p92 - April - 2015 - Eg - FInance & Business - Answers

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Examination Guide

P92 – Insurance business


and finance

Diploma in Insurance

April 2015 Examination Guide

SPECIAL NOTICE

Candidates entered for the October 2015 examination should study this Examination Guide
carefully in order to prepare themselves for the examination.

Practise in answering the questions is highly desirable and should be considered a critical part of
a properly planned programme of examination preparation.

P92 April 2015 EG


Examination Guide

P92 – Insurance business and finance

Contents
Important guidance for candidates 3
Examiner comments 7
Question paper 9
Test Specification 16
Model answers 17

Published August 2015

Telephone: 020 8989 8464


Fax: 020 8530 3052
Email: [email protected]

© 2015 The Chartered Insurance Institute

P92 April 2015 EG 2


Examination Guide

IMPORTANT GUIDANCE FOR CANDIDATES

Introduction
The purpose of this Examination Guide is to help you understand how examiners seek to assess
the knowledge and skill of candidates. You can then use this understanding to help you
demonstrate to the examiners that you meet the required levels of knowledge and skill to merit a
pass in this unit.

Before the examination


Study the syllabus carefully
This is available online at www.cii.co.uk or from Customer Service. All the questions in the
examination are based directly on the syllabus. You will be tested on the syllabus alone, so it is
vital that you are familiar with it.

There are books specifically produced to support your studies that provide coverage of all the
syllabus areas; however you should be prepared to read around the subject. This is important,
particularly if you feel that further information is required to fully understand a topic or an
alternative viewpoint is sought. The reading list which can be found with the syllabus provides
valuable suggestions.

Read widely
It is vital that your knowledge is widened beyond the scope of one book. It is quite unrealistic to
expect that the study of a single study text will be sufficient to meet all your requirements. While
books specifically produced to support your studies will provide coverage of all the syllabus areas,
you should be prepared to read around the subject. This is important, particularly if you feel that
further information is required to fully understand a topic or an alternative viewpoint is sought.
The reading list which can be found with the syllabus provides valuable suggestions.

Make full use of the Examination Guide


This Examination Guide contains a full examination paper and model answers. The model answers
show the types of responses the examiners are looking for and which would achieve maximum
marks. However, you should note that there are alternative answers to some question parts
which would also gain high marks. For the sake of clarity and brevity not all of these alternative
answers are shown.

This guide and previous Examination Guides can be treated as ‘mock’ examination papers.
Attempting them under examination conditions as far as possible, and then comparing your
answers to the model ones, should be seen as an essential part of your exam preparation. The
examiner’s comments on candidates’ actual performance in each question provide further
valuable guidance. You can purchase copies of the most recent Examination Guides online at
www.cii.co.uk. CII members can download free copies of older Examination Guides online at
www.cii.co.uk/knowledge.

P92 April 2015 EG 3


Examination Guide

Know the structure of the examination


Assessment is by means of a three hour written paper.

The paper consists of 20 compulsory questions and carries a total of 200 marks.

Each question part will clearly show the maximum marks which can be earned.

Read the current Diploma in Insurance Information for Candidates


Details of administrative arrangements and the regulations which form the basis of your
examination entry are to be found in the current Diploma in Insurance Information for Candidates
brochure, which is essential reading for all candidates. It is available online at www.cii.co.uk or
from Customer Service.

P92 April 2015 EG 4


Examination Guide

In the examination

The following will help:

Spend your time in accordance with the allocation of marks


 The marks allocated to each question part are shown on the paper.
 If a question has just two marks allocated, there are likely to be only one or two points for
which the examiner is looking, so a long answer is a waste of time.
 Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate
answer.
 Do not spend excessive time on any one question; if the time allocation for that question has
been used up, leave some space, go on to the next question and return to the incomplete
question after you have completed the rest of the paper, if you have time.

