CAS Risk Assessment and Management 3 — Questions and Answers
Question 1: Which statistical distribution is commonly used to model the number of claims in an insurance portfolio due to its flexibility with the mean-variance relationship?
- Normal distribution
- Negative binomial distribution (Correct answer)
- Uniform distribution
- Beta distribution
Correct answer: Negative binomial distribution
The negative binomial distribution is widely used for claim counts because it allows the variance to exceed the mean, capturing overdispersion common in insurance data.
Question 2: A catastrophe model's 'event set' refers to:
- The list of insured properties exposed to catastrophe
- A catalog of simulated natural disaster scenarios with probabilities and intensities (Correct answer)
- The set of reinsurance treaties activated by a catastrophe
- Historical losses from prior catastrophe events
Correct answer: A catalog of simulated natural disaster scenarios with probabilities and intensities
An event set is the stochastic catalog of thousands of simulated hazard events, each with an annual rate of occurrence and geographic footprint.
Question 3: The 'probable maximum loss' (PML) at the 99th percentile means:
- Losses will exceed this level 99% of the time
- There is a 1% chance losses will exceed this level in a given year (Correct answer)
- Losses will exactly equal this value 1% of the time
- The average annual loss equals 1% of this value
Correct answer: There is a 1% chance losses will exceed this level in a given year
A 99th percentile PML means there is a 1-in-100 annual probability that losses will exceed this amount.
Question 4: Which of the following is an example of 'moral hazard' in insurance?
- An insured deliberately underreporting property values
- An insured taking fewer safety precautions after purchasing insurance (Correct answer)
- An applicant with known health issues seeking life insurance
- A broker steering clients to higher-premium products
Correct answer: An insured taking fewer safety precautions after purchasing insurance
Moral hazard occurs when insurance coverage reduces the insured's incentive to prevent losses, leading to riskier behavior post-purchase.
Question 5: In risk mapping, a risk heat map typically plots risks on axes representing:
- Frequency vs. severity (Correct answer)
- Retained loss vs. transferred loss
- Systematic risk vs. idiosyncratic risk
- Short-tail risk vs. long-tail risk
Correct answer: Frequency vs. severity
Heat maps plot frequency (likelihood) on one axis and severity (impact) on the other to visually prioritize risks requiring attention.
Question 6: Which risk management strategy involves restructuring a business operation to eliminate an exposure entirely?
- Risk retention
- Risk reduction
- Risk transfer
- Risk avoidance (Correct answer)
Correct answer: Risk avoidance
Risk avoidance means choosing not to engage in the activity that creates the risk, thus eliminating the exposure rather than mitigating or transferring it.
Question 7: The Solvency II standard formula uses a one-year Value at Risk at which confidence level to set the Solvency Capital Requirement (SCR)?
- 90.0%
- 95.0%
- 99.5% (Correct answer)
- 99.9%
Correct answer: 99.5%
Solvency II sets the SCR at the 99.5th percentile VaR over a one-year horizon, targeting a less-than-0.5% probability of insolvency.
CAS Risk Assessment and Management 3
Which statistical distribution is commonly used to model the number of claims in an insurance portfolio due to its flexibility with the mean-variance relationship?