CIA Investment Strategies 2

Question 1

An insurance company holds a large portfolio of investment-grade corporate bonds. If interest rates rise significantly, the PRIMARY impact on this portfolio will be:

Accepted Answer

Decreased market value of the bond holdings

Answer

Rising interest rates cause existing bond prices to fall because newer bonds offer higher yields, making older bonds less attractive in the secondary market.

Question 2

Which investment strategy is MOST appropriate for an insurer trying to match the duration of its long-tail liability reserves?

Accepted Answer

Purchasing long-duration bonds with similar maturity profiles

Answer

Asset-liability matching requires investing in assets whose duration closely aligns with the duration of long-tail liabilities to reduce interest rate risk.

Question 3

A property-casualty insurer allocates 15% of its investment portfolio to equities. This allocation is PRIMARILY limited by:

Accepted Answer

Regulatory surplus requirements and risk-based capital rules

Answer

State insurance regulations and risk-based capital (RBC) requirements limit equity holdings because equities carry higher capital charges than investment-grade bonds.

Question 4

In the context of insurance company investments, 'unrealized gains' on available-for-sale securities are reported:

Accepted Answer

As a component of other comprehensive income in equity

Answer

Under GAAP, unrealized gains and losses on available-for-sale securities flow through other comprehensive income (OCI) rather than the income statement until realized.

Question 5

Which of the following BEST describes the concept of 'immunization' in insurance investment management?

Accepted Answer

Structuring the asset portfolio so that interest rate changes have minimal net impact on surplus

Answer

Immunization is a strategy that matches asset and liability durations so that interest rate movements affect both sides of the balance sheet equally, protecting surplus.

(CIA) Certified Insurance Appraiser Practice Test

(CIA) Certified Insurance Appraiser Practice Test

CIA Investment Strategies 2