GAP Financial Analysis & Reporting 3 — Questions and Answers
Question 1: A vehicle is totaled with an ACV of $18,000 and an outstanding loan balance of $22,500. The primary insurer pays $18,000. What is the GAP benefit payable before any applicable deductible waiver?
- $3,500
- $4,500 (Correct answer)
- $22,500
- $18,000
Correct answer: $4,500
GAP benefit = outstanding loan balance minus ACV insurance payout = $22,500 − $18,000 = $4,500.
Question 2: For GAAP financial statement purposes, how should unearned GAP premiums be classified on the balance sheet?
- As a long-term asset
- As a current liability (Correct answer)
- As stockholders' equity
- As deferred revenue under long-term liabilities
Correct answer: As a current liability
Unearned premiums represent obligations to provide future coverage and are classified as current liabilities because they are expected to be earned within 12 months for most GAP terms.
Question 3: Which of the following best describes a 'ceded loss ratio' in GAP reinsurance reporting?
- Losses retained by the primary insurer divided by direct premiums
- Losses transferred to reinsurers divided by ceded premiums (Correct answer)
- Total losses divided by net retained premiums
- Reinsurance recoveries divided by total incurred losses
Correct answer: Losses transferred to reinsurers divided by ceded premiums
The ceded loss ratio measures the losses passed to reinsurers relative to the premiums ceded to those reinsurers, indicating the value of the reinsurance arrangement.
Question 4: An actuarial analysis of a GAP book reveals an ultimate loss pick of 45% of earned premium. If the carried loss reserve is 40%, what action is required?
- Release the excess reserve to income
- Strengthen the reserve by 5 points (Correct answer)
- No action needed if within a 10-point corridor
- Reduce premiums by 5% to offset the difference
Correct answer: Strengthen the reserve by 5 points
When the actuarially indicated ultimate loss ratio (45%) exceeds the carried reserve ratio (40%), the administrator must strengthen reserves to avoid understatement of liabilities.
Question 5: In GAP program financial analysis, which metric is used to evaluate the effectiveness of a dealer's cancellation and refund processing?
- Cancellation loss ratio
- Earned-to-written premium ratio
- Cancellation refund turnaround time and accuracy rate (Correct answer)
- Net promoter score
Correct answer: Cancellation refund turnaround time and accuracy rate
Cancellation refund turnaround time and accuracy rate directly measures how efficiently and correctly dealers and administrators process pro-rata or short-rate refunds upon early contract termination.
Question 6: When computing a pro-rata cancellation refund for a GAP product cancelled at month 18 of a 60-month term, what percentage of the original premium is refunded (ignoring fees)?
- 30%
- 60%
- 70% (Correct answer)
- 40%
Correct answer: 70%
Months remaining = 60 − 18 = 42; refund % = 42/60 = 70% of the original premium under pro-rata calculation.
Question 7: Which report would a GAP program administrator use to reconcile remittances from dealer partners against policies issued?
- Loss run report
- Premium bordereaux (Correct answer)
- Reinsurance treaty summary
- Actuarial certification
Correct answer: Premium bordereaux
A premium bordereaux is a detailed schedule of individual policies that dealers submit to administrators, enabling reconciliation of remitted funds against issued contracts.
GAP Financial Analysis & Reporting 3
A vehicle is totaled with an ACV of $18,000 and an outstanding loan balance of $22,500.
The primary insurer pays $18,000.
What is the GAP benefit payable before any applicable deductible waiver?