ACTUAL QUESTIONS AND CORRECT
ANSWERS
Losses that have been paid to, or on behalf of, insureds during a given time period -
CORRECT ANSWER Paid losses
The losses that have occurred during a specific period, no matter when claims resulting from
the losses are paid - CORRECT ANSWER Incurred Losses
An estimate of the amount of money the insurer expects to pay in the future for losses that
have already occurred and been reported but are not yet settled - CORRECT
ANSWER Loss reserve
An insurer liability representing the amount of premiums received from policy holders that
are not yet earned - CORRECT ANSWER Unearned premium reserve
An insurer's total admitted assets minus its total liabilities - CORRECT
ANSWER Policyholder's surplus
A ratio that measures losses and loss adjustment expenses against earned premiums. This
ratio reflects the % of premiums being consumed by losses - CORRECT
ANSWER Loss Ratio
An insurer's incurred underwriting expenses for a given period divided by its written
premiums for the same period - CORRECT ANSWER Expense ratio
A profitability ratio that indicates whether an insurer has made an underwriting loss or
gain...It is Loss Ratio + Expense Ratio - CORRECT ANSWER Combined Ratio Ex: if
combined ratio is 70%, it paid .70 in losses & expenses for every $1.00 earned
, Net investment income / earned premium (for a given period) - CORRECT
ANSWER Investment income ratio
Combined ratio - Investment income ratio - CORRECT ANSWER Overall operating
ratio
The financial report for Hometown Insurer contains the following information:
Earned premiums
$4,000,000
Written premiums
$5,000,000
Net investment income
$1,000,000
Incurred losses
$3,000,000
Incurred underwriting expense
$2,000,000
What is Hometown Insurer's investment income ratio?
A. 10%
B. 20%
C. 25%
D. 50% - CORRECT ANSWER 25%
Hometown's investment income ratio equals its net investment income ($1,000,000) divided
by its earned premiums ($4,000,000), or 25 percent
Which one of the following is shown on an insurer's income statement?
A. Acquisition expenses
B. Cash and short-term investments
C. Loss reserves