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Calculate gross margin, given the following: Revenue: $1,000,000. Beginning inventory: $500,000. Additional inventory: $25,000. Ending inventory: $50,000. Taxes: 5%. Investment gain: $75,000. - Correct Answers ✅Gross Margin = Gross Profit ÷ Sales Step 1) Calculate cost of goods sold = ($500,000 + $25,000) - $50,000 = $475, Step 2) Calculate gross profit = $1,000,000 - $475,000= $525, Step 3) Calculate gross margin = $525,000 ÷ $1,000,000 =52.5% X-Bot Robotics Company generated $500,000 in revenue in 2016. In 2016 X-Bot's cost of goods sold was $200,000, taxes were $50,000, and depreciation totaled $25,000. What is X-Bot Robotics Company's gross margin? - Correct Answers ✅Gross Margin = Gross Profit ÷ Sales Step 1) Calculate gross profit = $500,000 - $200,000 = $300, Step 2) Calculate gross margin = $300,000 ÷ $500,000 = 60% Big Blocks Company issues 15,000 shares of common at $20 per share. Big Blocks issues the stock with a $0.15 par value and pays a dividend of $0.25 per share. Big Blocks retained earnings prior to issuing the 15,000 shares is $50,000, and its net income is
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$25,000. Calculate the paid-in capital for Big Blocks Company. - Correct Answers ✅Paid in capital is the money raised by a company that is issuing stock. This is the amount of capital "paid in" by investors, meaning the amount of money contributed by investors. This does not include any funds generated from ongoing business operations. Paid in capital = 15,000 shares X $20 per share = $300, Mac, an analyst for XYZ Firm, is attempting to compare the financial statements of Big Couches Company and Discount Furniture Co. in order to determine the best investment. Big Couches Company generates $1 billion in annual revenue, whereas Discount Furniture Co. generates $5 million in annual revenue. Which of the following should Mac use to compare these two companies? - Correct Answers ✅Vertical analysis is the process of using a common size statement to analyze financial reports. A common size statement enables the reader to compare data points from the financial statements of two different companies. This allows the reader to evaluate the financial performance of two companies of different size. Otherwise, it is difficult to compare different size companies. For instance, when comparing the financial statements of a billion-dollar corporation to the financial statements of a million-dollar corporation, the
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retention ratio? - Correct Answers ✅This is the percentage of policies that are renewed for another period of insurance after the policy expires. The retention ratio calculates the number of policies that choose to renew their insurance coverage for another policy period. This is calculated as the number of renewals that are accepted divided by the number of renewals that are offered. The loss ratio of ABC Insurance Company increased from 70% last year to 85% this year. Senior management of ABC Insurance would like to improve their loss ratio to 85% by next year. Which of the following describes how the Claims department can help to improve the loss ratio? - Correct Answers ✅An increasing loss ratio can indicate that the Claims Department is not operating effectively. The Claims Department should attempt to reduce loss- adjusting expense (LAE) to improve the loss ratio. LAE can be reduced by settling claims out of court. This keeps legal expenses down. Avery is an underwriter reviewing a new auto application. He has researched the exposures faced by the applicant and decides to accept the application for a premium of $800 a year, only if the
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applicant agrees to include a $1,000 deductible on their policy. What is the next step in the underwriting process for Avery? - Correct Answers ✅Avery must communicate his decision to the producer and applicant. After the application has been reviewed, modified, and assigned a premium, the underwriter must make a final underwriting decision. The underwriter must choose to accept the application as is, accept the application with modifications, or reject the application. Therefore, the next step for Avery is to communicate his decision on the application with the producer and applicant. ABC Mutual Insurance is using the loss ratio method to determine its rate increase. ABC's combined ratio during the last year was 95% and the expense ratio was 25%. ABC expects its loss ratio to be 60% and written premiums to be $50 million. What is ABC Mutual's rate change? - Correct Answers ✅16.7 % The loss ratio method calculates the insurance rate change by comparing the insurer's actual historical loss ratio to the insurer's expected loss ratio. This method cannot be used for new types of insurance because it relies on the historical loss performance of the insurer.
