IIC Principles and Practice of Insurance C11 Question # 13 Topic 2 Discussion
C11 Exam Topic 2 Question 13 Discussion:
Question #: 13
Topic #: 2
[Insurance Companies]
Ace Brokerage Inc., a liability insurer, has been in business for three years. It is suffering financial difficulties despite writing a significant amount of new business. What is the most likely reason?
A.
Poor handling of its accounts receivable
B.
Lack of profit-sharing commissions earned
C.
Many clients have added endorsements to their policies
D.
Premiums were discounted when policyholders paid in full
For a new insurer, cash flow and premium collection are critical. Liability claims often take years to develop, but expenses such as commissions, reinsurance, administration, and claim reserves must be funded immediately. If premiums are not collected promptly due to poor management of accounts receivable, the insurer may not have sufficient liquidity to meet obligations—even if it has written a large volume of business on paper.
Option B is irrelevant because insurers (unlike brokers) do not receive profit-sharing commissions.
Option C is not typically a cause of financial distress since endorsements generateadditionalpremium.
Option D—discounting premiums—could affect income but would not normally create severe financial difficulty unless combined with other poor practices.
The most likely reason for early-stage financial trouble is failure to collect premiums efficiently, making A correct.
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