AIAF 114- Chapter 5 Practice Exam Questions With 100% Correct Answers.

When accounting for accident-year losses for year 20X6, which one of the following would be included? - Answer-A reserve change in 20X7 for a loss that occurred in 20X6 Correct. When accounting for accident-year losses for year 20X6, a reserve change in 20X7 for a loss that occurred in 20X6 would be included. An accident-year method aggregates incurred losses for a given period (such as twelve months) using all incurred losses for insured events that occurred during that period. Any losses that occurred in previous or later periods are not included. The case reserving method that establishes an average amount for all claims that have similar characteristics in terms of the claimant's age, health, and marital status is known as the - AnswerTabular method Both primary insurers and reinsurers must maintain reserves for expected future loss payments. Which one of the following best describes the reserves that a reinsurer must maintain? - AnswerAmounts obligated in the future to pay to primary insurers The average method of case reserving is most suitable for those types of insurance where claims are - Answer-Reported and paid promptly Assume an actuary estimates losses at 80 percent of earned premium of $20 million, and that $3 million in losses have been paid. The insurer wants to establish a bulk reserve for reported losses— payment uncertain. Which one of the following represents the appropriate amount for the bulk reserve? - Answer-$13 million Correct. Reserves for reported losses when the amount of payment is uncertain can be calculated on a bulk basis by subtracting the amount already paid for losses from a certain percentage of total earned premium. The bulk reserve would be the estimated incurred loss of $16 million ($20 million premium x 80 percent loss ratio) less the $3 million of paid losses, which is $13 million. Bulk reserves can be established for various categories. At any given time, the difference between incurred losses and ultimate losses is known as - Answer-Incurred but not reported (IBNR) reserves Loss development is - Answer-The increase or decrease of incurred losses over time. Incurred but not reported (IBNR) reserves are residual reserves. They represent the difference between - Answer-Ultimate losses and reported incurred lossesPravalt Insurance Company is estimating its incurred but not reported (IBNR) reserves using the loss triangle method. The following table shows Pravalt's incurred and reported losses for each of the past five accident years, along with the ultimate loss development factor for each accident year. Which one of the following statements best describes what would happen next to determine the estimated IBNR reserves? - Answer-The ultimate loss development factor for each year is multiplied by that year's incurred and reported losses, and the difference each year between that figure and the incurred and reported losses amount is the IBNR reserve. Correct. The ultimate loss development factor for each year is multiplied by that year's incurred and reported losses, and the difference each year between that figure and the incurred and reported losses amount is the IBNR reserve. Which one of the following is a weakness of using the judgment method to determine case loss reserves? - Answer-The accuracy of the case reserves set using the judgment method depends on the quality of the claim representative's experience. When an insurer is under-reserved, its surplus is - Answer-Overstated Additional case reserves are most common for which one of the following types of claims? - AnswerClaims under assumed reinsurance contracts. Which one of the following accounting standards or rules may apply to self-insured liabilities related to workers compensation claims? - Answer-Employee benefit accounting When a claim payment is made but the corresponding entry has not yet been made, the payment is registered to - Answer-A suspense account. The tabular method of determining case loss reserves would most likely be used when setting the reserve for - Answer-A structured settlement amount for a liability insurance claim. Incurred but not reported (IBNR) losses include those losses that have occurred but have not yet been reported as well as a reserve for reported losses that are expected to develop further. Which of the following methods uses historical relationships between IBNR reserves and reported losses in IBNR forecasts? - Answer-Percentage method Which one of the following individuals would normally set the level of bulk reserves for an insurer? - Answer-ActuaryWhich one of the following statements is true regarding an insurer's total case reserves? - AnswerReinsurers may supplement the primary insurer's case reserves for their own financial reporting purposes. The purpose of loss reserves is to - Answer-Estimate the insurer's liability for losses that have occurred but have not yet been settled. Primary Insurance Company (PIC) has a large book of first party automobile policies. Which one of the following would be the best method for PIC to reserve collision losses that arise from the resulting claims? - Answer-Average method The correct formula for incurred losses is - Answer-Incurred Losses = paid losses + loss reserves + loss adjustment expense reserves. Primary Insurance Company (PIC) has outstanding loss reserves at the end of the past year totaling $28 million. During the first quarter of this year PIC's reserves were reevaluated and were increased to $32 million. Which one of the following best describes the financial impact of this increase? - Answer-Policyholders' surplus will be reduced. Which one of the following is an approach used to determine the intial recognition of losses for the current accident year? - Answer-Accrual of estimated incurred losses based on the level of earned exposure Which one of the following statements concerning the effect of under-reserving on premium rates is true? - Answer-Under-reserving makes incurred losses appear too low and results in rates that are too low. Which one of the following best explains how loss reserves are handled on an insurer's financial statements? - Answer-They are liabilities on the balance sheet