CPCU 540 Practice Questions
The NAIC Own Risk and Solvency Assessment (ORSA) does all of the following, EXCEPT: ANS: Imposes
rigid structure
Which one of the following describes what effect, if any, a reduction in an insurer's loss reserves will
have on net income and policyholder's surplus in the year that any adjustment is made? ANS: It will
increase both net income and policyholder's surplus.
Risky Insurance Company has a risk-based capital (RBC) level of 200 percent of the authorized control
level. At this level, the regulator ANS: Will require Risky Insurance Company to file a comprehensive
plan.
The risk that customers will fail to make promised payments as they come due is ANS: Credit risk.
FAM Insurance issued $100 million in catastrophe bonds through a special purpose vehicle (SPV).
Coverage attaches when losses from a Category 3 or greater hurricane exceed $50 million. The bond
pays 8 percent interest and has a 3-year term. Which one of the following correctly states how the
catastrophe bond will respond if FAM Insurance experiences $35 million in losses from a Category 4
hurricane during the bond term? ANS: he SPV will provide 8 percent in interest each year and return the
principal at the end of the 3-year term.
An insurer can improve its balance sheet values by increasing the value of its assets. Which one of the
following is a way of accomplishing this? ANS: Sale and leaseback
Robert has borrowed $5,000 for six months at an interest rate of six percent simple interest per year. At
the end of six months, the amount Bob needs to pay off the loan plus interest is ANS: $5,150.
Based on the coefficient of variation, which one of the following investment portfolios has the lowest
relative risk? ANS: Mean return of 10%; standard deviation of 25%
,When quantifying an investment risk by its variance, to measure the deviation of an investment's return
from the average, it is useful to convert the variance units back to ANS: The data set units by taking the
square root of the answer.
A legal document that details the terms of an investment bond is referred to as ANS: An indenture
agreement.
An insurance company's investment strategy must be tied to its underwriting strategy because ANS:
Investment returns are used to pay losses as they come due.
By diversifying one's investment exposure by investing in stock, bonds, real estate, and commodities,
which one of the following risks would be most affected? ANS: Unsystematic risk
Which one of the following is the coupon rate of a bond with a $1,000 face value, a $40 coupon, and is
selling at "80.0"? ANS: .040
Which one of the following statements about common stock is most correct? ANS: Although common
stock prices can be very volatile, they tend to earn more than preferred stocks for the investor over the
long run.
Anticipation of which one of the following by investors would tend to increase stock prices? ANS: Higher
earnings
Laura borrowed $10,000 as a student loan on September 1, 2020. She will graduate on September 1,
2024. Interest begins accruing on the loan immediately; however, Laura does not have to make any
payments until graduation. The interest rate is eight percent, compounded semi-annually. What is the
total amount Laura will owe for this loan on September 1, 2024? ANS: $13,686
Patrick was comparing the combined ratios of different insurers. Which one of the following combined
ratios means that losses and expenses have exceeded premium income? ANS: 105%
, Although the risks associated with leverage are of concern to all companies, the solvency orientation of
insurance regulators makes it particularly important to evaluate leverage for insurers. One of the widely
used ratios to determine insurance leverage is the ANS: Reserves-to-surplus ratio.
Which one of the following statements regarding an insurer's liquidity ratio is true? ANS: A liquidity
ratio greater than one indicates the insurer should be able to meet its financial obligations as they
become due.
To determine an insurer's liquidity, ANS: Cash and high-grade invested assets are compared to
policyholder obligations.
Which one of the following combined ratios mean that losses and expenses have exceeded premium
income? ANS: 105%
An insurer's premium-to-surplus ratio is calculated by taking ANS: Net written premium divided by
policyholders' surplus.
Which one of the following statements is true? ANS: If losses and loss adjustment expenses exceed
earned premium, an insurer must draw on its policyholders' surplus to meet its obligations.
The balance sheet provides a snapshot of an organization's financial condition ANS: At a given point in
time.
The role of the policyholders' surplus is to ANS: Provide a cushion to ensure the insurer has enough
resources to meet obligations to the policyholders.
Unrealized capital gains are not included in accounting income. Under statutory accounting principles
(SAP), unrealized capital gains are included in ANS: Policyholders' surplus.
