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.
Why is it important to include margins in insurance pricing?

a.

To maximize profits for the company

b.

To minimize regulatory constraints

c.

To reduce the financial risk from adverse future experience

d.

To attract more customers to purchase policies

Discuss
Answer: (c).To reduce the financial risk from adverse future experience Explanation:Including margins in insurance pricing is crucial to reduce the financial risk stemming from adverse future experience. These margins act as a safety net, helping the insurer withstand unexpected events and maintain stability in its operations.
Q26.
Which approach can be used to incorporate margins in a formula model for insurance pricing?

a.

Using a stochastic approach

b.

Adjusting the risk discount rate

c.

Including margins in the expected values

d.

Adjusting the policyholder premiums

Discuss
Answer: (c).Including margins in the expected values Explanation:In a formula model for insurance pricing, margins can be incorporated by including them in the expected values of the assumptions. This method helps account for potential risks and uncertainties in a straightforward manner.
Q27.
How do margins contribute to reducing the risk for insurance companies?

a.

By increasing the policyholder premiums

b.

By providing additional profits to the company

c.

By minimizing the impact of adverse future experience

d.

By reducing the need for regulatory compliance

Discuss
Answer: (c).By minimizing the impact of adverse future experience Explanation:Margins in insurance pricing serve to minimize the impact of adverse future experience, thereby reducing the financial risk for insurance companies. They help ensure that the company remains financially resilient and capable of fulfilling its obligations to policyholders.
Q28.
Which approach involves incorporating margins in the assumptions for each individual parameter?

a.

Approach 1: Using margins in the expected value

b.

Approach 2: Using a stochastic approach

c.

Approach 3: Using the risk element of the risk discount rate

d.

All of the above

Discuss
Answer: (a).Approach 1: Using margins in the expected value Explanation:Approach 1 entails incorporating margins directly into the assumptions for each parameter, such as investment returns and mortality rates. This method aims to reduce the risk from adverse future experience by adjusting the expected values with margins.
Q29.
How is the investment returns assumption adjusted to include a margin?

a.

Subtracting the margin from the best estimate investment return

b.

Adding the margin to the best estimate investment return

c.

Multiplying the margin by the best estimate investment return

d.

Dividing the best estimate investment return by the margin

Discuss
Answer: (a).Subtracting the margin from the best estimate investment return Explanation:The pricing investment return (Ip) is calculated by subtracting the margin from the best estimate investment return (Ib). This adjustment accounts for the potential variability in actual investment returns compared to the expected values.
Q30.
Why is a margin taken in mortality assumptions?

a.

To increase the probability of lower actual deaths than expected

b.

To decrease the probability of higher actual deaths than expected

c.

To maintain a balance between competitive premiums and risk

d.

All of the above

Discuss
Answer: (c).To maintain a balance between competitive premiums and risk Explanation:Margin is included in mortality assumptions, particularly for products with significant death benefits, to strike a balance between offering competitive premiums and managing the risk of adverse future experience.
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