Take great care to answer the question that has been set
 Many candidates leave the examination room confident that they have written a ‘good’
paper, only to be surprised when they receive a disappointing result. Often, the explanation
for this lies in a failure to fully understand the question that has been asked before putting
pen to paper.
 Highlighting key words and phrases is a technique many candidates find useful.
 The model answers provided in this Examination Guide would gain full marks. Alternative
answers that cover the same points and therefore answer the question that has been asked
would also gain full marks.

Tackling questions
Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any
questions which you find challenging until you have attempted the questions you are confident
about. Candidates’ should avoid mixing question parts, (for example, 1(a)(i) and (ii) followed by
2(b)(ii) followed by 1(e)(i)) as this often leads to candidates unintentionally failing to fully
complete the examination paper. This can make the difference between achieving a pass or a
narrow fail.

It is vital to label all parts of your answer correctly as many questions have multiple parts to them
(for example, question 1(a) may have parts (i), (ii) and (iii)). Failure to fully distinguish between
the separate question parts may mean that full credit cannot be given. It is also important to note
that a full answer must be given to each question part and candidates should not include notes
such as ‘refer to answer given in 1(b)(i)’.

Answer format
Unless the question requires you to produce an answer in a particular format, such as a letter or a
report, you should use ‘bullet points’ or short paragraphs. The model answers indicate what is
acceptable for the different types of question.

Where you are asked to perform a calculation it is important to show all the steps in your answer.
The majority of the marks will be allocated for demonstrating the correct method of calculation.

Provided handwriting is legible, candidates will not lose marks if it is ‘untidy’. Similarly, marks are
not lost due to poor spelling or grammar.

P92 April 2015 EG 5


Examination Guide

Calculators
If you bring a calculator into the examination room, it must be a silent, battery or solar‐powered,
non‐programmable calculator. The use of electronic equipment capable of being programmed to
hold alphabetical or numerical data and/or formulae is prohibited. You may use a financial or
scientific calculator, provided it meets these requirements. The majority of the marks will be
allocated for demonstrating the correct method of calculation.

P92 April 2015 EG 6


Examination Guide

EXAMINER COMMENTS
Question 1
This question was well answered by many candidates with a good range of answers
demonstrated.

Question 2
Part (a) of this question was very well answered with parts (b) and (c) providing a more varied
response.

Question 3
The majority of candidates provided good answers for part (a), with the stronger candidates
outlining correctly three expectations of the UK regulators as required in part (b).

Question 4
Many candidates did not perform well on this question, which focused on Dr John Adair’s action
centre leadership approach.

Question 5
Many candidates did not provide specific examples and instead mentioned what key
performance indicators are.

Question 6
This question was very well answered by the majority of candidates.

Question 7
Part (a) of this question was not well answered, with many candidates listing other reports such
as financial accounts instead of the matters to be considered in the directors’ report. Part (b)
provided stronger answers than part (a) however candidates generally either knew all five
statutory registers or none at all.

Question 8
Candidates’ answers would have benefitted from demonstrating a greater knowledge of the five
recommended actions which should be undertaken.

Question 9
This question had a mixed response from candidates, with many providing a basic answer when
more detail was required, for a 12 mark question.

Question 10
Many candidates provided a good answer to part (a) of this question, part (b) however, was not
so well answered with candidates mentioning sponsorship and advertising as opposed to
planning.

Question 11
The majority of candidates correctly identified the three areas of activity, with the stronger
candidates providing a good explanation of each of these areas.

P92 April 2015 EG 7


Examination Guide

Question 12
Many candidates did perform well on this question with full marks achieved.

Question 13
Few candidates gained high marks on this question, with parts (b) and (c) being answered the
best.

Question 14
This question was not well answered by the majority of candidates.

Question 15
This question had a mixed response from candidates. Some answers would have clearly
benefitted from a better understanding of the four principal objectives of the International
Financial Reporting Standards Foundation.