The NAIC Own Risk and Solvency Assessment (ORSA) does all of the following, EXCEPT: ANS: Imposes
rigid structure
Which one of the following describes what effect, if any, a reduction in an insurer's loss reserves will
have on net income and policyholder's surplus in the year that any adjustment is made? ANS: It will
increase both net income and policyholder's surplus.
Risky Insurance Company has a risk-based capital (RBC) level of 200 percent of the authorized control
level. At this level, the regulator ANS: Will require Risky Insurance Company to file a comprehensive
plan.
The risk that customers will fail to make promised payments as they come due is ANS: Credit risk.
FAM Insurance issued $100 million in catastrophe bonds through a special purpose vehicle (SPV).
Coverage attaches when losses from a Category 3 or greater hurricane exceed $50 million. The bond
pays 8 percent interest and has a 3-year term. Which one of the following correctly states how the
catastrophe bond will respond if FAM Insurance experiences $35 million in losses from a Category 4
hurricane during the bond term? ANS: he SPV will provide 8 percent in interest each year and return the
principal at the end of the 3-year term.
An insurer can improve its balance sheet values by increasing the value of its assets. Which one of the
following is a way of accomplishing this? ANS: Sale and leaseback
Robert has borrowed $5,000 for six months at an interest rate of six percent simple interest per year. At
the end of six months, the amount Bob needs to pay off the loan plus interest is ANS: $5,150.
Based on the coefficient of variation, which one of the following investment portfolios has the lowest
relative risk? ANS: Mean return of 10%; standard deviation of 25%
,When quantifying an investment risk by its variance, to measure the deviation of an investment's return
from the average, it is useful to convert the variance units back to ANS: The data set units by taking the
square root of the answer.
A legal document that details the terms of an investment bond is referred to as ANS: An indenture
agreement.
An insurance company's investment strategy must be tied to its underwriting strategy because ANS:
Investment returns are used to pay losses as they come due.
By diversifying one's investment exposure by investing in stock, bonds, real estate, and commodities,
which one of the following risks would be most affected? ANS: Unsystematic risk
Which one of the following is the coupon rate of a bond with a $1,000 face value, a $40 coupon, and is
selling at "80.0"? ANS: .040
Which one of the following statements about common stock is most correct? ANS: Although common
stock prices can be very volatile, they tend to earn more than preferred stocks for the investor over the
long run.
Anticipation of which one of the following by investors would tend to increase stock prices? ANS: Higher
earnings
Laura borrowed $10,000 as a student loan on September 1, 2020. She will graduate on September 1,
2024. Interest begins accruing on the loan immediately; however, Laura does not have to make any
payments until graduation. The interest rate is eight percent, compounded semi-annually. What is the
total amount Laura will owe for this loan on September 1, 2024? ANS: $13,686
Patrick was comparing the combined ratios of different insurers. Which one of the following combined
ratios means that losses and expenses have exceeded premium income? ANS: 105%
, Although the risks associated with leverage are of concern to all companies, the solvency orientation of
insurance regulators makes it particularly important to evaluate leverage for insurers. One of the widely
used ratios to determine insurance leverage is the ANS: Reserves-to-surplus ratio.
Which one of the following statements regarding an insurer's liquidity ratio is true? ANS: A liquidity
ratio greater than one indicates the insurer should be able to meet its financial obligations as they
become due.
To determine an insurer's liquidity, ANS: Cash and high-grade invested assets are compared to
policyholder obligations.
Which one of the following combined ratios mean that losses and expenses have exceeded premium
income? ANS: 105%
An insurer's premium-to-surplus ratio is calculated by taking ANS: Net written premium divided by
policyholders' surplus.
Which one of the following statements is true? ANS: If losses and loss adjustment expenses exceed
earned premium, an insurer must draw on its policyholders' surplus to meet its obligations.
The balance sheet provides a snapshot of an organization's financial condition ANS: At a given point in
time.
The role of the policyholders' surplus is to ANS: Provide a cushion to ensure the insurer has enough
resources to meet obligations to the policyholders.
Unrealized capital gains are not included in accounting income. Under statutory accounting principles
(SAP), unrealized capital gains are included in ANS: Policyholders' surplus.
