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
What is 'duration mismatch' risk for a property-casualty insurer, and why is it a concern?
Answer: Assets have longer duration than liabilities, exposing surplus to interest rate increases
If an insurer's fixed-income asset portfolio has longer duration than its loss reserve liabilities, a rise in interest rates will reduce asset values more than liability values, eroding surplus.
In the context of health insurance risk, what is 'adverse selection' and how do insurers typically mitigate it?
Answer: High-risk individuals disproportionately seek coverage; mitigated through underwriting, waiting periods, and risk pooling mechanisms
Adverse selection arises because individuals with greater risk are more likely to purchase insurance, skewing the insured pool; underwriting and risk classification help insurers price this appropriately.
Which of the following is an example of 'model risk' in actuarial practice?
Answer: Using a compound Poisson model when claims actually have negative binomial frequency
Model risk arises when the chosen mathematical model structure does not accurately represent the underlying loss-generating process, leading to systematic mispricing or misreserving.
The 'expected policyholder deficit' (EPD) ratio is used to measure insurer solvency by calculating:
Answer: The expected amount by which liabilities exceed assets at ruin, divided by total liabilities
EPD measures the expected shortfall to policyholders if the insurer becomes insolvent — it equals the probability-weighted deficit at failure divided by total liabilities, serving as a risk-adjusted solvency metric.
In a workers' compensation pricing analysis, an actuary applies 'trend factors' to historical losses. What does loss development trending correct for?
Answer: Changes in claim costs over time due to wage inflation, medical cost trends, and legal environment shifts
Trend factors adjust historical losses to reflect current and future cost levels, accounting for inflation in wages, medical expenses, and changes in the legal/regulatory environment affecting claim values.
What is the key difference between 'process risk' and 'parameter risk' in stochastic loss modeling?
Answer: Process risk is inherent randomness in outcomes even with perfectly known parameters; parameter risk is uncertainty in the parameter estimates themselves
Process risk is irreducible randomness in actual outcomes (even with true parameters known), while parameter risk stems from estimating model parameters from finite, imperfect data.
Under the Own Risk and Solvency Assessment (ORSA) framework required by NAIC, what is an insurer primarily required to demonstrate?
Answer: That the company understands its risk profile and holds sufficient capital relative to its own risk assessment
ORSA requires insurers to internally assess their risk profile, quantify capital needs relative to those risks, and demonstrate prospective solvency under stressed conditions to regulators.