To determine an insurer's liquidity, which items are compared?

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Multiple Choice

To determine an insurer's liquidity, which items are compared?

Liquidity measures focus on the insurer’s ability to meet policyholder obligations with readily available funds. To assess this, analysts look at cash and high-grade invested assets because these are the resources that can be quickly turned into cash to pay claims, surrenders, and other near-term policyholder demands. When cash and high-quality investments are compared to policyholder obligations, you get a clear picture of how prepared the company is to meet its near-term outflows. Other options don’t fit the liquidity view. Net premiums earned is a revenue measure and doesn’t reflect how quickly funds can be accessed to pay obligations. Investment income is earnings from investments, not the immediate cash available, and it can occur over time rather than when payments are due. Underwriting expenses are costs of underwriting, which affect profitability, not the insurer’s ability to cover obligations with liquid resources.

Liquidity measures focus on the insurer’s ability to meet policyholder obligations with readily available funds. To assess this, analysts look at cash and high-grade invested assets because these are the resources that can be quickly turned into cash to pay claims, surrenders, and other near-term policyholder demands. When cash and high-quality investments are compared to policyholder obligations, you get a clear picture of how prepared the company is to meet its near-term outflows.

Other options don’t fit the liquidity view. Net premiums earned is a revenue measure and doesn’t reflect how quickly funds can be accessed to pay obligations. Investment income is earnings from investments, not the immediate cash available, and it can occur over time rather than when payments are due. Underwriting expenses are costs of underwriting, which affect profitability, not the insurer’s ability to cover obligations with liquid resources.

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