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 5 of 7

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Q41.
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.
Q42.
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.
Q43.
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.
Q44.
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.
Q45.
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.
Q46.
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.
Q47.
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.
Q48.
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.
Q49.
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.
Q50.
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.
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