CPCU 540 EXAM 4 2026 PRACTICE TEST
PAPER UNDERWRITING PRINCIPLES AND
COVERAGE REVIEW SHEET FULL SOLUTIONS
◉ An underwriter is conducting ratio analysis and determines that a
company has a current ratio of 1.2. Which one of the following
adjustments to the calculation should the underwriter make to
ensure that the company is able to meet its short-term obligations.
Answer: Subtract the company's inventory from the calculation
◉ An underwriter is attempting to conduct ratio analysis on a
company. The underwriter notices that the company has $8 million
in sales, $5 million in gross profit, and $2 million in net income.
Which one of the following conclusions can the underwriter reach
by calculating the company's net profit margin? Answer: 25% of the
company's sales is left after all expenses are paid
◉ The role of PHS is to. Answer: Provide a cushion to ensure the
insurer has enough resources to meet obligations to its
policyholders
◉ Which one of the following statements concerning insurer
financial relationships is true?. Answer: Immediately recognizing
policy acquisition costs while deferring recognition of the associated
revenue causes surplus to decrease
,◉ The largest asset for many insurance companies is their
investment in bonds. Under SAP, how is a bond valued on an
insurance company's balance sheet?. Answer: At the bond's
amortized cost
◉ Which one of the following statements about various schedules to
the NAIC Annual Statement is true?. Answer: Schedule F provides
information about the insurer's reinsurance arrangements,
including reinsurance assumed and reinsurance ceded
◉ When premiums earned during any specific accounting period are
less than incurred losses plus underwriting expenses there will be
an. Answer: Underwriting loss
◉ As a component of insurer income, other income consists of
revenues and expenses that are not related to income from either.
Answer: Underwriting or investment activities
◉ To determine an insurer's liquidity. Answer: Cash and high-grade
invested assets are compared to policyholder obligations
◉ The ABC Company has net written premiums in the amount of
$4,123,892,369 and a policyholders' surplus of $2,836,586,123.
LMN Inc. has net written premiums in the amount of $9,852,239,444
, and a policyholders' surplus of $3,552,453,811. Looking at these two
insurers,. Answer: The ABC Company is less aggressive in terms of
using its surplus to leverage premium writing
◉ McBrothers and Sons, Inc. showed an earned premium of
$4,523,584,371, and incurred losses and LAE of $4,568,662,935,
underwriting expenses of $916,828,986, and written premiums of
$4,615,768,451. Which one of the following statements is true?.
Answer: McBrothers and Sons, Inc. has a combined ratio that reflects
its long-tail lines of business
◉ Which one of the following is correct regarding A.M. best's review
of an insurer's balance sheet strength. Answer: When reviewing a
rating unit's balance sheet strength, A.M. Best is evaluating its ability
to meet its financial obligations
◉ A.M. Best's financial strength ratings may be accompanied by one
or more modifiers, indicated by lowercase letters. The modifier r
indicates which one of the following?. Answer: That the rating
includes consideration of reinsurance
◉ The NAIC's change in net premiums written ratio, what is the
threshold for an acceptable increase or decrease?. Answer: 33%
◉ Sun Company's computer system must be replaced in five years at
a cost of $100,000. The owners have placed $60,000 in an
PAPER UNDERWRITING PRINCIPLES AND
COVERAGE REVIEW SHEET FULL SOLUTIONS
◉ An underwriter is conducting ratio analysis and determines that a
company has a current ratio of 1.2. Which one of the following
adjustments to the calculation should the underwriter make to
ensure that the company is able to meet its short-term obligations.
Answer: Subtract the company's inventory from the calculation
◉ An underwriter is attempting to conduct ratio analysis on a
company. The underwriter notices that the company has $8 million
in sales, $5 million in gross profit, and $2 million in net income.
Which one of the following conclusions can the underwriter reach
by calculating the company's net profit margin? Answer: 25% of the
company's sales is left after all expenses are paid
◉ The role of PHS is to. Answer: Provide a cushion to ensure the
insurer has enough resources to meet obligations to its
policyholders
◉ Which one of the following statements concerning insurer
financial relationships is true?. Answer: Immediately recognizing
policy acquisition costs while deferring recognition of the associated
revenue causes surplus to decrease
,◉ The largest asset for many insurance companies is their
investment in bonds. Under SAP, how is a bond valued on an
insurance company's balance sheet?. Answer: At the bond's
amortized cost
◉ Which one of the following statements about various schedules to
the NAIC Annual Statement is true?. Answer: Schedule F provides
information about the insurer's reinsurance arrangements,
including reinsurance assumed and reinsurance ceded
◉ When premiums earned during any specific accounting period are
less than incurred losses plus underwriting expenses there will be
an. Answer: Underwriting loss
◉ As a component of insurer income, other income consists of
revenues and expenses that are not related to income from either.
Answer: Underwriting or investment activities
◉ To determine an insurer's liquidity. Answer: Cash and high-grade
invested assets are compared to policyholder obligations
◉ The ABC Company has net written premiums in the amount of
$4,123,892,369 and a policyholders' surplus of $2,836,586,123.
LMN Inc. has net written premiums in the amount of $9,852,239,444
, and a policyholders' surplus of $3,552,453,811. Looking at these two
insurers,. Answer: The ABC Company is less aggressive in terms of
using its surplus to leverage premium writing
◉ McBrothers and Sons, Inc. showed an earned premium of
$4,523,584,371, and incurred losses and LAE of $4,568,662,935,
underwriting expenses of $916,828,986, and written premiums of
$4,615,768,451. Which one of the following statements is true?.
Answer: McBrothers and Sons, Inc. has a combined ratio that reflects
its long-tail lines of business
◉ Which one of the following is correct regarding A.M. best's review
of an insurer's balance sheet strength. Answer: When reviewing a
rating unit's balance sheet strength, A.M. Best is evaluating its ability
to meet its financial obligations
◉ A.M. Best's financial strength ratings may be accompanied by one
or more modifiers, indicated by lowercase letters. The modifier r
indicates which one of the following?. Answer: That the rating
includes consideration of reinsurance
◉ The NAIC's change in net premiums written ratio, what is the
threshold for an acceptable increase or decrease?. Answer: 33%
◉ Sun Company's computer system must be replaced in five years at
a cost of $100,000. The owners have placed $60,000 in an
