CAS Practice Exam 2025 – Complete Study Guide

Inefficiency can have serious repercussions for an insurer's overall effectiveness, primarily reflected through its impact on operational costs and financial stability. While insolvency is a grave outcome, it can stem from a variety of inefficiencies that contribute to reduced financial performance. When an insurer operates inefficiently, it often sees an increase in operational costs without a corresponding rise in revenue, which can erode profit margins. Over time, persistent inefficiencies may accumulate losses, leading to an inability to meet obligations and ultimately resulting in insolvency.

In contrast, increased operational costs do likely occur with inefficiencies, but the impact on insolvency serves as a more severe long-term consequence. Enhancing customer loyalty and improving regulatory compliance are generally linked with efficient processes and good practices, making these options less relevant in the context of how inefficiency specifically negatively affects an insurer's effectiveness. Thus, focusing on the severe outcomes of inefficiency situates insolvency as a significant concern for insurers dealing with inefficiency in their operations.