Deck 22: Accounting for Insurance

Question 1

List and explain the three broad classes of assets insurers have.

Answer 1

The three broad classes of assets are investments,operating assets,and financial assets.Investments consist of holdings of property,listed and unlisted shares,and debt securities.Investments are held to earn revenue and to make capital gains.Revenues and gains frominvestments make significant additions to underwriting profits and are essential for the operationsof most insurance companies.An insurer's portfolio of investments must produce a pattern ofcash flows that allows the insurer to meet its claims liabilities as they are settled.Operating assets are used by an insurer in the process of generating underwriting revenuesand investment revenues.The costs of using operating assets are expenses.Operating assetsconsist of land and buildings occupied by the insurer,plant and equipment,motor vehicles,and inventories of consumables such as stationery.Operating assets are traditionally accountedfor at historical cost and are depreciated over their useful lives.An alternative view is thatbuildings owned and occupied by an insurance company should be treated as investmentsrather than as operating assets.This is based on the view that all property owned by insurersis an investment.Owner occupancy of buildings yields rent savings and capital gains when theproperty is sold.Financial assets are cash or claims to cash.They include accounts receivable,premiumsreceivable and bank deposits used for operating purposes.Financial assets are accounted for atthe amount expected to be received.

Question 2

Which disclosure requirement is to be presented in the statement of comprehensive income?

A) The component related to risk margin
B) Information regarding material non-insurance contracts
C) The amount of net claims incurred
D) The process used to determine risk margin

Answer 2

C

Question 3

Which of the following is not one of the broad categories of insurance?

A) Life
B) General
C) Medical
D) Fixed-fee service contracts

Answer 3

C

Question 4

What are the two sources of premium revenue?

A) Direct and indirect
B) Reinsurance and direct
C) Investments and operating
D) General and fixed-fee

Question 5

Which of the following are components of expected future payments?

A) Amounts in relation to unpaid reported claims
B) Claim handling costs expected to be incurred by the insurer
C) Claims incurred but not reported
D) All of the above are components of expected future payments

Question 6

Which of the following is an obligation arising from past events?

A) Claims have been received but not been settled
B) Claims that have been received but for which the amount of the obligation is uncertain
C) Both A and B are correct
D) Neither A nor B are correct

Question 7

What term describes the process of reinsurers themselves reinsuring in order to reduce risk?

A) Superannuation
B) Reinsurance
C) Retrocession
D) Underwriting

Question 8

What must be present for an insurer to enter into an insurance contract?

A) Written contract
B) Insurance policy
C) Insurable risk
D) Insurable interest

Question 9

Underwriting and investment are the two activities of ________.

A) Fixed-fee service contracts
B) Life insurance
C) General insurance
D) All insurance categories

Question 10

What is the proper treatment basis for the allocation of a premium?

A) The payment history of the policyholder
B) The number of parties to which the payment is to be allocated
C) The type of insurance (medical, general, etc.)
D) The probability of a claim

Question 11

Which type of insurance policy pays benefits only if the insured person dies within a specified period?

A) Whole-of-life
B) Term
C) Endowment
D) Disability

Question 12

Explain the solvency requirements as outlined by the Insurance Act of 1973 and Prudential Standard GPS 110 'Capital Adequacy'.

Question 13

According to AASB 1023,how are assets backing general insurance liabilities to be measured?

A) Fair value
B) Book value of the insurer
C) Book value of the insured party
D) Historical cost

Question 14

Which of the following is considered an operating asset?

A) Cash
B) Consumables
C) Property not occupied by the insurer
D) Debt securities

Question 15

Where is the deficiency related to an unearned premium liability to be reported?

A) On the face of the income statement
B) In the statement of comprehensive income
C) In the insurance contract
D) In the notes of the insured financial statements

Question 16

Insurers desire to earn income in excess of the costs to manage the various types of insurance contracts. Which management objective is being addressed?

A) Solvency
B) Liquidity
C) Transparency
D) Profitability

Question 17

Which of the following is an example of a fixed-fee service contract?

A) Vehicle towing
B) Renter's insurance
C) Medical insurance
D) Accident claims

Question 18

Which of the following is not considered an underwriting activity?

A) Arbitration
B) Reinsurance
C) Claims
D) Premiums

Question 19

What would cause a decrease in the premium paid for a fixed-fee service contract?

A) Decrease in the number of insurance contracts
B) Prompt settlement of claims
C) Increase in the frequency of claim disputes
D) Increase in the number of insurance contracts

Question 20

Differentiate the types of insurance liabilities that arise from events that have already occurred.

Question 21

Aside from details of income,expenses,assets,liabilities,and equity,what must life insurers disclose in financial statements?

A) Regulatory capital information
B) Disaggregated information
C) Managed funds
D) All of the above are correct

Question 22

What is the main accounting issue insurers faced by life insurers?

A) Disclosure
B) Measurement
C) Recognition
D) B and C above are correct

Question 23

'Surrender' of an insurance policy before death is a characteristic of which type of traditional life insurance activity?

A) Whole-of-life
B) Endowment
C) Both A and B are correct
D) Neither A nor B is correct

Question 24

Which accounting standard covers accounting for the life insurance industry?

A) AASB 1023
B) AASB 1038
C) AASB 9
D) AASB 4

Question 25

Which of the following is the correct measurement of assets and liabilities,according to AASB 1038?

A) Assets Liabilities Net present value Fair value
B) Assets Liabilities Fair value Net present value
C) Assets Liabilities Fair value Fair value
D) Assets Liabilities Net present value Net present value

Question 26

Which type of traditional activity is disability insurance most similar to?

A) General insurance
B) Annuity contracts
C) Endowment insurance
D) Term insurance

Question 27

Which two users of information are addressed by life insurance activities?

A) Underwriters and policyholders
B) Shareholders and policyholders
C) Insurance agents and underwriters
D) Shareholders and underwriters

Question 28

List and describe the five main types of traditional activities related to life insurance.