CPCU 540 EXAMS SCRIPT 2025/2026 QUESTIONS WITH
ANSWERS RATED A+
✔✔Current ratio - ✔✔A liquidity ratio that indicates the company's ability to meet its
short term financial obligations; calculated by dividing current assets by current liabilities
✔✔Acid test ratio (quick ratio) - ✔✔A liquidity ratio that provides a measure of a
company's ability to meet its current obligations if it cannot sell its inventory
✔✔Debt to equity ratio - ✔✔A leverage ratio that measures the extent to which a
company is financed using borrowings rather than its own funds (owners' equity)
✔✔Debt to assets ratio - ✔✔A leverage ratio that shows the extent to which a
company's assets are financed by debt; uses balance sheet data and is calculated by
dividing total liabilities by total assets
✔✔Asset turnover - ✔✔A ratio that emphasizes the efficiency of the company's use of
its assets
✔✔Quick ratio - acid test ratio - ✔✔A liquidity ratio that provides a measure of a
company's ability to meet its current obligations if it cannot sell its inventory
✔✔Policyholders' surplus - ✔✔Under statutory accounting principles SAP an insurer's
total admitted assets minus its total liabilties
✔✔Accounting equation - ✔✔The equation that relates assets to liabilities and owners'
equity
✔✔Matching principle - ✔✔An accounting rule that requires expenses incurred in
generating revenues to be matched against those revenues
✔✔Nonadmitted assets - ✔✔Types of property, such as office furniture and equipment,
that regulators do not allow insurers to show as assets on financial statements because
these assets cannot readily be converted to cash at or near their market value
✔✔Admitted assets - ✔✔Assets meeting minimum standards of liquidity that an insurer
is allowed to report on its balance sheet in accordance with statutory accounting
principles
✔✔Reinsurance recoverables - ✔✔Amounts for losses and loss adjustment expenses
owned to an insurer under reinsurance agreements covering paid losses
✔✔Unauthorized reinsurer - ✔✔A reinsurer that is not licensed or otherwise authorized
to do business in the primary insurer's state of domicle
, ✔✔NAIC annual statement - ✔✔The primary financial statement prepared by insurers
and required by every state insurance department
✔✔Loss reserve - ✔✔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
✔✔Loss adjustment expense reserves - ✔✔Estimates of the future expense that an
insurer expects to incur to investigate
✔✔Surplus note - ✔✔A type of unsecured debt instrument, 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
✔✔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
✔✔Capacity - ✔✔The amount of business an insurer is able to write, usually based on a
comparison of the insurer's written premiums to its policyholders' surplus
✔✔Liquidity - ✔✔The ease with which an asset can be converted to cash with little or no
loss of value
✔✔Written premium - ✔✔The total premium on all policies (put into effect) during a
particular period
✔✔Unearned premium reserve - ✔✔An insurer liability representing the amount of
premiums received from policyholders that are not yet earned.
✔✔Earned premiums - ✔✔The portion of written premiums that corresponds to
coverage that has already been provided
✔✔Benchmarking - ✔✔The process of comparing results to industry standards or best
practices
✔✔Premium to surplus ratio or capacity ratio - ✔✔A capacity ratio that indicates an
insurer's financial strength by relating net written premiums to policyholders' surplus
ANSWERS RATED A+
✔✔Current ratio - ✔✔A liquidity ratio that indicates the company's ability to meet its
short term financial obligations; calculated by dividing current assets by current liabilities
✔✔Acid test ratio (quick ratio) - ✔✔A liquidity ratio that provides a measure of a
company's ability to meet its current obligations if it cannot sell its inventory
✔✔Debt to equity ratio - ✔✔A leverage ratio that measures the extent to which a
company is financed using borrowings rather than its own funds (owners' equity)
✔✔Debt to assets ratio - ✔✔A leverage ratio that shows the extent to which a
company's assets are financed by debt; uses balance sheet data and is calculated by
dividing total liabilities by total assets
✔✔Asset turnover - ✔✔A ratio that emphasizes the efficiency of the company's use of
its assets
✔✔Quick ratio - acid test ratio - ✔✔A liquidity ratio that provides a measure of a
company's ability to meet its current obligations if it cannot sell its inventory
✔✔Policyholders' surplus - ✔✔Under statutory accounting principles SAP an insurer's
total admitted assets minus its total liabilties
✔✔Accounting equation - ✔✔The equation that relates assets to liabilities and owners'
equity
✔✔Matching principle - ✔✔An accounting rule that requires expenses incurred in
generating revenues to be matched against those revenues
✔✔Nonadmitted assets - ✔✔Types of property, such as office furniture and equipment,
that regulators do not allow insurers to show as assets on financial statements because
these assets cannot readily be converted to cash at or near their market value
✔✔Admitted assets - ✔✔Assets meeting minimum standards of liquidity that an insurer
is allowed to report on its balance sheet in accordance with statutory accounting
principles
✔✔Reinsurance recoverables - ✔✔Amounts for losses and loss adjustment expenses
owned to an insurer under reinsurance agreements covering paid losses
✔✔Unauthorized reinsurer - ✔✔A reinsurer that is not licensed or otherwise authorized
to do business in the primary insurer's state of domicle
, ✔✔NAIC annual statement - ✔✔The primary financial statement prepared by insurers
and required by every state insurance department
✔✔Loss reserve - ✔✔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
✔✔Loss adjustment expense reserves - ✔✔Estimates of the future expense that an
insurer expects to incur to investigate
✔✔Surplus note - ✔✔A type of unsecured debt instrument, 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
✔✔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
✔✔Capacity - ✔✔The amount of business an insurer is able to write, usually based on a
comparison of the insurer's written premiums to its policyholders' surplus
✔✔Liquidity - ✔✔The ease with which an asset can be converted to cash with little or no
loss of value
✔✔Written premium - ✔✔The total premium on all policies (put into effect) during a
particular period
✔✔Unearned premium reserve - ✔✔An insurer liability representing the amount of
premiums received from policyholders that are not yet earned.
✔✔Earned premiums - ✔✔The portion of written premiums that corresponds to
coverage that has already been provided
✔✔Benchmarking - ✔✔The process of comparing results to industry standards or best
practices
✔✔Premium to surplus ratio or capacity ratio - ✔✔A capacity ratio that indicates an
insurer's financial strength by relating net written premiums to policyholders' surplus
