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AIAF 114 Chapter 5 Practice Exam | 100% Correct Verified Q&A’s 2026/2027 Version, Exams of Financial Accounting

University of Illinois - Urbana-ChampaignFinancial Accounting

Verified AIAF 114 Chapter 5 Practice Exam questions and answers covering accident-year loss accounting, reserve changes, and insurance incurred loss recognition methods used in actuarial science and insurance financial reporting.

Typology: Exams

2025/2026

Available from 06/19/2026

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AIAF 114- Chapter 5 Practice Exam |
Actual Exam Questions | 100% Correct
Answers | Verified 2026 Version
When accounting for accident-year losses for year 20X6, which one of the following would be included? -
✔✔A reserve change in 20X7 for a loss that occurred in 20X6
Correct. When accounting for accident-year losses for year 20X6, a reserve change in 20X7 for a loss that
occurred in 20X6 would be included. An accident-year method aggregates incurred losses for a given
period (such as twelve months) using all incurred losses for insured events that occurred during that
period. Any losses that occurred in previous or later periods are not included.
The case reserving method that establishes an average amount for all claims that have similar
characteristics in terms of the claimant's age, health, and marital status is known as the - ✔✔Tabular
method
Both primary insurers and reinsurers must maintain reserves for expected future loss payments. Which
one of the following best describes the reserves that a reinsurer must maintain? - ✔✔Amounts obligated
in the future to pay to primary insurers
The average method of case reserving is most suitable for those types of insurance where claims are -
✔✔Reported and paid promptly
Assume an actuary estimates losses at 80 percent of earned premium of $20 million, and that $3 million
in losses have been paid. The insurer wants to establish a bulk reserve for reported losses—payment
uncertain. Which one of the following represents the appropriate amount for the bulk reserve? - ✔✔$13
million
Correct. Reserves for reported losses when the amount of payment is uncertain can be calculated on a
bulk basis by subtracting the amount already paid for losses from a certain percentage of total earned
premium. The bulk reserve would be the estimated incurred loss of $16 million ($20 million premium x
80 percent loss ratio) less the $3 million of paid losses, which is $13 million.
Bulk reserves can be established for various categories. At any given time, the difference between
incurred losses and ultimate losses is known as - ✔✔Incurred but not reported (IBNR) reserves
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AIAF 114- Chapter 5 Practice Exam |

Actual Exam Questions | 100% Correct

Answers | Verified 202 6 Version

When accounting for accident-year losses for year 20X6, which one of the following would be included? - ✔✔A reserve change in 20X7 for a loss that occurred in 20X Correct. When accounting for accident-year losses for year 20X6, a reserve change in 20X7 for a loss that occurred in 20X6 would be included. An accident-year method aggregates incurred losses for a given period (such as twelve months) using all incurred losses for insured events that occurred during that period. Any losses that occurred in previous or later periods are not included. The case reserving method that establishes an average amount for all claims that have similar characteristics in terms of the claimant's age, health, and marital status is known as the - ✔✔Tabular method Both primary insurers and reinsurers must maintain reserves for expected future loss payments. Which one of the following best describes the reserves that a reinsurer must maintain? - ✔✔Amounts obligated in the future to pay to primary insurers The average method of case reserving is most suitable for those types of insurance where claims are - ✔✔Reported and paid promptly Assume an actuary estimates losses at 80 percent of earned premium of $20 million, and that $3 million in losses have been paid. The insurer wants to establish a bulk reserve for reported losses—payment uncertain. Which one of the following represents the appropriate amount for the bulk reserve? - ✔✔$ million Correct. Reserves for reported losses when the amount of payment is uncertain can be calculated on a bulk basis by subtracting the amount already paid for losses from a certain percentage of total earned premium. The bulk reserve would be the estimated incurred loss of $16 million ($20 million premium x 80 percent loss ratio) less the $3 million of paid losses, which is $13 million. Bulk reserves can be established for various categories. At any given time, the difference between incurred losses and ultimate losses is known as - ✔✔Incurred but not reported (IBNR) reserves

Loss development is - ✔✔The increase or decrease of incurred losses over time. Incurred but not reported (IBNR) reserves are residual reserves. They represent the difference between - ✔✔Ultimate losses and reported incurred losses Pravalt Insurance Company is estimating its incurred but not reported (IBNR) reserves using the loss triangle method. The following table shows Pravalt's incurred and reported losses for each of the past five accident years, along with the ultimate loss development factor for each accident year. Which one of the following statements best describes what would happen next to determine the estimated IBNR reserves? - ✔✔The ultimate loss development factor for each year is multiplied by that year's incurred and reported losses, and the difference each year between that figure and the incurred and reported losses amount is the IBNR reserve. Correct. The ultimate loss development factor for each year is multiplied by that year's incurred and reported losses, and the difference each year between that figure and the incurred and reported losses amount is the IBNR reserve. Which one of the following is a weakness of using the judgment method to determine case loss reserves? - ✔✔The accuracy of the case reserves set using the judgment method depends on the quality of the claim representative's experience. When an insurer is under-reserved, its surplus is - ✔✔Overstated Additional case reserves are most common for which one of the following types of claims? - ✔✔Claims under assumed reinsurance contracts. Which one of the following accounting standards or rules may apply to self-insured liabilities related to workers compensation claims? - ✔✔Employee benefit accounting When a claim payment is made but the corresponding entry has not yet been made, the payment is registered to - ✔✔A suspense account.

Which one of the following statements concerning the effect of under-reserving on premium rates is true? - ✔✔Under-reserving makes incurred losses appear too low and results in rates that are too low. Which one of the following best explains how loss reserves are handled on an insurer's financial statements? - ✔✔They are liabilities on the balance sheet Which one of the following statements about the loss ratio method of establishing bulk reserves for incurred but not reported (IBNR) losses is most accurate? - ✔✔The Serve, in part, to account for future growth of known lossesloss ratio method should only be used for the first year or two after losses are incurred. Which one of the following is a drawback of the average method of determining case reserves? - ✔✔It may produce inadequate reserves for those types of insurance that have a wide variation in claim amounts The reserve representing the estimated deficiency in the aggregate of case reserves for known claims are known as - ✔✔Bulk reserves Which one of the following statements regarding the calculation of the reserve for unallocated loss adjustment expenses (ULAE) is accurate? - ✔✔It is usually estimated as a percentage of the sum of incurred losses and allocated loss adjustment expenses. Which one of the following represents an insurer's right to recover the amount of claim payment from a responsible third party? - ✔✔Subrogation Incurred but not reported (IBNR) reserves - ✔✔Serve, in part, to account for future growth of known losses