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 4 of 7

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Q31.
Why does targeting an untested market contribute to the riskiness of a product?

a.

It reduces the risk by opening up new opportunities.

b.

It stabilizes the product's performance.

c.

Behavior in untested markets is unpredictable, increasing the product's risk.

d.

It eliminates the need for market research.

Discuss
Answer: (c).Behavior in untested markets is unpredictable, increasing the product's risk. Explanation:Untested markets pose uncertainty about customer behavior and preferences, making it challenging to predict product demand and performance. This unpredictability increases the risk associated with introducing a product to such markets.
Q32.
How is the risk discount rate determined for different products?

a.

By using a fixed rate for all products regardless of their risk levels.

b.

By assessing the risk-free rate and adding an allowance for the specific product's riskiness.

c.

By relying solely on short-term government bond yields.

d.

By adjusting the rate based on market fluctuations.

Discuss
Answer: (b).By assessing the risk-free rate and adding an allowance for the specific product's riskiness. Explanation:The risk discount rate is determined by evaluating the risk-free rate and then adjusting it to account for the specific risk associated with each product being sold. This approach considers the unique risk profile of each product in determining its appropriate risk discount rate.
Q33.
What is the relationship between the risk discount rate and the risk-free rate?

a.

The risk discount rate is always lower than the risk-free rate.

b.

The risk discount rate must be higher than the risk-free rate.

c.

The risk discount rate remains constant regardless of changes in the risk-free rate.

d.

The risk discount rate is unaffected by market interest rates.

Discuss
Answer: (b).The risk discount rate must be higher than the risk-free rate. Explanation:The risk discount rate, used to assess the risk associated with a product, must be higher than the risk-free rate to compensate for the additional risk. Changes in market interest rates may cause fluctuations in the risk discount rate to reflect changes in overall risk.
Q34.
How should the risk discount rates for different products be determined?

a.

By maintaining a fixed rate for all products to ensure consistency.

b.

By setting rates arbitrarily without considering the relative risk of each product.

c.

By adjusting rates to reflect the relative risk of each product.

d.

By disregarding product-specific risks and focusing solely on market trends.

Discuss
Answer: (c).By adjusting rates to reflect the relative risk of each product. Explanation:The risk discount rates for different products should be determined by adjusting the rates to reflect the relative risk associated with each product. This ensures that the pricing adequately accounts for the varying levels of risk across different products.
Q35.
What is the purpose of profit criteria in pricing a product?

a.

To ensure that the product generates maximum revenue.

b.

To meet regulatory requirements for profit margins.

c.

To set a benchmark for the return on capital and overall profitability.

d.

To minimize the impact of market fluctuations on pricing decisions.

Discuss
Answer: (c).To set a benchmark for the return on capital and overall profitability. Explanation:Profit criteria are used to establish a benchmark for the return on capital and overall profitability of a product. This helps ensure that the price charged for the product generates satisfactory profits given the underlying assumptions and risks.
Q36.
How does the gross premium valuation method calculate reserves for life insurance liabilities?

a.

By subtracting cash inflow from cash outflow and discounting the result.

b.

By considering only future cashflows and projecting them forward till the end of the policy term.

c.

By using historical data to estimate future liabilities and premiums.

d.

By allocating a fixed percentage of premiums as reserves.

Discuss
Answer: (b).By considering only future cashflows and projecting them forward till the end of the policy term. Explanation:The gross premium valuation method calculates reserves by considering only future cashflows, including benefit payments, expenses, and commissions, and projecting them forward until the end of the policy term. These cashflows are then discounted using a valuation interest rate.
Q37.
Which method is typically used for calculating reserves of life insurance liabilities in India?

a.

Net premium valuation method

b.

Gross premium valuation method

c.

Gross profit valuation method

d.

Discounted cash flow valuation method

Discuss
Answer: (b).Gross premium valuation method Explanation:In India, the gross premium valuation method is used to calculate reserves for life insurance liabilities. This method is specified by regulations and involves calculating reserves based on present values of net cash outflows.
Q38.
When calculating reserves using the gross premium valuation method, which cashflows are considered?

a.

Only past cashflows

b.

Only current cashflows

c.

Only future cashflows

d.

All cashflows regardless of timing

Discuss
Answer: (c).Only future cashflows Explanation:When using the gross premium valuation method, only future cashflows are considered for calculating reserves. Past and current cashflows are not included in the calculation, and only future liabilities and premiums are projected forward till the end of the policy term.
Q39.
How are reserves calculated for life insurance policies?

a.

Reserves are calculated collectively for all policies.

b.

Reserves are calculated based on past cashflows only.

c.

Reserves are calculated policy by policy as per regulation.

d.

Reserves are calculated without considering guaranteed outflows.

Discuss
Answer: (c).Reserves are calculated policy by policy as per regulation. Explanation:Reserves for life insurance policies are calculated individually for each policy as per regulation. This ensures that each policy's liabilities are accurately accounted for.
Q40.
What is the purpose of the "Margin for adverse deviation" (MAD) used in reserving?

a.

To underestimate liabilities and minimize reserves.

b.

To overestimate liabilities and maximize reserves.

c.

To provide a buffer against adverse future experience.

d.

To inflate the valuation interest rate for higher returns.

Discuss
Answer: (c).To provide a buffer against adverse future experience. Explanation:The "Margin for adverse deviation" (MAD) used in reserving is intended to provide a buffer against adverse future experience. It ensures that reserves are prudently calculated to guard against unexpected losses or unfavorable conditions.
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