Question 16
Few candidates gained high marks in part (b) of this question and there was a mixed response in
the answers to part (a).

Question 17
This question was well answered by many candidates.

Question 18
This question was well answered by the majority of candidates. Some answers would have
benefitted further from not showing the ratios upside down.

Question 19
This question was well answered by many candidates.

Question 20
Many candidates did not perform well on this question, with poor answers to part (a) and some
mixed‐up answers across all three parts of the question.

P92 April 2015 EG 8


Examination Guide

THE CHARTERED INSURANCE INSTITUTE

P92
Diploma in Insurance
Unit P92 – Insurance business and finance
April 2015 examination

Instructions

 Three hours are allowed for this paper.

 Do not begin writing until the invigilator instructs you to.

 Read the instructions on page 3 carefully before answering any questions.

 Provide the information requested on the answer book and form B.

 You are allowed to write on the inside pages of this question paper, but you must NOT write
your name, candidate number, PIN or any other identification anywhere on this question
paper.

 The answer book and this question paper must both be handed in personally by you to the
invigilator before you leave the examination room. Failure to comply with this regulation will
result in your paper not being marked and you may be prevented from entering this
examination in the future.

P92 April 2015 EG 9


Examination Guide

Unit P92 – Insurance business and finance


Instructions to candidates

Read the instructions below before answering any questions

 Three hours are allowed for this paper, which contains 20 compulsory questions and carries a
total of 200 marks.

 Read carefully all questions and information provided before starting to answer. Your answer
will be marked strictly in accordance with the question set.

 The number of marks allocated to each question part is given next to the question and you
should spend your time in accordance with that allocation.

 You may find it helpful in some places to make rough notes in the answer booklet. If you do
this, you should cross through these notes before you hand in the booklet.

 It is important to show each step in any calculation, even if you have used a calculator.

 If you bring a calculator into the examination room, it must be a silent, battery or
solar‐powered non‐programmable calculator. The use of electronic equipment capable of
being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You
may use a financial or scientific calculator, provided it meets these requirements.

 Answer each question on a new page. If a question has more than one part, leave six lines
blank after each part.

P92 April 2015 EG 10


Examination Guide

Answer ALL questions

Note form is acceptable where this conveys all the necessary information

1. (a) Outline five advantages of organic growth. (5)

(b) Outline five disadvantages of organic growth. (5)

2. Identify three specific interests or expectations that each of the following


stakeholders would have in an insurance business:

(a) Employees. (3)

(b) Regulators. (3)

(c) Shareholders. (3)

3. (a) Explain briefly three disadvantages of outsourcing. (6)

(b) Outline three expectations of the UK regulators when regulated businesses


source and manage outsourcing. (6)

4. Dr John Adair’s action centred leadership approach identified three key areas of a
team leader’s effectiveness. One of these key areas is the ‘task’.

Identify the seven ‘task needs’ a team leader should perform to ensure
effectiveness. (7)

5. (a) Identify two specific examples of results‐orientated key performance


indicators (KPIs). (4)

(b) Identify two specific examples of effort‐orientated KPIs. (4)

P92 April 2015 EG 11


Examination Guide

6. Identify and explain briefly the five ‘C’s approach to the process of decision‐making
as suggested by The Industrial Society. (10)

7. (a) Explain briefly three matters that have to be included in the business
review of a directors’ report for a quoted company as required by the
Companies Act 2006. (6)

(b) State the five statutory registers that must be maintained by a public
company under the Companies Act 2006. (5)

8. Explain briefly five recommended actions which should be undertaken to minimise


the risk of insider dealing/improper disclosure. (10)

9. Explain briefly six of the functions/decisions that would typically be carried out by an
insurance company’s IT department. (12)

10. (a) Outline five areas an insurer will audit within a line slip or binding authority. (5)

(b) Identify six marketing activities that insurance organisations rely on market
research to accomplish. (6)

11. (a) Identify the three areas of activity that a cash flow statement analyses. (3)

