Actuary Certification Regulation 3 — Questions and Answers
Question 1: Under the Standard Valuation Law (SVL), what approach does the Principle-Based Reserving (PBR) framework use for life insurance reserves?
- Fixed formula factors only
- A blend of stochastic and deterministic modeling reflecting company-specific risks (Correct answer)
- The highest of 12 prescribed reserve methods
- A flat percentage of face amount
Correct answer: A blend of stochastic and deterministic modeling reflecting company-specific risks
PBR uses company-specific assumptions, stochastic modeling, and deterministic scenarios to determine reserves that better reflect the actual risks of the products being valued.
Question 2: An actuary who discovers a material error in a previously submitted actuarial opinion has an obligation under the Code of Professional Conduct to:
- Immediately resign from the engagement
- Take reasonable steps to correct or withdraw the erroneous opinion (Correct answer)
- Keep the error confidential to protect the client
- File a complaint with the state insurance department
Correct answer: Take reasonable steps to correct or withdraw the erroneous opinion
Precept 8 of the Code of Professional Conduct requires actuaries to take reasonable steps to ensure that actuarial communications are not misrepresented or used inappropriately.
Question 3: Which of the following best describes the concept of 'regulatory surplus' in property-casualty insurance?
- The amount by which admitted assets exceed total liabilities as measured under statutory accounting principles (Correct answer)
- The difference between GAAP equity and market value of investments
- The reinsurance recoverables minus ceded premiums
- The amount of premium collected but not yet earned
Correct answer: The amount by which admitted assets exceed total liabilities as measured under statutory accounting principles
Regulatory surplus under statutory accounting is the excess of admitted assets over total liabilities, representing the insurer's financial cushion under insurance regulatory standards.
Question 4: The McCarran-Ferguson Act of 1945 granted primary regulatory authority over insurance to:
- The federal government through the Commerce Clause
- State governments, exempting most insurance activities from federal antitrust laws (Correct answer)
- The NAIC as a quasi-federal regulatory body
- The Treasury Department through the OFR
Correct answer: State governments, exempting most insurance activities from federal antitrust laws
McCarran-Ferguson affirmed state regulation of insurance and provided a limited antitrust exemption for the business of insurance when regulated by state law.
Question 5: Under the Affordable Care Act (ACA), what is the medical loss ratio (MLR) requirement for large group health insurers?
- At least 70% of premiums must be spent on medical claims and quality improvement
- At least 80% of premiums must be spent on medical claims and quality improvement
- At least 85% of premiums must be spent on medical claims and quality improvement (Correct answer)
- At least 90% of premiums must be spent on medical claims and quality improvement
Correct answer: At least 85% of premiums must be spent on medical claims and quality improvement
The ACA requires large group health insurers to spend at least 85% of premium revenue on medical claims and quality improvement activities, or rebate the difference.
Question 6: Which actuarial standard addresses the use of models in actuarial practice?
- ASOP No. 25
- ASOP No. 38
- ASOP No. 56 (Correct answer)
- ASOP No. 12
Correct answer: ASOP No. 56
ASOP No. 56, Modeling, provides guidance on the use of models in actuarial work, including model governance, validation, and documentation.
Question 7: When a state insurance department places an insurer into receivership, who typically acts as the receiver?
- The NAIC directly manages the receivership
- The state insurance commissioner or a designee appointed by the court (Correct answer)
- Federal bankruptcy trustees
- The insurer's board of directors under court supervision
Correct answer: The state insurance commissioner or a designee appointed by the court
In insurance insolvency, state insurance commissioners (or their designees) serve as the receiver under state insurance insolvency statutes, not federal bankruptcy courts.
Actuary Certification Regulation 3
Under the Standard Valuation Law (SVL), what approach does the Principle-Based Reserving (PBR) framework use for life insurance reserves?