Pricing of Products II MCQs

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

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Pricing of Products II MCQs | Page 5 of 6

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Q41.
Which profit criterion is considered the best to use in insurance?

a.

Gross profit margin

b.

Operating profit

c.

Net present value

d.

Return on investment

Discuss
Answer: (c).Net present value Explanation:Net present value is considered the best profit criterion to use in insurance. It is calculated by discounting the profit signature at the risk discount rate, providing a measure of the profitability of an insurance contract over time.
Q42.
What is the internal rate of return (IRR) in insurance?

a.

The rate at which insurance premiums increase over time

b.

The rate of return at which the discounted value of cashflows is zero

c.

The percentage of policyholders who renew their insurance policies

d.

The rate at which insurance claims are paid out by the company

Discuss
Answer: (b).The rate of return at which the discounted value of cashflows is zero Explanation:The internal rate of return (IRR) in insurance is defined as the rate of return at which the discounted value of cashflows is zero. It helps in evaluating the profitability of an insurance contract over time.
Q43.
How is the net present value (NPV) expressed in terms of the premium income of insurance companies?

a.

As a percentage of the premium income

b.

As the total sum of premium income

c.

As a fraction of the premium income

d.

As the difference between premium income and expenses

Discuss
Answer: (a).As a percentage of the premium income Explanation:The net present value (NPV) can be expressed as a percentage of the present value of the premiums that will be paid under the policy. This measure, known as profit margin, relates the profitability of the policy to the size of the market, which is often measured in terms of premium income.
Q44.
What is a limitation of using the internal rate of return (IRR) in insurance?

a.

It cannot be calculated accurately for insurance contracts

b.

It may not provide a unique rate of return if there are multiple changes in profit

c.

It always agrees with the net present value in evaluating profitability

d.

It is not affected by changes in market conditions

Discuss
Answer: (b).It may not provide a unique rate of return if there are multiple changes in profit Explanation:A limitation of using the internal rate of return (IRR) in insurance is that it may not provide a unique rate of return if there are multiple changes in profit within the profit signature. This can make it difficult to interpret the results accurately.
Q45.
What does the discounted payback period represent in insurance decision making?

a.

The duration of the insurance policy

b.

The time it takes for policyholders to recover their initial investment

c.

The time it takes for the company to recover its initial investment with interest

d.

The period over which insurance claims are paid out by the company

Discuss
Answer: (c).The time it takes for the company to recover its initial investment with interest Explanation:The discounted payback period in insurance decision making refers to the duration at which the profits generated by the policy have a present value of zero. It represents the time it takes for the company to recover its initial investment with interest at the risk discount rate.
Q46.
How is the discounted payback period typically used in insurance decision making?

a.

It is used as the prime criterion for selecting insurance products

b.

It is referenced alongside the net present value to inform product design

c.

It is used to calculate the total premium income of insurance companies

d.

It is employed to determine the commission rates for insurance agents

Discuss
Answer: (b).It is referenced alongside the net present value to inform product design Explanation:The discounted payback period is typically referenced alongside the net present value to inform product design in insurance decision making. While the net present value is the prime criterion, the discounted payback period provides additional information about the time it takes for the company to recover its initial investment.
Q47.
What are some advantages of the cash flow method in insurance pricing?

a.

It allows for easy incorporation of assumptions that vary over time

b.

It provides a simple and quick method for determining premiums

c.

It does not require consideration of reserves or solvency requirements

d.

It cannot cope with complex charging and benefit structures

Discuss
Answer: (a).It allows for easy incorporation of assumptions that vary over time Explanation:One advantage of the cash flow method in insurance pricing is that it allows for easy incorporation of assumptions that vary over time. This flexibility enables the method to adapt to changing circumstances and future projections.
Q48.
What is a limitation of the cash flow method in insurance pricing?

a.

It is less time-consuming and costly compared to the formula method

b.

It relies on unreliable data input, leading to unreliable output

c.

It allows for generalization of premium rates for all insurance products

d.

It does not require consideration of the term structure of interest rates

Discuss
Answer: (b).It relies on unreliable data input, leading to unreliable output Explanation:One limitation of the cash flow method in insurance pricing is that it relies on the accuracy and reliability of the data input. If the data used in the model is unreliable, the output generated by the model may also be unreliable, following the principle of "garbage in, garbage out."
Q49.
What are the two known methods of determination of price in insurance?

a.

Formula method and cash flow method

b.

Equation method and cash calculation method

c.

Premium method and expense method

d.

Actuarial method and projection method

Discuss
Answer: (a).Formula method and cash flow method Explanation:The two known methods of determination of price in insurance are the formula method and the cash flow method. These methods involve different approaches to calculating premiums based on various factors such as present value of benefits, expenses, and expected cash flows.
Q50.
Which equation represents the determination of price in insurance using the formula method?

a.

Present Value of Premiums (Receipts) = Present Value of Benefits (Outgo) + Present Value of Expenses (Outgo)

b.

Premium = Sum assured + Expense incurred in year t

c.

Present Value of Ps = Present Value of S + Present Value of E(t)s

d.

Premium = Sum assured - Expense incurred in year t

Discuss
Answer: (a).Present Value of Premiums (Receipts) = Present Value of Benefits (Outgo) + Present Value of Expenses (Outgo) Explanation:In the formula method of determining price in insurance, the fundamental principle is represented by the equation of value: Present Value of Premiums (Receipts) = Present Value of Benefits (Outgo) + Present Value of Expenses (Outgo). This equation reflects the balance between premiums received, benefits paid out, and expenses incurred.
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