LOMA 308 Module 2 Exam
Questions and Answers All
Correct
The Amber Insurance Company is designing a new life insurance product and has
identified two important risks associated with the product:
A. The risk that inflation rates will increaseB. The risk that the bonds used to back the
product will default
Amber will be able to diversify
Both Risk A and Risk B
Risk A only
Risk B only
Neither Risk A nor Risk B - Answer-Risk B Only - Bond defaults (Risk B) are
diversifiable risks because default is specific to an individual asset or issuer. Inflation
(Risk A) is nondiversifiable because it affects all assets in an economy.
Zenith Insurance Company's actuary used experience data to determine the cost of
providing surrender benefits under a new whole life insurance policy. Experience data
can correctly be defined as
A projection of the future movements of specified variables based on historical patterns
Data about the past behavior of certain variables
A prediction of how certain variables will behave if conditions change over time
A random set of values that fall into defined ranges or time periods - Answer-data about
past behavior of certain variables - Experience data is internal proprietary data about
the past behavior of specified variables. Trend analysis provides a projection of the
future movements of variables based on historical patterns, and modeling provides
projections of how variables will behave if conditions change over time. A random
sample is a set of values that fall into defined ranges or time periods.
The Crestwood Insurance Company is designing a new final expense term life
insurance policy that will provide a $20,000 death benefit. Crestwood's actuaries looked
at various mortality tables and determined that it could expect to pay benefits on 12
policies per year over the next 10 years. The cost of death benefits for Crestwood's
policy for a given year is equal to
$20,000
$200,000
$240,000
,$2,400,000 - Answer-240 k - The cost of a policy's death benefit for a given year is
equal to the benefit amount payable x number of insureds expected to die during the
year. Crestwood's policy offers a $20,000 death benefit, and Crestwood expects to pay
12 benefits each year, for a total of $240,000 each year. $20,000 is the amount of a
single benefit; $200,000 is 10 times the stated death benefit; and $2,400,000 is the total
amount payable over the entire 10-year period.
Insurers often use basis points (bps) to determine explicit charges on variable insurance
products. One basis point is equal to
A. 1/100th of 1 percent of contract value
B. 1/10th of 1 percent of contract value
C. 10 percent of contract value
D. 100 percent of contract value - Answer-A. - A basis point (bp) is equal to 1/100th of 1
percent, or 0.0001.
In the context of financial modeling, dependent variables are
A. Always single values
B. Projected future results produced by processing input variables
C. Measures of real-world financial values
D. Responsible for changes in independent variables - Answer-B. - The dependent
variables in a financial model represent the projected future values produced by
processing independent (input) variables. They can be single values or a listing of all
possible values in a data set. Because they change in response to changes in input
variables, they represent expected rather than real-world financial values.
When the Danbury Insurance Company designed a new life insurance product it
assumed that revenues for the product would be 8 percent of invested assets, mortality
rates for the product would be 80 percent of an industry table, and administrative
expenses would be 5 percent of premium. At the end of the first year, Danbury
evaluated the product's performance and found that product revenues were 10 percent,
mortality rates were 79 percent, and administrative expenses were 6 percent. The
deviations Danbury experienced were
A. Favorable for revenues, but adverse for benefits and expenses
B. Favorable for revenues and mortality, but adverse for expenses
C. Adverse for revenues, but favorable for benefits and expenses
D. - Adverse for revenues and benefits, but favorable for expenses - Answer-B. -
Deviations in revenues and mortality are favorable because actual revenues (10
percent) were higher than assumed revenues (8 percent), and actual mortality (79
percent) was lower than assumed mortality (80 percent). The deviation in expenses was
adverse because actual expenses (6 percent) were higher than assumed expenses (5
percent).
Asset-liability management - Answer-To remain solvent and comply with regulatory
requirements, life insurers need a way to ensure that the value of the company's asset
portfolio (its investments) always exceeds the value of its liability portfolio (its obligations
to customers). In other words, they need to manage their assets and liabilities.
,Insurers accomplish this task by means of an asset-liability management (ALM) system
that allows the company to
Manage the asset portfolio and the liability portfolio on an integrated basis.
Coordinate investment and liability administration and risk management activities.
Maintain an acceptable level of risk and take advantage of opportunities to generate
returns. One of the primary strategies ALM uses to manage risks is diversification.
Although the actual applications of ALM are complex, ALM has become a day-to-day
risk management activity for many insurance companies.
Risk Control Process - Answer-A risk control process includes processes and practices
that support an organization's specific risk control efforts.
Strategic Risk Management Process - Answer-Strategic risk management processes
reflect the company's strategic choices for managing risks.
Catastrophic Risk Management Process - Answer-Catastrophic risk management
processes identify and address extreme events, such as a cyber attack that destroys
company records, a natural disaster that generates an extreme number of claims, or a
stock market crash that threatens the company's solvency.
Risk Management Culture - Answer-A risk management culture automatically
incorporates risk management approaches into all company decisions.
The Risk Control Process - Answer-Although an effective ERM program should include
all of the components, the risk control process is especially important because it's where
a company takes the steps necessary to limit its risk exposures. A typical risk control
process consists of four basic steps:
Identify: Managers identify risk exposures for all areas of the organization. ERM focuses
not only on risks that threaten an organization's viability, but also risks that have the
potential to enhance the company's profitability.
Evaluate: Managers evaluate and prioritize each of the identified risks according to their
importance to the company. Most insurers have a distinct set of priority risks. (More
details about priority risks are below.)
- market risk
- business risk
- credit risk
- operational risk
- pricing risl
Monitor: Specific managers are accountable for monitoring and actively managing each
risk and for communicating the status of top priority risks to company officers.
, Take Action: Managers assign limits to specified risks and implement an action plan for
each priority risk. Action can involve avoiding, controlling, accepting, or transferring the
risk.
Mandatory Risk Assessments - Answer-In the wake of the near collapse of the
American International Group (AIG) holding company in 2008, the National Association
of Insurance Commissioners (NAIC) launched a Solvency Modernization Initiative (SMI)
that focused on
Capital requirements
Group governance and risk management supervision
Statutory accounting
Financial reporting
Reinsurance
In 2011, the NAIC introduced a new solvency regulation—The Risk Management and
Own Risk and Solvency Assessment (ORSA) Model Act—to support the initiative.
The Model Act and ORSA - Answer-The Model Act has two main goals:
To foster an effective level of ERM at all insurers to help them identify, assess, monitor,
prioritize, and report on material and relevant risks that could impact their ability to meet
obligations to policyowners. These risks include underwriting, credit, market,
operational, and liquidity risks.
To provide a group-level perspective on risk and capital in addition to the existing legal
entity view.
The Model Act requires all large and medium-sized insurers to evaluate the adequacy of
their risk management programs and their current and future solvency positions under
normal and severe stress scenarios.
To ensure its continuing solvency, the Acme Insurance Company implemented a
program that allowed the company to coordinate all of its administrative and risk
management activities and ensure that the value of its invested assets always exceeds
the value of its obligations to customers. This program is known as
Enterprise Risk Management (ERM)
A Catastrophic Risk Management program
Asset-Liability Management (ALM)
A Solvency Modernization Initiative (SMI) - Answer-ALM- is designed to help insurers
manage risks and returns by coordinating the administration of company assets
(investments) and liabilities (obligations to customers). ERM is an enterprise-wide
program designed to help companies identify and quantify significant risks and manage
them in a single framework. Catastrophic Risk Management is an ERM component
designed to help companies identify and address extreme events that can affect
company solvency. The Solvency Modernization Initiative (SMI) is a program created by
the NAIC.
