Financial Analysis and Reporting Flashcards

What is the 'risk-based capital' (RBC) ratio and what does it measure?

Answer: A regulatory solvency measure comparing actual capital to the minimum capital required given an insurer's risk profile

The RBC ratio compares an insurer's total adjusted capital to its RBC requirement, which reflects underwriting, investment, credit, and operational risks.

Under statutory accounting, which assets are classified as 'non-admitted' and excluded from the balance sheet?

Answer: Assets such as furniture, goodwill, and certain deferred tax assets that lack ready liquidation value

SAP excludes non-admitted assets (those not readily convertible to cash or restricted) to present a conservative view of available resources for policyholder protection.

What is an 'incurred but not reported' (IBNR) reserve and why is it required?

Answer: A reserve for losses that have occurred but have not yet been reported to the insurer

IBNR reserves cover claims that have occurred during the policy period but have not yet been submitted to the insurer, ensuring liabilities are not understated.

Which of the following best describes 'ceded reinsurance' on an insurer's financial statements?

Answer: Premiums paid and losses recovered from reinsurers for risk transferred to them

Ceded reinsurance involves paying premiums to reinsurers and recovering a portion of losses, reducing the cedant's net liabilities and premium income.

An insurer's balance sheet shows reinsurance recoverables as an asset. What credit risk does this create?

Answer: The risk that the reinsurer becomes insolvent and cannot pay amounts owed to the cedant

Reinsurance recoverables represent amounts owed by reinsurers; if a reinsurer becomes insolvent, the primary insurer remains liable to policyholders but cannot collect.

What distinguishes 'written premium' from 'earned premium' in a given accounting period?

Answer: Written premium is the total premium on policies incepted during the period; earned premium is the portion applicable to expired coverage

Written premium is recorded when a policy is issued, while earned premium represents the portion of written premium that corresponds to the coverage period already elapsed.

In a 'retrospective rating' plan, how does the final premium adjustment affect financial reporting?

Answer: Additional or return premiums are accrued as liabilities or assets based on loss experience, affecting both income and balance sheet

Retrospective plans require insurers to estimate and accrue retro premium adjustments based on developing loss experience, creating assets (return premium due) or liabilities (additional premium owed).