that person conceal a misappropriation. Splitting the duties creates an independent check, which is the core purpose of segregation of duties.

Question 46Insurance Operations

An insurer's unearned premium reserve is 4,200,000 and annual written premium is 8,400,000. Assuming even earning over 12-month terms, what does the reserve imply about the average remaining coverage period?

  1. About twelve months of coverage remains unearned
  2. About three months of coverage remains unearned
  3. About six months of coverage remains unearned Correct answer.
  4. About twenty-four months of coverage remains unearned

Explanation

The reserve equals half of annual written premium, and with even earning over 12-month terms the reserve represents half of a year of coverage. That corresponds to roughly six months of unearned coverage remaining on average.

Question 47Insurance Operations

An insurer's claims operation shows rising average paid severity, stable claim counts, and stable policy counts. Which operational driver is most consistent with these results?

  1. A decline in the number of policies in force
  2. A reduction in the number of claims reported
  3. An increase in the number of claims denied
  4. Higher average cost per closed claim, such as increased repair costs or larger settlements Correct answer.

Explanation

Stable counts with rising severity points to the cost side of each claim rather than how many claims occur. Drivers include higher repair costs, medical inflation, or more generous settlements per claim.

Question 48Insurance Operations

An insurer notices that its ratio of ceded recoverables to ceded paid losses has risen for four consecutive quarters. Which operational concern does this pattern most directly raise?

  1. The insurer is ceding too little of its risk to reinsurers
  2. Recoverables may be accumulating because reinsurers are slow to pay or disputes are unresolved, creating collection risk Correct answer.
  3. The insurer's loss ratio is understated
  4. The insurer's unearned premium reserve is overstated

Explanation

A recoverable balance that grows faster than the ceded losses that generated it suggests cash is not being collected from reinsurers at the expected pace. Operations should investigate aging, disputes, and reinsurer credit quality, because unpaid recoverables are an asset at risk.

Question 49Insurance Operations

An insurer's premium audit finds that an insured's actual payroll was lower than the deposit basis, and the policy is subject to an experience modification that also changed. Which operational step is required before any return premium is issued?

  1. Recalculate the earned premium using audited exposure and the applicable modification, then compare with premium already earned Correct answer.
  2. Apply the return premium to the unearned premium reserve
  3. Refund the full deposit premium without recalculation
  4. Refer the audit result to the claims department for reserve adjustment

Explanation

Return premium must reflect the correct exposure base and the correct modification for the policy period. Recalculating earned premium first prevents over- or under-refunding and keeps the audited policy record consistent with the rating basis.

Question 50Insurance Operations

An insurer's claims and underwriting systems hold different effective dates for the same policy, and claims are being denied on that basis. Which root cause and remedy pair is most appropriate?

  1. Reinsurance dispute; renegotiate the treaty terms
  2. Data integrity failure between systems; establish a single authoritative policy record with reconciliation and edit checks Correct answer.
  3. Rate inadequacy; file a rate revision with the regulator
  4. Adjuster error; retrain adjusters on coverage interpretation

Explanation

Conflicting effective dates for one policy point to inconsistent data across systems rather than human judgment about coverage. The durable remedy is a single source of truth for policy data, supported by reconciliation and edit checks that prevent divergence.