Free CAS Exam 6-U.S. (Regulation and Financial Reporting) Primary Statements & Statutory Accounting Practice Questions
Practice 60 free Primary Statements & Statutory Accounting questions for CAS Exam 6-U.S. (Regulation and Financial Reporting).
Sample Questions
Question 1
Easy
Compared with U.S. GAAP, how does statutory accounting (SAP) treat acquisition costs such as commissions and premium taxes?
Solution
A is correct. SAP follows a conservative, solvency-oriented view and charges acquisition costs to income as incurred, so no deferred acquisition cost (DAC) asset appears on the statutory balance sheet. GAAP instead matches these costs to the premium they help produce by capitalizing a DAC asset and amortizing it over the policy period. This difference makes statutory surplus lower than GAAP equity for a rapidly growing book of business.
Question 2
Medium
A property-casualty insurer's ledger records total assets of $850 million, of which $40 million represents nonadmitted assets. Reported liabilities total $620 million. Computing policyholders' surplus on a statutory basis, what value should the insurer report?
Solution
B is correct. Statutory policyholders' surplus equals admitted assets minus liabilities. Nonadmitted assets are excluded from the statutory balance sheet, so admitted assets = $850M − $40M = $810M. Surplus = $810M − $620M = $190M.
Question 3
Hard
An insurer begins the year with policyholders' surplus of $500M. During the year it earns statutory net income of $60M, records $20M of net unrealized capital gains, sees its nonadmitted assets increase by $15M, and pays $25M of stockholder dividends. Reconciling these movements, what is the ending policyholders' surplus?
Solution
B is correct. The change-in-surplus reconciliation adds items that build surplus and subtracts items that reduce it. Net income (+60) and net unrealized capital gains (+20) increase surplus; an increase in nonadmitted assets (−15) reduces admitted assets and thus surplus; and stockholder dividends (−25) are a distribution out of surplus. Ending surplus is , or $540M.