Premium Bases Margins MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Premium Bases Margins, 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 Margins 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 Margins mcq questions that explore various aspects of Premium Bases Margins problems. Each MCQ is crafted to challenge your understanding of Premium Bases Margins 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 Margins MCQs are your pathway to success in mastering this essential IC 92 Actuarial Aspects of Product Development topic.

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Premium Bases Margins MCQs | Page 1 of 7

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Q1.
How does an actuary guard against the risk of underestimating mortality in insurance pricing?

a.

By assuming mortality rates lower than best estimates

b.

By selecting the riskiest percentile for pricing

c.

By using a lower risk discount rate

d.

By relying solely on historical mortality data

Discuss
Answer: (a).By assuming mortality rates lower than best estimates Explanation:To guard against the risk of underestimating mortality, an actuary assumes mortality rates higher than best estimates, incorporating margins into the assumptions.
Q2.
What crucial factors determine the size of margins required for pricing in insurance?

a.

The popularity of the insurance product

b.

The complexity of the insurance policy terms

c.

The degree of risk associated with each parameter

d.

The demographic characteristics of the insured population

Discuss
Answer: (c).The degree of risk associated with each parameter Explanation:The size of margins required for pricing in insurance heavily depends on the degree of risk associated with each parameter used in the pricing model.
Q3.
How are margins adjusted in practical scenarios for insurance pricing?

a.

Adjusting individual parameter assumptions followed by risk discount rate adjustment

b.

Direct adjustment to the risk discount rate

c.

Utilizing only the stochastic approach for all parameters

d.

Ignoring risk considerations during pricing

Discuss
Answer: (a).Adjusting individual parameter assumptions followed by risk discount rate adjustment Explanation:In practical scenarios, margins are adjusted by first modifying individual parameter assumptions to account for risks, followed by the application of the risk discount rate to discount cash flows.
Q4.
Why has the use of the second approach, involving probability distributions, increased in insurance pricing?

a.

Due to decreased technological advancements

b.

To simplify the pricing process for actuaries

c.

Because of the ease of running scenarios with technological advancements

d.

To minimize the influence of individual parameter assumptions

Discuss
Answer: (c).Because of the ease of running scenarios with technological advancements Explanation:The use of the second approach, involving probability distributions, has increased in insurance pricing due to advancements in technology, making it easier to run multiple scenarios quickly.
Q5.
What is the primary consideration in deriving a suitable risk discount rate for insurance pricing models?

a.

The historical investment performance of the insurance company

b.

The expected rate of return demanded by shareholders

c.

The company's market share in the insurance industry

d.

The current economic conditions

Discuss
Answer: (b).The expected rate of return demanded by shareholders Explanation:The primary consideration in deriving a suitable risk discount rate for insurance pricing models is the expected rate of return demanded by shareholders on the capital they invest in the insurance company.
Q6.
Why do investors demand a higher expected rate of return from risky investments compared to safe investments?

a.

To encourage companies to invest in high-risk ventures

b.

To compensate for the risks of default and commercial failure

c.

To stabilize the financial markets

d.

To discourage investment in safer assets

Discuss
Answer: (b).To compensate for the risks of default and commercial failure Explanation:Investors demand a higher expected rate of return from risky investments compared to safe investments to compensate for the risks of default, commercial failure, and other uncertainties associated with such investments.
Q7.
What is the concept of the "risk-free" asset in economic theory?

a.

An asset with the highest possible return

b.

An asset that is completely immune to market fluctuations

c.

An asset that offers a certain return free from all risk of default

d.

An asset that guarantees a fixed rate of return

Discuss
Answer: (c).An asset that offers a certain return free from all risk of default Explanation:In economic theory, the "risk-free" asset refers to an asset that offers a certain return free from all risk of default, providing investors with a stable investment option.
Q8.
What is the primary purpose of the Capital Asset Pricing Model (CAPM)?

a.

To predict the future performance of individual stocks

b.

To evaluate the overall risk associated with investing in the stock market

c.

To determine the appropriate risk premium for investing in specific companies

d.

To identify the most profitable investment opportunities

Discuss
Answer: (b).To evaluate the overall risk associated with investing in the stock market Explanation:The primary purpose of the Capital Asset Pricing Model (CAPM) is to evaluate the overall risk associated with investing in the stock market by considering systematic or non-specific risks.
Q9.
According to the CAPM, what risks are considered when determining the appropriate risk premium for investing in a life insurance company?

a.

Only risks specific to the insurance industry

b.

Only risks specific to individual insurance companies

c.

Systematic or non-specific risks inherent in the stock market

d.

Both systematic risks and specific risks of individual companies

Discuss
Answer: (c).Systematic or non-specific risks inherent in the stock market Explanation:According to the Capital Asset Pricing Model (CAPM), the appropriate risk premium for investing in a life insurance company considers systematic or non-specific risks inherent in the stock market, rather than risks specific to individual companies.
Q10.
What are margins in the context of insurance pricing and reserving?

a.

Additional profits earned by the company

b.

Extra cushion used to minimize the impact of risk from adverse future experience

c.

Premiums paid by policyholders

d.

Administrative expenses of the company

Discuss
Answer: (b).Extra cushion used to minimize the impact of risk from adverse future experience Explanation:Margins in insurance refer to the additional amount added to estimated assumptions during pricing and reserving to mitigate the risk from adverse future experience. They provide a buffer against uncertainties and help ensure financial stability for the insurer.
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