Insurance Finance
Insurance Finance
Insurance Finance tests how insurers report results, hold reserves, and protect capital. Questions cover statutory versus GAAP accounting, loss and LAE reserves, ratio analysis, reinsurance recoverables, investments, and capital adequacy.
Core finance rules
- Statutory accounting is conservative. NAIC Statutory Accounting Principles emphasize policyholder protection: nonadmitted assets are excluded from surplus, and reinsurance recoverables are admitted only when collectible.
- Reserves are estimates, not plugs. Case reserves, IBNR, and LAE must be actuarially supported. Reserve development - favorable or adverse - flows through earnings and surplus.
- Use the right denominator. Loss and LAE ratio = incurred losses and LAE ÷ earned premium; expense ratio = underwriting expenses ÷ written premium (or as defined); combined ratio = the two. Operating ratio = combined ratio − investment income ratio.
- Capital measures capacity. Premium-to-surplus, reserve leverage, and RBC test whether growth is supported by capital. Investment portfolio duration should match claim liabilities.
Worked example
A carrier reports earned premium of $20 million, incurred losses of $12 million, LAE of $2 million, underwriting expenses of $5 million, and investment income of $600,000. Loss and LAE ratio = ($12M + $2M) ÷ $20M = 70%. Expense ratio = $5M ÷ $20M = 25%. Combined ratio = 95%. Investment income ratio = $600K ÷ $20M = 3%. Operating ratio = 92%. If the actuarial central estimate of reserves is $10 million but carried reserves are $9 million, the $1 million deficiency reduces surplus and raises premium-to-surplus from, say, 1.33x to 1.43x if surplus falls from $15M to $14M. That is a capital signal, not a small timing difference.
Traps that cost marks
Do not mix written and earned premium. Do not compare gross loss ratios with net reinsurance results. Do not treat investment gains as underwriting profit. Do not ignore nonadmitted assets or reserve deficiencies.