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Which data-collection method should not be used when analyzing a liability line of business where claims are paid over multiple years? - Correct Answers ✅ Which data-collection method should not be used when analyzing a liability line of business where claims are paid over multiple years? - Correct Answers ✅Calendar year data is collected from transactions occurring during a twelve-month period beginning January 1, also known as the calendar year. For example, all loss payments made during 2018 would be considered the collected transactions. This estimates earned premium and incurred losses using an accounting formula. This is the least accurate method. This is best for claims that are paid quickly with small loss reserves, such as auto physical damage claims. This should not be used for claims that are paid over several calendar years. The policy year or accident year method should be used for claims paid over multiple years, such as liability claims.
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Which of the following is true in regard to the brokerage marketing system? - Correct Answers ✅Middle market businesses and national accounts typically use brokers to purchase insurance. A broker does not own the agency expiration list. A broker is an independent firm that works for the insurance customer. Unlike insurance agents, the broker represents the insurance customer to help find the best insurance. Brokers shop multiple different insurers to find the best insurance coverage for one insured. Brokers do not have the ability to bind insurance coverage. The insurer and insurance agent are ultimately responsible for binding the insurance policy. Both brokers and agents are compensated by commission per policy. They are also compensated through profit-sharing plans based on the volume and loss ratio of the insured policies. Premium auditing helps to contribute to other departments in the insurance organization. Which of the following is an example of premium auditing providing information to other departments? - Correct Answers ✅Premium audits are helpful to the
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new employees. Which of the following is the best distribution system choice for ASICS? - Correct Answers ✅The exclusive agency is the best choice for ASICS because the agents do not own the expiration list and the agents are not employees of ASICS. ABC Insurance Corporation was established in the state of Arizona in 1980. ABC Insurance Company now sells insurance in Arizona, Texas, Oklahoma, and California. What type of insurer is ABC Insurance in the state of Texas? - Correct Answers ✅ABC Insurance is a foreign insurer because it is domestic to Arizona but sells insurance in other states. Garry Insurance Corp.'s retention ratio has been declining over the past 5 years. In the past 3 years alone, Garry Insurance's retention ratio has dropped by 8%. This might be an indication of what? - Correct Answers ✅Garry Insurance's pricing is not competitive. Retention is the percentage of expiring policies that an insurer renews. Low retention is an indication of poor business, such as poor service, noncompetitive pricing, or unfavorable claims handling.
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The independent agent marketing system is one of the most popular distribution systems in the insurance market. All of the following is true regarding the independent agent distribution system except? - Correct Answers ✅An insurance agent sells insurance on behalf of the insurance company. Agents are independent contractors; they are not employees of the insurer. An independent agent represents more than one insurance company; they sell insurance for multiple unrelated insurance companies at once. independent agents are the most flexible distribution systems for insurers. Independent agents own the agency expiration list. The Claims department often works with other departments including Marketing, Underwriting, and the Actuarial department. Which of the following describes how the Claims department works with the marketing team? - Correct Answers ✅The claims team gathers information about new product ideas. The Claims department works directly with the insured. The claims rep can provide valuable insight to the marketing team about their experience working with the insured, such as new coverage ideas, new product needs, customer wants, and customer
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BMX Insurance Organization is experiencing an unusually large increase in claims after a brutal winter storm. BMX Insurance has a Claims department consisting of 50 claims representatives but can't seem to keep pace with the number of new claims. BMX is considering hiring more staff to assist with the large inflow of claims. Which of the following is the best option for BMX Insurance Organization? - Correct Answers ✅Hire independent adjusters. The best option for BMX Insurance is to hire independent adjusters. Independent adjusters are not employees of the insurer; they are contracted by the insurer when all internal claim representatives are too busy handling other claims. When trying to select a new distribution system, XYZ Insurance Company determines that they will need complete control over the producer and marketing strategies. Which distribution system is best for XYZ Insurance? - Correct Answers ✅The direct writer system gives the insurer complete control over the producer and marketing strategy.
