Financial Analysis and Reporting Flashcards

Under GAAP, which method must property-casualty insurers use to recognize premium revenue?

Answer: Earn premium ratably over the policy period

GAAP requires P&C insurers to earn premium ratably over the exposure period of the policy.

What is the primary purpose of the Schedule P in the NAIC Annual Statement?

Answer: Display loss and loss adjustment expense development triangles

Schedule P presents paid and incurred loss development triangles used to evaluate reserve adequacy over time.

An insurer's combined ratio is 108%. What does this indicate?

Answer: Underwriting operations are generating a loss

A combined ratio above 100% means underwriting expenses and losses exceed earned premiums, indicating an underwriting loss.

Which statutory accounting principle (SAP) differs most significantly from GAAP regarding policy acquisition costs?

Answer: SAP expenses acquisition costs immediately, while GAAP defers and amortizes them

Under SAP, policy acquisition costs are expensed immediately (conservatism), whereas GAAP defers them as DAC and amortizes over the policy period.

In the NAIC Annual Statement, what does 'surplus as regards policyholders' represent?

Answer: The excess of admitted assets over liabilities, equivalent to statutory net worth

Surplus as regards policyholders is the statutory equivalent of equity, calculated as admitted assets minus total liabilities.

Which ratio measures how efficiently an insurer uses its surplus to write business?

Answer: Premium-to-surplus ratio

The net premiums written-to-surplus ratio (leverage ratio) measures how much business is written relative to the capital base.

What is the effect of adverse loss development on an insurer's statutory surplus?

Answer: Surplus decreases because additional reserve additions reduce net income

When reserves are strengthened due to adverse development, the increase in liabilities reduces net income and therefore reduces surplus.