Actuary Certification ACTUARY Professional and Practical Applications 3 — Questions and Answers
Question 1: A property insurer wants to reflect trend in its ratemaking. Which component of trend adjusts historical premium to current rate level?
- Loss trend factor
- Premium trend factor
- On-level factor (Correct answer)
- Exposure trend factor
Correct answer: On-level factor
The on-level factor adjusts historical premiums to reflect the current rate level, accounting for rate changes since the historical period.
Question 2: Under Solvency II in the European framework, the Solvency Capital Requirement (SCR) is calibrated to:
- 99% VaR over one year
- 95% TVaR over one year
- 99.5% VaR over one year (Correct answer)
- 99.5% TVaR over one year
Correct answer: 99.5% VaR over one year
Solvency II calibrates the SCR to the 99.5th percentile Value-at-Risk over a one-year horizon, ensuring survival in 199 out of 200 years.
Question 3: When performing an asset adequacy analysis for a life insurer, the actuary tests whether assets are sufficient under various scenarios. This analysis is known as:
- Cash flow testing (Correct answer)
- Dynamic financial analysis
- Reserve adequacy testing
- Gross premium valuation
Correct answer: Cash flow testing
Cash flow testing projects asset and liability cash flows under multiple interest rate scenarios to assess asset adequacy.
Question 4: An actuary uses the loss ratio method in workers' compensation ratemaking. The indicated rate change is -5%. The current combined ratio is 108%. Which statement is most consistent?
- The insurer is currently profitable and needs a rate decrease
- The insurer is unprofitable but the method still indicates a decrease (Correct answer)
- The -5% indication means the insurer is over-reserved
- A combined ratio above 100% always triggers a rate increase
Correct answer: The insurer is unprofitable but the method still indicates a decrease
A combined ratio above 100% indicates underwriting losses, but the loss ratio method can still indicate a decrease if actual losses are below expected.
Question 5: In a defined benefit pension plan, the Projected Unit Credit (PUC) method attributes benefit costs based on:
- Level annual contributions as a percentage of salary
- Each year of service earning one unit of projected benefit (Correct answer)
- A lump sum equal to the plan's current liability
- Future salary growth applied retrospectively to all past service
Correct answer: Each year of service earning one unit of projected benefit
Under PUC, each year of service credits one additional unit of the projected final benefit, so cost reflects the incremental unit earned each year.
Question 6: An actuary produces a reserve estimate and is asked to provide a range of reasonable estimates. According to ASOP No. 36, this range should:
- Always extend from the 5th to 95th percentile of outcomes
- Reflect a reasonable range of possible outcomes, not a confidence interval (Correct answer)
- Be centered on the actuarial central estimate
- Equal the difference between optimistic and pessimistic scenarios only
Correct answer: Reflect a reasonable range of possible outcomes, not a confidence interval
ASOP No. 36 defines a reasonable range as a range of estimates that could be produced by qualified actuaries, not necessarily a statistical confidence interval.
Question 7: Which type of reinsurance agreement obligates the reinsurer to accept all risks ceded within a defined class, without individual risk selection?
- Facultative reinsurance
- Treaty reinsurance (Correct answer)
- Finite reinsurance
- Catastrophe bond
Correct answer: Treaty reinsurance
Treaty reinsurance covers an entire class of business automatically, while facultative reinsurance requires case-by-case negotiation.
Actuary Certification ACTUARY Professional and Practical Applications 3
A property insurer wants to reflect trend in its ratemaking.
Which component of trend adjusts historical premium to current rate level?