CAS Risk Assessment and Management 2 — Questions and Answers
Question 1: Which risk measure is defined as the expected loss given that the loss exceeds a specified threshold?
- Value at Risk (VaR)
- Tail Value at Risk (TVaR) (Correct answer)
- Standard deviation
- Coefficient of variation
Correct answer: Tail Value at Risk (TVaR)
TVaR (also called CVaR or Expected Shortfall) is the expected loss conditional on the loss exceeding the VaR threshold.
Question 2: A risk with low frequency and high severity is best handled through which risk management technique?
- Risk retention
- Loss prevention programs
- Risk transfer via insurance (Correct answer)
- Risk avoidance
Correct answer: Risk transfer via insurance
Low-frequency, high-severity risks are prime candidates for insurance transfer because catastrophic losses are rare but devastating when they occur.
Question 3: In enterprise risk management (ERM), 'risk appetite' refers to:
- The maximum possible loss an organization could sustain
- The amount of risk an organization is willing to accept in pursuit of its objectives (Correct answer)
- The historical average loss of an organization
- The regulatory minimum capital requirement
Correct answer: The amount of risk an organization is willing to accept in pursuit of its objectives
Risk appetite is the level of risk an organization's board and management are willing to accept while pursuing strategic goals.
Question 4: Which of the following best describes 'parameter risk' in actuarial modeling?
- Uncertainty arising from random variation in the underlying loss process
- Uncertainty due to incorrectly specified model structure
- Uncertainty in the estimated values of model parameters (Correct answer)
- Uncertainty caused by operational errors in data entry
Correct answer: Uncertainty in the estimated values of model parameters
Parameter risk is the uncertainty that arises because model parameters must be estimated from finite data and may not equal their true population values.
Question 5: A reinsurance treaty that pays losses exceeding $500,000 per occurrence up to $2,000,000 is called:
- Quota share treaty
- Surplus share treaty
- Per-occurrence excess of loss (Correct answer)
- Aggregate stop-loss
Correct answer: Per-occurrence excess of loss
Per-occurrence excess of loss (XL) reinsurance attaches at a retention level and covers losses above it up to a limit on an event-by-event basis.
Question 6: Which correlation coefficient value between two risks results in the GREATEST diversification benefit in a portfolio?
- +1.0
- +0.5
- 0.0
- -1.0 (Correct answer)
Correct answer: -1.0
Perfect negative correlation (-1.0) means losses in one risk are exactly offset by gains in another, providing maximum diversification and the lowest combined variance.
Question 7: Under the CAS ERM framework, 'risk tolerance' differs from 'risk appetite' in that risk tolerance is:
- A broader strategic statement
- The maximum acceptable variation around risk appetite targets (Correct answer)
- The total risk capacity of the firm
- The regulatory capital requirement
Correct answer: The maximum acceptable variation around risk appetite targets
Risk tolerance defines the acceptable boundaries or variation around the risk appetite, acting as operational guardrails for day-to-day decisions.
CAS Risk Assessment and Management 2
Which risk measure is defined as the expected loss given that the loss exceeds a specified threshold?