(b) Explain briefly what each of the three areas of activity you have identified in
part (a) above relates to. (9)

QUESTIONS CONTINUE OVER THE PAGE

P92 April 2015 EG 12


Examination Guide

12. Using the entries below, construct a balance sheet for CG Holdings Ltd.

£000s
Cash 350
Deferred tax 450
Land/Property 2,000
Stock 600
Retained profits 800
Long‐term borrowings 1,100
Share capital 100
Creditors 1,250
Debtors 750 (13)

13. Explain briefly the interest that the following stakeholders will have in the financial
information of an insurance company:

(a) Directors and managers. (2)

(b) Financial analysts. (2)

(c) Employees. (2)

(d) Intermediaries. (2)

14. (a) Define an unexpired risk provision. (3)

(b) Explain briefly why financial information on claims is recorded by accounting


period. (3)

(c) State the four factors that need to be taken into account when deciding how
to categorise claims statistics. (4)

15. Explain briefly the four principal objectives of the International Financial Reporting
Standards Foundation. (8)

P92 April 2015 EG 13


Examination Guide

16. (a) Explain briefly what a gearing ratio measures in an insurance company,
providing the formula for its calculation. (6)

(b) Explain briefly two circumstances in which a high gearing ratio in an


insurance company can be acceptable. (4)

17. (a) Provide the formulae, in an insurance company context, for each of the
following ratios:

(i) Solvency ratio. (2)

(ii) Liquidity ratio. (2)

(iii) Return on equity ratio. (2)

(b) Explain briefly what an insurance company solvency ratio and liquidity ratio
can demonstrate. (4)

18. (a) List the three main activity (or turnover) ratios for a typical manufacturing
company. (3)

(b) Provide the formulae of each of the above three main activity
(or turnover) ratios. (6)

19. In the event of inadequate levels of capital, in particular a breach in minimum


capital requirement:

(a) state how an insurance company would be expected to react in


immediate terms; (2)

(b) outline the two basic options available to the company in the event of
inadequate levels of regulatory capital; (2)

(c) describe briefly three actions that could be taken for each of the two basic
options identified in part (b) above. (6)

QUESTIONS CONTINUE OVER THE PAGE

P92 April 2015 EG 14


Examination Guide

20. (a) Identify the three resources an insurance company must, at all times
maintain, as a regulatory requirement, to ensure there is no significant risk
that its liabilities cannot be met as they fall due. (3)

(b) Outline four examples of what would typically be included in an insurance


company risk appetite statement. (4)

(c) State three matters that an insurance company’s risk appetite statement
would be used to set. (3)

P92 April 2015 EG 15


Examination Guide

TEST SPECIFICATION

April 2015 Examination – P92 Insurance business and finance


Question Syllabus learning outcome(s) examined
1 1 – Understand the structure of the insurance industry
2 1 – Understand the structure of the insurance industry
3 1 – Understand the structure of the insurance industry
4 2 – Understand the management of insurance businesses
5 2 – Understand the management of insurance businesses
6 2 – Understand the management of insurance businesses
7 3 – Understand the main aspects of corporate governance
8 3 – Understand the main aspects of corporate governance
9 4 – Understand the role of common functions within insurance organisations
10 4 – Understand the role of common functions within insurance organisations
11 5 – Understand accounting principles and practices and their application
12 5 – Understand accounting principles and practices and their application
13 5 – Understand accounting principles and practices and their application
14 6 – Understand the main practices of insurance company accounts
15 6 – Understand the main practices of insurance company accounts
16 7 – Analyse businesses using financial ratios
17 7 – Analyse businesses using financial ratios
18 7 – Analyse businesses using financial ratios
19 8 – Understand the financial strength of insurance companies
20 8 – Understand the financial strength of insurance companies

P92 April 2015 EG 16


Examination Guide

NOTE ON MODEL ANSWERS


The model answers given are those which would achieve maximum marks. However, there
are alternative answers to some question parts which would also gain high marks. For the
sake of clarity and brevity not all of these alternative answers are shown. An oblique (/)
indicates an equally acceptable alternative answer.

