Premium Bases Interest Rate MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Premium Bases Interest Rate, a fundamental topic in the field of IC 92 Actuarial Aspects of Product Development. Whether you're preparing for competitive exams, honing your problem-solving skills, or simply looking to enhance your abilities in this field, our Premium Bases Interest Rate MCQs are designed to help you grasp the core concepts and excel in solving problems.

In this section, you'll find a wide range of Premium Bases Interest Rate mcq questions that explore various aspects of Premium Bases Interest Rate problems. Each MCQ is crafted to challenge your understanding of Premium Bases Interest Rate principles, enabling you to refine your problem-solving techniques. Whether you're a student aiming to ace IC 92 Actuarial Aspects of Product Development tests, a job seeker preparing for interviews, or someone simply interested in sharpening their skills, our Premium Bases Interest Rate MCQs are your pathway to success in mastering this essential IC 92 Actuarial Aspects of Product Development topic.

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Premium Bases Interest Rate MCQs | Page 6 of 9

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Q51.
Why is the expected time between changes to the company’s pricing basis for a contract important in establishing the investment assumption?

a.

It affects the level of reserves built up

b.

It influences the intended investment mix for the contract

c.

It impacts the degree of mismatching between assets and liabilities

d.

It determines the likelihood of changes in future investment returns

Discuss
Answer: (d).It determines the likelihood of changes in future investment returns Explanation:The expected time between changes to the company’s pricing basis for a contract affects the likelihood of changes in future investment returns, which is important in establishing the investment assumption.
Q52.
What is an important consideration when determining the likely future return of the investment mix for the contract?

a.

Current return on the investments within the mix

b.

The degree of mismatching between assets and liabilities

c.

The expected time between changes to the company’s pricing basis

d.

The level of reserves built up

Discuss
Answer: (a).Current return on the investments within the mix Explanation:Investigating the current return on the investments within the mix is an important consideration when determining the likely future return of the investment mix for the contract.
Q53.
Why is the intended investment mix for a contract affected by the level of free assets or capital available to the company?

a.

Free assets determine the level of new business strain

b.

More free assets allow for a less risky investment strategy

c.

Less free assets require more matching to control investment risk

d.

All of the above

Discuss
Answer: (d).All of the above Explanation:The intended investment mix for a contract is affected by the level of free assets or capital available to the company because free assets determine the level of new business strain, allow for a less risky investment strategy, and require more matching to control investment risk when they are less.
Q54.
What is the purpose of using interest rate models and equity pricing models in estimating likely future returns?

a.

To ensure precise estimation for interest sensitive products

b.

To reduce the level of new business strain

c.

To increase the level of free assets

d.

To simplify the estimation process

Discuss
Answer: (a).To ensure precise estimation for interest sensitive products Explanation:Interest rate models and equity pricing models are used to ensure precise estimation for interest sensitive products, allowing for accurate determination of likely future returns.
Q55.
How do complex stochastic models contribute to the estimation of likely future returns?

a.

They simplify the estimation process

b.

They provide a basic starting point for estimation

c.

They allow for precise estimation for non-interest sensitive products

d.

They enable precise estimation by considering various possible future scenarios

Discuss
Answer: (d).They enable precise estimation by considering various possible future scenarios Explanation:Complex stochastic models contribute to the estimation of likely future returns by enabling precise estimation through consideration of various possible future scenarios.
Q56.
What is interest rate risk in the context of insurance firms?

a.

The risk of earning more return than expected

b.

The risk of earning less return than expected

c.

The risk of policy claims exceeding premium income

d.

The risk of policy surrenders exceeding policy claims

Discuss
Answer: (b).The risk of earning less return than expected Explanation:Interest rate risk in the context of insurance firms refers to the risk of earning less return than expected while pricing the product, which could lead to significant losses if the product is interest rate sensitive.
Q57.
How does falling interest rates impact the reinvestment risk for insurance companies?

a.

Falling interest rates decrease reinvestment risk

b.

Falling interest rates increase reinvestment risk

c.

Falling interest rates have no impact on reinvestment risk

d.

Falling interest rates eliminate reinvestment risk

Discuss
Answer: (b).Falling interest rates increase reinvestment risk Explanation:Falling interest rates increase reinvestment risk for insurance companies because when net cash flows are positive, the reinvestment of these cash flows will occur at rates lower than the initial rates, leading to potential losses.
Q58.
In response to low interest rates, what strategy do insurance companies often employ to attract buyers?

a.

Issuing high fixed-interest rate products

b.

Issuing low fixed-interest rate products

c.

Issuing unit-linked products and interest-sensitive products

d.

Reducing the guaranteed rate of interest on policies

Discuss
Answer: (c).Issuing unit-linked products and interest-sensitive products Explanation:In response to low interest rates, insurance companies often employ the strategy of issuing unit-linked products and interest-sensitive products to attract buyers, as high fixed-interest products become costly to issue and low fixed-interest rate products may not be attractive to potential buyers.
Q59.
How do insurance companies mitigate the risk of interest rate fluctuations affecting their investments and liabilities?

a.

By issuing policies with guaranteed rates of interest

b.

By investing only in equities to maximize returns

c.

By borrowing funds to cover cash shortages

d.

By properly managing the differential between investment returns and policy payouts

Discuss
Answer: (d).By properly managing the differential between investment returns and policy payouts Explanation:Insurance companies mitigate the risk of interest rate fluctuations affecting their investments and liabilities by properly managing the differential between what they earn on their investments and what they pay out on policies, ensuring that there is no mismatch between earnings and payouts.
Q60.
What is disintermediation risk in the context of insurance?

a.

The risk of funds being withdrawn from low-yield investments to invest in higher-yield instruments

b.

The risk of funds being invested in low-yield instruments instead of higher-yield investments

c.

The risk of funds being reinvested in the same low-yield investment

d.

The risk of funds being invested in high-yield instruments without withdrawing from low-yield investments

Discuss
Answer: (a).The risk of funds being withdrawn from low-yield investments to invest in higher-yield instruments Explanation:Disintermediation risk refers to the risk that policy owners will withdraw funds from low-yield investments, such as fixed accounts, to invest in higher-yielding instruments, potentially accelerating asset sales and leading to financial losses.
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