Cpcu 540 Chapter 5

Front 1

Three concepts that must be understood to analyze and insurers financial statement.

Back 1

1. Capacity
2. Liquidity
3. Profitability

Front 2

Liquidity

Back 2

The ease with which an asset can be converted to cash with little or not loss of value.

Front 3

Capacity

Back 3

The amount of business an insurer is able to write, usually based on a comparison of the insurers written premiums to its policyholders surplus.

Front 4

Written premiums

Back 4

The total premium on all policies written during a particular period. (Net of reinsurance)

Front 5

Profitability

Back 5

Based primarily on underwriting and investment results.

Front 6

Earned premiums

Back 6

The portion of written premiums that corresponds to coverage that has already been provided.

Front 7

Benchmarking

Back 7

The process of comparing results to industry standards or best practices.

Front 8

Premium-to-surplus ratio

Back 8

Written premiums (net of reinsurance) / policyholders surplus.

A capacity ratio that indicates an insurers financial strength by relating net written premiums to policyholders surplus.

Higher ratio = more aggressive, lower ratio means insurer has additional capacity to write business.

Front 9

Reserves-to-surplus ratio

Back 9

Loss reserves & LAE / policyholders surplus **?

A financial ratio that provide a measure of the ability of an insurers surplus to absorb increase in reserves. Insurance leverage.

Higher ratio = Ok with small reserve underestimation, lower ratio = insurer could handle a large underestimation.

Front 10

Ceding commission

Back 10

An amount paid by the reinsurer to the primary insurer to cover part of all of the primary insurers policy acquisition expenses.

Front 11

Insurance leverage

Back 11

An indication of the extent to which policyholders surplus can support a given level of reserves.

Front 12

Liquidity ratio

Back 12

(Cash + invested assets) / (unearned premium reserve + losses & LAE)

A ratio that measures the extent to which an insurer can meet its obligations as they come due.

Front 13

Combined ratio

Back 13

Loss ratio + expense ratio

A profitability ratio that indicated whether an insurer has made an underwriting loss or gain.

If greater than 100, there has been an loss. Most common measurement of underwriting profit.

Front 14

Loss ratio

Back 14

A ratio that measures losses and LAE against earned premiums and that reflects the percentage of premiums beign consumed by losses.

Front 15

Expense ratio

Back 15

An insurers incurred underwriting expense for a given period divided by its written premiums for the same period.

Front 16

Operating ratio

Back 16

Investment income ratio - combined ratio.

A ratio that measurers an insurers overall pretax operational profitability from underwriting and investment activities.

Front 17

Investment income ratio

Back 17

Net investment income / Earned premiums for a given period.

Front 18

Investment yield ratio

Back 18

A probability ratio that indicates the total return on investments for an insurers investment operations.

Front 19

Return on policyholders surplus

Back 19

A profitability ratio that shows the rate of return an insurer is earning on its resources.

Front 20

A.M. Best Financial Strength Ratings

Back 20

Independent opinion of an insurers financial strength and its ability to meet ongoing insurance policy and contract obligations.

Based on quanititative and qualitative tests.

Front 21

Quantitative tests for A.M. Bests rating

Back 21

1. Profitability
2. Liquidity
3. Capital and leverage
4. Loss reserves

Front 22

An insurers operating stability

Back 22

Ability to withstand losses from unfavorable underwriting results, catastrophes, poor management decisions, industry trends and adverse economic developments.

Front 23

Qualitative tests for A.M. Bests rating

Back 23

1. Capital structure of the insurer holding company
2. Reinsurance and other risk mitigation programs
3. Loss reserve adequacy and accuracy
4. Quality and diversity of investments
5. Spread of risk
6. Management
7. Market position
8. Surplus adequacy
9. Exposure to event risk

Front 24

Bests rating scale

Back 24

Secure-A++ down to B+
Vulnerable-B-F
Suspended-S (significant events that have not fully been evaluated.

Front 25

IRIS ratios

Back 25

1. Overall tests
2. Profitability tests
3. Liquidity tests
4. Reserve tests

Front 26

IRIS review levels

Back 26

Level A-Highest priority
Level B-Some adverse results
Reviewed-No level

Reviewed by experienced financial examiners

Front 27

A.M Bests financial size category

Back 27

Classifies the size of the insurers adjusted surplus.