Model answer for Question 1

(a) Any five of the following:


 It can deliver long term benefits such as profitable relationships with clients. More
competition/more customer choice.
 It encourages innovation.
 Reduces uncertainty amongst staff therefore ensuring productivity remains high.
 Not distracted by mergers/acquisitions so can concentrate on business.
 No cultural clashes which often arise from mergers/ acquisitions where two cultures
then apply.
 It enables analysts to measure real growth. Accounts otherwise distorted by mergers
and acquisitions.
 Less risky as many mergers do not yield expected results.
 More economic/less costly compared to mergers and acquisitions.

(b) Any five of the following:


 Needs more time/demands and staff who can handle the process of organic growth
who can be difficult to recruit.
 Takes enormous commitment from these staff. In very competitive market may not
be possible/easy to grow organically.
 They often need training.
 Premises and equipment need acquiring.
 Possible vulnerability of a company that does not merge or acquire may be too small
to survive in a competitive marketplace.
 Often need extensive marketing for people to know you are moving into a new area.
 Does not always meet investors’ needs. Quite possible to seek unprofitable business
as strive to achieve unrealistic organic growth goals.

P92 April 2015 EG 17


Examination Guide

Model answer for Question 2

(a) Any three of the following:


 Satisfactory salary.
 Staff benefits.
 Job security/company making profits so going to stay in business.
 Promotion opportunities/training and development.
 Good working conditions/fair treatment.

(b)  Compliant operations/open communication.


 Fit and proper management.
 Achievement of regulatory aims/capital adequacy.

(c) Any three of the following:


 High rate of investment return.
 Sustained and increased growth/business strategy in line with shareholders
expectations/interests and agreement.
 Transparency.
 Increased shareholder value.

Model answer for Question 3

(a) Any three of the following:


 The control and direction can be lost.
 There may be possible reputational damage.
 If service is poor then the business will lose customers.
 Confidential information needs to be protected.
 If the business is too dependent on a limited number of suppliers then it is open to
higher costs when competition is lacking.
 If outsourcing and the company gets into financial difficulty then the company has the
issue of trying to find a replacement at short notice and often increased costs as a
consequence.
 Full understanding of customer behaviour can be lost if communication between the
businesses is inadequate.

(b)  Take reasonable steps to ensure that there is no undue additional operational risk in
outsourcing an activity as opposed to retaining it in‐house.
 The quality of internal control is not impaired.
 The ability of the regulators to monitor the firm’s regulatory compliance is not
hampered.

P92 April 2015 EG 18


Examination Guide

Model answer for Question 4

 Define the team’s goals and objectives.


 Ensure appropriate resources are available.
 Develop work plans and define team tasks.
 Allocate the work and resources.
 Control the work rate and quality.
 Check performance against plans.
 Adjust the plans as necessary.

Model answer for Question 5

(a)  Increase sales numbers by 10%.


 Increase market share by 15%.

(b)  Ensure all aged debt is less than 90 days old.


 Ensure complaints are handled within 24 hours.

Model answer for Question 6

 Consider – the preparation stage at which the problem is considered.


 Consult – the stage at which initiatives are taken to involve those affected.
 Crunch – the need to ensure that something is done.
 Communicate – the stage at which what has been decided, and why, is explained to the
staff.
 Check – the need to go back and monitor the results of the decision.

Model answer for Question 7

(a) Any three of the following:


 The main trends and factors likely to affect the future development, performance and
position of the company’s business.
 Information on social and community matters including information on company
policies and their effectiveness.
 Information on environmental matters including the impact on the environment of
the company’s business.
 Information about persons who the company has contractual obligations to which are
essential to the business.

