CFA Level 3 Practice Exam 2025 – Complete Exam Prep

A positive interest spread for an insurance company is indicative of the difference between the interest it earns on its investments and the interest it pays to policyholders. Specifically, when the interest earned minus interest credited is greater than zero, it signifies that the company is generating more income from its investments than the amount it is obligated to pay to policyholders in the form of interest on their accounts or policies.

This positive spread is vital for an insurance company's profitability as it reflects its ability to manage investment income effectively, covering costs and generating a profit. In a situation where the spread is indeed positive, it allows the insurance company to fund operational expenses, meet reserve requirements, and contribute to surplus or profit accumulation, thus enhancing its financial stability and capacity to pay claims.

The other options do not accurately capture the significance of a positive interest spread. For instance, the idea that interest earned equals interest credited would suggest no profit is being realized from investments, while stating that interest earned is less than interest credited implies a loss on investment operations. Moreover, claiming that interest earned exceeds total liabilities does not directly relate to the specific relationship between interest earned and interest credited, which is the essential focus when discussing interest spreads.