CPCU 540 FINAL EXAM 2026 ACTUAL QUESTIONS AND
SOLUTIONS RATED A+
✔✔Surplus note - ✔✔a type of unsecured debt insturment, issued only by insurers, that
has characteristics of both conventional equity and debt securities and is classified as
policyholders' surplus rather than as a liability on the insurer's statutory balance sheet
✔✔Authorized reinsurer - ✔✔A reinsurer that is authorized to do business in the primary
insurer's state of domicile
✔✔Unauthorized reinsurer - ✔✔A reinsurer that is not licensed or otherwise authorized
to do business in the primary insurer's state of domicile
✔✔Certified reinsurer - ✔✔An unauthorized reinsurer that meets certain qualifications
and is approved by the state insurance regulator of the ceding company's state of
domicile.
✔✔Insurance leverage - ✔✔An indication of the extent to which policyholders' surplus
can support a given level of reserves.
✔✔Liquidity - ✔✔the ease with which an asset can be converted into cash with little to
no loss of value
✔✔Expense Ratio - ✔✔An insurer's incurred underwriting expenses for a given period
divided by its written premiums for the same period.
✔✔Operating Ratio - ✔✔A ratio that measures an insurer's overall pretax operational
profitability from underwriting and investment activities and is calculated by subtracting
the investment income ratio from the combined ratio.
✔✔Investment Income Ratio - ✔✔Net investment income divided by earned premiums
for a given period.
✔✔Investment Yield Ratio - ✔✔A profitability ratio that indicates the total return on
investments for an insurer's investment operations.
✔✔Return on policyholders' surplus ratio - ✔✔A profitability ratio that shows the rate of
return an insurer is earning on its resources.
✔✔Telematics - ✔✔The use of technological devices in vehicles with wireless
communication and GPS tracking that transmit data to businesses or government
agencies; some return information for the driver.
, ✔✔Usage-based insurance - ✔✔A type of auto insurance in which the premium is
based on the policyholder's driving behavior.
✔✔maturity date - ✔✔The date on which a bond's principal or par value becomes
payable to the bondholder
✔✔Principal - ✔✔In finance, the amount borrowed under a loan
✔✔Face value - ✔✔A bond's original value and the amount that will be paid at the
bond's maturity date.
✔✔Coupon rate - ✔✔a bond's annual interest payment per dollar of par value
✔✔convertible bond - ✔✔A debt instrument that gives the holder the option to convert
the bond into another security (generally common stock) of the issuing company at a
specified price, within a given time, and under stated terms.
✔✔Guaranteed bond - ✔✔A debt instrument guaranteed by an entity other than the
issuer
✔✔zero coupon bond - ✔✔A corporate bond that does not pay periodic interest income
✔✔secured bond - ✔✔A debt instrument that is secured by specific assets and has
priority over the funds received in the liquidation of those assets
✔✔preferred stock - ✔✔Stock that is generally nonvoting but that has priority over
common stock, usually regarding dividends and capital distribution if the corporation
ends its existence.
✔✔Common stock - ✔✔An ownership interest in a corporation that gives stockowners
certain rights and privileges, such as the right to vote on important corporate matters
and to receive dividends
✔✔rate of return - ✔✔An asset's or activity's annual profit or surplus, expressed as a
percentage of its original cost
✔✔par value - ✔✔a bond's face amount or the amount the insurer will pay at the bond's
maturity
✔✔Variance - ✔✔A measure of dispersion; a measure of the deviation of each variable
in a dataset from the mean of the dataset
SOLUTIONS RATED A+
✔✔Surplus note - ✔✔a type of unsecured debt insturment, issued only by insurers, that
has characteristics of both conventional equity and debt securities and is classified as
policyholders' surplus rather than as a liability on the insurer's statutory balance sheet
✔✔Authorized reinsurer - ✔✔A reinsurer that is authorized to do business in the primary
insurer's state of domicile
✔✔Unauthorized reinsurer - ✔✔A reinsurer that is not licensed or otherwise authorized
to do business in the primary insurer's state of domicile
✔✔Certified reinsurer - ✔✔An unauthorized reinsurer that meets certain qualifications
and is approved by the state insurance regulator of the ceding company's state of
domicile.
✔✔Insurance leverage - ✔✔An indication of the extent to which policyholders' surplus
can support a given level of reserves.
✔✔Liquidity - ✔✔the ease with which an asset can be converted into cash with little to
no loss of value
✔✔Expense Ratio - ✔✔An insurer's incurred underwriting expenses for a given period
divided by its written premiums for the same period.
✔✔Operating Ratio - ✔✔A ratio that measures an insurer's overall pretax operational
profitability from underwriting and investment activities and is calculated by subtracting
the investment income ratio from the combined ratio.
✔✔Investment Income Ratio - ✔✔Net investment income divided by earned premiums
for a given period.
✔✔Investment Yield Ratio - ✔✔A profitability ratio that indicates the total return on
investments for an insurer's investment operations.
✔✔Return on policyholders' surplus ratio - ✔✔A profitability ratio that shows the rate of
return an insurer is earning on its resources.
✔✔Telematics - ✔✔The use of technological devices in vehicles with wireless
communication and GPS tracking that transmit data to businesses or government
agencies; some return information for the driver.
, ✔✔Usage-based insurance - ✔✔A type of auto insurance in which the premium is
based on the policyholder's driving behavior.
✔✔maturity date - ✔✔The date on which a bond's principal or par value becomes
payable to the bondholder
✔✔Principal - ✔✔In finance, the amount borrowed under a loan
✔✔Face value - ✔✔A bond's original value and the amount that will be paid at the
bond's maturity date.
✔✔Coupon rate - ✔✔a bond's annual interest payment per dollar of par value
✔✔convertible bond - ✔✔A debt instrument that gives the holder the option to convert
the bond into another security (generally common stock) of the issuing company at a
specified price, within a given time, and under stated terms.
✔✔Guaranteed bond - ✔✔A debt instrument guaranteed by an entity other than the
issuer
✔✔zero coupon bond - ✔✔A corporate bond that does not pay periodic interest income
✔✔secured bond - ✔✔A debt instrument that is secured by specific assets and has
priority over the funds received in the liquidation of those assets
✔✔preferred stock - ✔✔Stock that is generally nonvoting but that has priority over
common stock, usually regarding dividends and capital distribution if the corporation
ends its existence.
✔✔Common stock - ✔✔An ownership interest in a corporation that gives stockowners
certain rights and privileges, such as the right to vote on important corporate matters
and to receive dividends
✔✔rate of return - ✔✔An asset's or activity's annual profit or surplus, expressed as a
percentage of its original cost
✔✔par value - ✔✔a bond's face amount or the amount the insurer will pay at the bond's
maturity
✔✔Variance - ✔✔A measure of dispersion; a measure of the deviation of each variable
in a dataset from the mean of the dataset