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Corporate underwriters are typically located in the home office. These underwriters help to develop the underwriting policy and are responsible for managing the risk-selection process. All of the following is true regarding a corporate underwriter, except? - Correct Answers ✅Corporate underwriters work directly with the producer. Field underwriters may be directly involved with producers in quoting a premium for an application, not corporate underwriters. XYZ Insurance's earned premium is $1 million from the $1. million written premium. XYZ insured 1,500 homes and incurred $200,000 in losses during the past year. XYZ expected its loss ratio to be 18% and incurred $75,000 in expenses. What is XYZ's pure premium? - Correct Answers ✅Pure Premium = Incurred Losses ÷ Exposure Units Pure Premium = $200,000 ÷ 1,500 = $133.33. All of the following is true regarding treaty reinsurance, except? - Correct Answers ✅This is most useful for insuring exposures that might not be reinsured by a facultative reinsurance agreement.
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This benefits the insurance agent and broker in the following ways: Assists in agent succession plan Expands the agent's network of insurers Helps agent meet profit-sharing requirement with combined income Helps agents more easily attain preferred contracts Increases sales volume Increases market share Meets countersignature laws for businesses in multiple states (This law requires insurance contracts in a state to be signed by a licensed producer within the state) Provides risk-management services Shares expenses Shares premiums An accurate premium audit is extremely beneficial to the insurer. Which of the following is a reason why an accurate premium audit is beneficial to the insurer? - Correct Answers ✅Audits that detect premium errors can help to retain customers.
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Accurate premium audits benefit the insurer in the following ways: Efficiency Financial standing Goodwill Policyholder retention (detect premium errors can help to retain customers) Premium collection Jack, a homeowner in Florida, lives only 100 feet from the coast and needs $750,000 in dwelling coverage. Because Jack needs such high dwelling coverage and lives so close to the coast, he is unable to obtain homeowner coverage. Which insurance system would Jack use to find insurance coverage? - Correct Answers ✅Surplus lines broker Jack's insurance needs are not met by any insurer in the state; he is unable to find insurance from a licensed insurer in Florida. Jack should use a surplus lines broker. A surplus lines broker gives consumers the option to purchase insurance from an insurance company not licensed in the state if the consumer's insurance
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Risk-control representatives should work in cooperation with the Marketing department. This is primarily helpful for driving new marketing campaigns and boosting sales. This helps the marketing and sales teams meet their internal goals. Risk-control representatives work directly with the insured, recommending risk-control techniques (i.e., installing burglar alarms) that help lower the premium and create an acceptable insurance policy. This helps to increase sales. James, an actuary for Safety Home Insurance Company, decides to increase the rate on customers with a credit score less than 600. This is an example of what? - Correct Answers ✅class relatives Using class relativities, an insurer can adjust the rate for subsections of policyholders. This allows the insurer to raise or reduce the insurance rate for different subsections of policyholders. New York Mutual's hit ratio is 15%. In prior years, New York Mutual averaged a hit ratio of 25%. This might be an indication of what? - Correct Answers ✅New York Mutual's rates are higher than competitors' rates.
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Hit ratio is a measure of the number of insurance policies written compared to the number of policies quoted. Issuing a license to an insurer is an indication, by the state insurance department, that an insurer has met all of the minimum standards of financial strength, competence, and integrity. All of the following is true regarding licensing insurers, except? - Correct Answers ✅A non-admitted insurer can write insurance in other states without a license. A non-admitted insurer is an insurance company that is not licensed or authorized to sell insurance within the state. An auditing error can cause unwarranted adjustments to the insurer's rating structure. This could cause severe problems for both the insurer and the insured. All of the following are reasons why premium audits must be accurate, except? - Correct Answers ✅Regulators directly monitor premium audits. THEY DO NOT. Accurate premium audits are important for three reasons: Benefits the insurer
