CIA Investment Strategies 5

Question 1

A property insurer with predominantly short-tail liabilities (e.g., homeowners claims settled within 12 months) should PRIMARILY invest in:

Accepted Answer

Short- to medium-term high-quality bonds to ensure liquidity

Answer

Short-tail liabilities require liquid, short-duration assets so that claim payments can be made promptly without having to sell long-term assets at a loss.

Question 2

The concept of 'float' in insurance investing refers to:

Accepted Answer

Investable funds held between premium collection and claim payment

Answer

Insurance float is the pool of policyholder premiums collected upfront that can be invested until claims are paid, generating investment income — a concept Warren Buffett famously emphasized.

Question 3

Which of the following BEST explains why life insurers typically hold longer-duration bonds than property-casualty insurers?

Accepted Answer

Life insurance liabilities (annuities, death benefits) extend for decades, requiring long-term asset matching

Answer

Life insurance products like whole life and annuities create liabilities spanning 20–40 years, necessitating long-duration bond investments to match those cash flow obligations.

Question 4

An insurer wants to reduce the credit risk in its bond portfolio without selling existing positions. Which instrument would BEST achieve this?

Accepted Answer

Credit default swap (CDS) to transfer default risk to a counterparty

Answer

A credit default swap allows the insurer to pay a periodic premium to a counterparty who assumes the default risk on the reference bond, effectively hedging credit exposure without selling the bond.

Question 5

Under risk-based capital (RBC) rules, which asset class carries the HIGHEST capital charge for a property-casualty insurer?

Accepted Answer

Common equity in unaffiliated companies

Answer

Common equity in unaffiliated companies carries the highest RBC charge (typically 15–30%) because equities are the most volatile asset class and pose the greatest threat to statutory surplus.

(CIA) Certified Insurance Appraiser Practice Test

(CIA) Certified Insurance Appraiser Practice Test

CIA Investment Strategies 5