RIMS Financial Analysis & Planning 2 — Questions and Answers
Question 1: A risk manager wants to quantify the maximum probable loss from a single event at the 99th percentile. Which metric best captures this?
- Expected loss (EL)
- Value at Risk (VaR) (Correct answer)
- Loss development factor (LDF)
- Combined ratio
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) represents the maximum loss not exceeded at a given confidence level over a specified time horizon.
Question 2: Which of the following best describes a 'risk-adjusted return on capital' (RAROC) metric?
- Net income divided by total assets
- Return on equity adjusted for systematic risk only
- Return generated per unit of economic capital allocated to a risk (Correct answer)
- Gross premium minus incurred losses
Correct answer: Return generated per unit of economic capital allocated to a risk
RAROC measures the return generated relative to the economic capital consumed by a risk, enabling comparison across different risk types.
Question 3: A company's total insurable value (TIV) is $500 million. If a coinsurance clause requires 90% coverage and the policy limit purchased is $400 million, what is the coinsurance penalty factor?
- 0.80
- 0.89 (Correct answer)
- 0.90
- 1.00
Correct answer: 0.89
The coinsurance penalty factor = insurance carried / insurance required = $400M / ($500M × 0.90) = $400M / $450M ≈ 0.889.
Question 4: Which financial statement line item is most directly affected when a company self-insures a large property loss?
- Revenue
- Other comprehensive income
- Operating expenses or loss reserve (Correct answer)
- Deferred tax liability
Correct answer: Operating expenses or loss reserve
A self-insured loss flows through operating expenses or increases loss reserves on the balance sheet, directly reducing operating income.
Question 5: In a captive insurance feasibility study, which factor most strongly suggests a captive is NOT financially viable?
- High premium volume with stable loss history
- Access to reinsurance markets
- Insufficient premium base to achieve actuarial credibility (Correct answer)
- Parent company with strong cash flow
Correct answer: Insufficient premium base to achieve actuarial credibility
Without sufficient premium volume, a captive cannot build statistically credible loss data, making accurate pricing and reserving unreliable.
Question 6: What does a combined ratio greater than 100% indicate for an insurer?
- The insurer is earning investment income exceeding underwriting losses
- Underwriting operations are profitable
- Losses and expenses exceed premiums earned (Correct answer)
- The insurer has excess surplus
Correct answer: Losses and expenses exceed premiums earned
A combined ratio above 100% means total losses and expenses exceed earned premiums, indicating an underwriting loss.
Question 7: Which approach is used to convert nominal loss amounts to constant dollars when analyzing multi-year loss data?
- Applying loss development factors
- Trend analysis using price or wage indices (Correct answer)
- Calculating the pure premium
- Applying a loading factor
Correct answer: Trend analysis using price or wage indices
Trend factors derived from price or wage indices adjust historical losses to a common dollar base, removing the effect of economic inflation.
RIMS Financial Analysis & Planning 2
A risk manager wants to quantify the maximum probable loss from a single event at the 99th percentile.
Which metric best captures this?