(b)  Register of members (i.e. the shareholders).


 Register of directors and secretaries.
 Register of directors’ interests.
 Register of charges.
 Register of interests in shares (for public companies).

P92 April 2015 EG 19


Examination Guide

Model answer for Question 8

Any five of the following:


 An insider list should be maintained which records all those who are allowed to know
about the transaction.
 Limit the number of people who need to know about the deal and justify adding people in
the future.
 Not passing information to individuals unless they are first clearly made aware of their
responsibilities for handling sensitive data.
 As far as is practical limit the individual’s knowledge to only the parts that are necessary.
 Where possible communicate to all other insiders when someone is removed from the list.
 Geographically separate deal teams from other areas of the business e.g. on a different
floor.
 Those with information sign binding non‐disclosure agreements and receive suitable
training.
 Appropriate external and internal audits are completed and the overall security of the
documents/information concerned is properly protected.

Model answer for Question 9

Any six of the following:


 Contribution to development of business strategy as IT becomes aware of the business
uses of the latest technology.
 Establish hardware requirements/purchase including servers, desktop PC’s and printers.
 Provide laptops and tablets to enable staff to work remotely.
 Setting up IT connectivity for home workers.
 Telecommunications strategy including the telecoms capability within the building services.
 Consider whether to retain any of the IT functions in‐house or whether to outsource.
 Choose/install appropriate software for the company, either through ‘off the shelf’
products or design of products to suit their specific needs.
 Designing/maintaining systems where interfacing with customers and customer purchase.
 Help in creation of management information (MI) reports and overall data
management/storage/security and migration.
 Overall systems maintenance including one‐off IT troubleshooting and maintenance and
emergency responses to events/downtime.
 Involvement in new projects to meet changing business requirements and ensuring current
business requirements are met through disaster recovery planning – both help in
formulation and testing.

P92 April 2015 EG 20


Examination Guide

Model answer for Question 10

(a) Any five of the following:


 Are terms/limits/management of exposures adhered to?
 Are procedures/service level agreements adhered to?
 Is premium in line with original plan/guidelines?
 Is cover/wordings provided in line with binding authority?
 Is policy wording issued to the client in line with authorities?
 Is broker remuneration/acquisition costs in line with the agreement?
 Is underwriting performance/claims experience as expected?

(b) Any six of the following:


 Develop marketing plans.
 Identify target markets.
 Formulate marketing strategy.
 Control marketing operations.
 Monitor the success of the products or service provided.
 Provide accurate market measurements.
 Investigate activities of competitors/competitor research.

Model answer for Question 11

(a)  Operating activities.


 Investing activities.
 Financing activities.

(b)  Operating activities – businesses generate cash flows from their trading activities, this
section deals with how much cash the business managed to generate as a direct
consequence of trading activities such as tax paid, interest received or paid and
dividends received. The statements show a reconciliation of the cash generated from
operations to net profit before tax.
 Investing activities – this section shows cash inflows and outflows created by
investment activities. Inflows will include proceeds of sales of investments and
outflows would include investments made.
 Financing activities – this includes changes to loan and share capital and payments of
dividends to shareholders. A cash inflow would include where the business has raised
new cash through negotiating new loans or issuing more shares. If it has paid back
some of its loan capital during the year, an outflow of cash is shown. Cash outflows
can also occur when a business decides to redeem or buy back some of its share
capital.

P92 April 2015 EG 21


Examination Guide

Model answer for Question 12

Balance sheet for CG Holdings Ltd as at 31/12/2014

Fixed/non‐current Assets
Land/Property 2,000
Total fixed assets 2,000

Current Assets
Debtors 750
Stock 600
Cash 350
Total current assets 1,700

Total Assets 3,700

Current Liabilities
Creditors (1,250)
Total current liabilities (1,250)

Long‐term/non‐current liabilities
Deferred tax (450)
Long‐term borrowings (1,100)
Total long‐term liabilities (1,550)

Total Liabilities (2,800)

Net Assets 900

Financed By
Retained profits 800
Share capital 100
900

P92 April 2015 EG 22


Examination Guide

Model answer for Question 13

(a) Directors and managers have overall responsibility for managing the business they need
to know if they have met their strategic objectives and if they are making the best use of
the resources available to them. They need to know if the organisation has enough
capital available to them, whether some parts of the business are more successful than
others and whether the company has behaved responsibly in the community.

