Risk Assessment Flashcards
7 cards from real Actuary Certification practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment flashcards as text
When fitting a loss severity model, a goodness-of-fit test rejects the lognormal distribution in favor of the Burr distribution. The Burr distribution is preferred because it:
Answer: Provides a more flexible tail shape through an additional shape parameter
The Burr distribution adds a second shape parameter compared to lognormal, giving it greater flexibility to fit heavy tails and varying skewness seen in casualty loss data.
What is 'parameter risk' in the context of actuarial model uncertainty?
Answer: Uncertainty in the estimated parameter values due to limited historical data
Parameter risk reflects sampling error — even if the model structure is correct, finite historical data produces estimated parameters that may differ from true population values.
An actuary applies the Bornhuetter-Ferguson (B-F) method to estimate IBNR. What key advantage does B-F have over the chain-ladder method?
Answer: B-F blends expected losses with actual emergence, reducing sensitivity to early volatile development
The B-F method weights expected losses (from an a priori loss ratio) with actual emerged losses, making it more stable than pure chain-ladder when early development data is sparse or volatile.
Which concept describes the risk that a counterparty to a financial contract will fail to fulfill its obligations, directly impacting an insurer's asset portfolio?
Answer: Credit risk (counterparty risk)
Credit (counterparty) risk is the risk of financial loss due to a counterparty's inability to meet contractual obligations, affecting bond holdings, reinsurance recoverables, and derivatives.
In enterprise risk management, what is the 'risk appetite statement' used for?
Answer: Articulating the types and levels of risk the company is willing to accept in pursuing its strategy
A risk appetite statement formally communicates senior management's and the board's willingness to accept specific types and magnitudes of risk in pursuit of business objectives.
The 'aggregate loss distribution' for a portfolio with stochastic claim frequency N and stochastic claim severity X is denoted S = X₁ + X₂ + ... + X_N. Which approach uses moment generating functions to derive the distribution of S?
Answer: The compound distribution MGF method
The MGF of the aggregate loss S = Σ Xᵢ can be derived analytically as M_S(t) = M_N(ln M_X(t)) when frequency and severity are independent, using the compound distribution MGF formula.
A 'catastrophe load' is added to insurance premiums primarily to:
Answer: Build margin for infrequent but severe events that distort expected loss ratios
Catastrophe loads ensure premiums reflect the long-run expected cost of rare, severe events (hurricanes, earthquakes) that may not appear in recent historical data but represent real expected losses.