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 3 of 7

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Q21.
How does the availability of capital influence the shareholders' required return on capital?

a.

It decreases the required return due to increased competition

b.

It increases the required return due to reduced competition

c.

It has no effect on the required return

d.

It leads to unpredictable changes in the required return

Discuss
Answer: (b).It increases the required return due to reduced competition Explanation:When capital is less readily available, companies may need to offer higher returns to attract investors, leading to an increase in the required return on capital. This is because the scarcity of capital increases competition among companies for investment, resulting in higher returns being demanded by shareholders.
Q22.
Who is the final judge of what constitutes an appropriate rate of return for shareholders?

a.

The actuary

b.

The company's management

c.

The market

d.

The regulatory authorities

Discuss
Answer: (c).The market Explanation:While the actuary may make assumptions regarding the rate of return for shareholders, the market ultimately determines what is considered appropriate. The market's assessment of a company's shares, influenced by factors such as risk and investor demand, determines the rate of return required by shareholders.
Q23.
Why can't the overall rate of return from the Capital Asset Pricing Model (CAPM) be directly used as the risk discount rate in pricing models?

a.

Because it doesn't consider the market's assessment of the company's shares

b.

Because it doesn't differentiate between risky and non-risky projects

c.

Because it doesn't account for the company's long-term profitability

d.

Because it doesn't reflect the specific risks associated with individual projects

Discuss
Answer: (d).Because it doesn't reflect the specific risks associated with individual projects Explanation:The CAPM provides an overall rate of return that shareholders expect to compensate for the risks involved in investing in a company. However, this rate may not reflect the specific risks associated with individual projects or products. Therefore, it cannot be directly used as the risk discount rate in pricing models, which require consideration of project-specific risks.
Q24.
How does launching a new product with innovative design features affect the risk discount rate?

a.

It decreases the risk discount rate due to diversification benefits.

b.

It has no impact on the risk discount rate.

c.

It increases the risk discount rate to satisfy shareholders' demand for higher returns.

d.

It stabilizes the risk discount rate regardless of market conditions.

Discuss
Answer: (c).It increases the risk discount rate to satisfy shareholders' demand for higher returns. Explanation:Launching a new product with innovative design features changes the market's evaluation of the company's riskiness. This change in risk perception leads to an increased demand for higher returns from the company's shareholders. Consequently, the risk discount rate needs to be higher to satisfy this demand for higher returns.
Q25.
How does a change in the mix of business impact the market's evaluation of a company's riskiness?

a.

It reduces the demand for higher returns from shareholders.

b.

It has no effect on the market's evaluation of riskiness.

c.

It increases the risk discount rate required by shareholders.

d.

It leads to a decrease in the overall market risk premium.

Discuss
Answer: (c).It increases the risk discount rate required by shareholders. Explanation:A change in the mix of business, particularly towards new and innovative contracts, alters the perception of a company's riskiness in the market. This change results in an increased demand for higher returns from shareholders, leading to a higher risk discount rate being required to satisfy this demand.
Q26.
How does the lack of historical data affect the riskiness of a product design?

a.

It reduces the risk by providing insights into future trends.

b.

It increases the risk by making the future more uncertain.

c.

It has no impact on the riskiness of the product.

d.

It stabilizes the risk by minimizing potential fluctuations.

Discuss
Answer: (b).It increases the risk by making the future more uncertain. Explanation:The absence of historical data limits the company's ability to identify trends and patterns for future projections. This uncertainty about future outcomes increases the risk associated with the product design.
Q27.
Why do high guarantees contribute to the riskiness of a product?

a.

They decrease the potential for losses.

b.

They increase the likelihood of adverse future circumstances.

c.

They stabilize the product's performance.

d.

They reduce the need for risk management.

Discuss
Answer: (b).They increase the likelihood of adverse future circumstances. Explanation:High guarantees increase the risk of loss for the company because they commit the insurer to significant payouts, especially in adverse future circumstances. This heightened exposure to adverse events makes the product riskier.
Q28.
How do policyholder options impact the riskiness of a product?

a.

They mitigate risks by providing flexibility.

b.

They increase profits by attracting more customers.

c.

They pose a danger if not priced properly, potentially leading to significant losses.

d.

They have no effect on the profitability of the product.

Discuss
Answer: (c).They pose a danger if not priced properly, potentially leading to significant losses. Explanation:Policyholder options, if not adequately priced, can be detrimental to the company's profitability. Improperly priced options may result in unexpected losses if a large number of policyholders exercise their options, converting potential profits into significant losses.
Q29.
What effect do high overhead costs have on the riskiness of a product?

a.

They decrease the risk by ensuring higher profits.

b.

They stabilize the product's performance.

c.

They increase the risk by creating uncertainty about cost recovery.

d.

They reduce the need for financial planning.

Discuss
Answer: (c).They increase the risk by creating uncertainty about cost recovery. Explanation:High overhead costs raise concerns about the company's ability to recoup these expenses, especially if sales are lower than expected or persistency rates are low. This uncertainty about cost recovery adds to the riskiness of the product.
Q30.
How does the complexity of design impact the riskiness of a product?

a.

It decreases the risk by simplifying the product features.

b.

It has no effect on the riskiness of the product.

c.

It increases the risk by reducing the likelihood of the product being understood and sold.

d.

It stabilizes the risk by providing clear product guidelines.

Discuss
Answer: (c).It increases the risk by reducing the likelihood of the product being understood and sold. Explanation:A complex design makes it difficult for customers to understand the product, potentially leading to lower sales. This lack of understanding increases the risk associated with the product.
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