(b) Financial analysts want to know whether to advise current shareholders and potential
shareholders to invest in the business. They use financial information to track the
performance of the business. Rating agencies may also use this information as well. They
are concerned with financial information that is accessible/comparable/understandable.

(c) Employees are concerned about how secure their job is. How has the company been
performing to establish if they will get paid on time or if they may receive a bonus/salary
increase?

(d) Intermediaries want to know that the company is financially strong so they will be able
to meet their claims obligations and to pay commissions. A security rating is high enough
for clients. They are concerned with whether they should continue to place business with
the company on behalf of their clients.

Model answer for Question 14

(a) The amount set‐up as a liability in the accounts if an assessment of the unearned
premium reserve is deemed inadequate to cover the expected cost of claims.

(b) Premiums are earned up to the last date of the accounting period and for profitability
purposes this needs to be matched to incidents that give rise to a claim.

(c)  Length of tail of claim.


 Expected claims patterns.
 Expectation of a surplus or deficit.
 Average claims values.

Model answer for Question 15

 To develop a single set of high quality, understandable, enforceable and globally


acceptable standards through its standard setting body.
 To promote the use and rigorous application of those standards.
 To take account of the financial reporting needs of emerging economies and small and
medium‐sized entities.
 To promote and facilitate the adoption of the International Financial Reporting Standards
Foundation as being the standards and interpretations issued by the International
Accounting Standards Board through the convergence of national accounting standards.

P92 April 2015 EG 23


Examination Guide

Model answer for Question 16

(a) A gearing ratio expresses the borrowings as a percentage of shareholder equity or


reliance on debt or liabilities.

The formula for its calculation:

(b) A highly geared company may be preferred to losing control by having too many shares
issued or with fewer shares there are fewer shareholders to participate in the profit so a
small increase in pre‐interest profit could lead to a large increase in dividends. It is
acceptable to be a high geared company if projected returns consistently exceed
projected interest rates.

Model answer for Question 17

(a) (i)

(ii)

(iii)

(b)  Solvency ratio can demonstrate how much risk the business has compared to its
assets. The higher the ratio the stronger the company.
 Liquidity ratio can demonstrate how liquid and accessible your cash is to meet
short‐term cash flow requirements. The higher the number the better.

Model answer for Question 18

(a)  Stock turnover ratio.


 Debt/debtor turnover ratio.
 Credit/creditor turnover ratio.

(b)

P92 April 2015 EG 24


Examination Guide

Model answer for Question 19

(a) An insurance company would file a plan, notify the regulator detailing how it would
expect to rectify the position.

(b)  Raise more regulatory capital.


 Reduce the regulatory capital requirement.

(c) Raise more regulatory capital through issuing new shares, issuing long‐term debt,
switching out of assets or selling off parts of the business.

Reduce the regulatory capital requirement by reducing the volume of business written,
purchasing reinsurance or switching out of high risk assets such as equities to lower risk
ones such as government bonds.

Model answer for Question 20

(a)  Financial.
 Capital.
 Liquidity.

(b)  A statement of the risks that is acceptable for the company to bear.
 What risks are not acceptable?
 The probability of failure that is deemed to be acceptable.
 The maximum loss that is acceptable forms any one incident.

(c) Any three of the following:


 Risk acceptance criteria/underwriting strategy.
 Investment policy.
 Reinsurance policy.
 Other financial and risk policy statements.

P92 April 2015 EG 25

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