CAIA - 36 - Structured Products II: Insurance-Linked Products and Hybrid Securities Flashcards Preview

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Flashcards in CAIA - 36 - Structured Products II: Insurance-Linked Products and Hybrid Securities Deck (62)
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1

___-___ ___ are tradable financial instruments whose values are driven by an insured loss event.

Insurance-linked securities (ILS) are tradable financial instruments whose values are driven by an insured loss event.

2

___ ___are risk-linked debt instruments designed to transfer catastrophe risks from issuers to investors.

Catastrophe bonds are risk-linked debt instruments designed to transfer catastrophe risks from issuers to investors.

3

___ ___ represent the largest portion of the ILS market.

Cat bonds represent the largest portion of the ILS market.

4

Cat bonds are typically ___-rate with ___coupons and maturities of ___-___ years (most with ___ years)

Cat bonds are typically floating-rate with quarterly coupons and maturities of 1-5 years (most with 3 years)

5

Spreads on cat bonds have typically been between ___-___% with events occurring 1 in ___ to ___ years. Expected losses have historically been ___-___ basis points when an event occurs.

Spreads on cat bonds have typically been between 4-10% with events occurring 1 in 50 to 100 years. Expected losses have historically been 50-500 basis points when an event occurs.

6

With an ___ ___, payment to the issuer is based on actual excess claims paid by the issuer.

With an indemnity trigger, payment to the issuer is based on actual excess claims paid by the issuer.

7

The ___ ___of the trigger is the point at which at least part of the principal must be used to cover claims.

The attachment point of the trigger is the point at which at least part of the principal must be used to cover claims.

8

The ___ ___is the amount of claims loss at which the cat bond loses 100% of the principal and investors are not responsible for additional claims.

The exhaustion point is the amount of claims loss at which the cat bond loses 100% of the principal and investors are not responsible for additional claims.

9

The ___ ___is the estimated probability that the cat bond' attachment point will be reached.

The attachment probability is the estimated probability that the cat bond' attachment point will be reached.

10

An ___ ___ ___ is based on index estimates of total industry losses due to the insured event.

An industry loss trigger is based on index estimates of total industry losses due to the insured event.

11

The indemnity trigger is advantageous for ___ and unfavorable for ___.

The indemnity trigger is advantageous for issuers and unfavorable for investors.

12

Indemnity triggers can create ___ ___since issuers have an incentive to underwrite excessive risk.

Indemnity triggers can create moral hazard since issuers have an incentive to underwrite excessive risk.

13

Industry loss triggers are settled ___ than indemnity triggers.

Industry loss triggers are settled faster than indemnity triggers.

14

With a ___ ___, payment to the issuer is triggered when a certain threshold is surpassed based on prespecified parameters of a natural event in a specified location.

With a parametric trigger, payment to the issuer is triggered when a certain threshold is surpassed based on prespecified parameters of a natural event in a specified location.

15

With a ___ ___, payment to the issuer is based on estimated claims generated by a computer model, which provides estimates of losses for an exposure portfolio given various extremes of a natural disaster.

With a modeled trigger, payment to the issuer is based on estimated claims generated by a computer model, which provides estimates of losses for an exposure portfolio given various extremes of a natural disaster.

16

Cat bonds have (the same/less/more) liquidity than most equities and corporate bonds.

Cat bonds have less liquidity than most equities and corporate bonds.

17

Cat bonds payoff distribution (is/is not) highly skewed with significant ___ tail risk.

Cat bonds payoff distribution is highly skewed with significant downside tail risk.

18

___ ___aims to earn short-term, low risk profits from pricing discrepancies due to complicated investment traits.

Complex arbitrage aims to earn short-term, low risk profits from pricing discrepancies due to complicated investment traits.

19

___ ___is the risk that policyholders and pensioners have higher than projected life expectencies.

Longevity risk is the risk that policyholders and pensioners have higher than projected life expectencies.

20

Longevity risk can be hedged using index-based and indemnity-based ___ ___ ___.

Longevity risk can be hedged using index-based and indemnity-based longevity swap contracts.

21

In ___-based longevity swap contracts, if a pension plan's beneficiaries live longer than assumed, the pension plan will receive higher payments from the counterparty.

In indemnity-based longevity swap contracts, if a pension plan's beneficiaries live longer than assumed, the pension plan will receive higher payments from the counterparty.

22

In ___-based contracts, an increase in general longevity will result in higher payments from the counterparty to the plan.

In index-based contracts, an increase in general longevity will result in higher payments from the counterparty to the plan.

23

Pension plans that hold longevity swap contracts are exposed to the following risks:

 

1. C___

2. R___

3. B___

4. L___

Pension plans that hold longevity swap contracts are exposed to the following risks:

 

1. Counterparty

2. Rollover

3. Basis

4. Legal

24

___ risk refers to the risk that pension plans' hedging contracts have shorter maturities than the liabilities they are trying to cover.

Rollover risk refers to the risk that pension plans' hedging contracts have shorter maturities than the liabilities they are trying to cover.

25

___ risk refers to the risk that, when index-based longevity contracts are used, the pension plan's mortality experience differs from that of the index used in the contract.

Basis risk refers to the risk that, when index-based longevity contracts are used, the pension plan's mortality experience differs from that of the index used in the contract.

26

___ risk arises if longevity swaps are not exchange traded.

Legal risk arises if longevity swaps are not exchange traded.

27

___ risk is the risk that a person dies sooner than expected.

Mortality risk is the risk that a person dies sooner than expected.

28

Who is mortality risk borne by?

Who is mortality risk borne by? 

 

Families of breadwinners and insurance companies

29

___ are the primary cause of increased mortality rates

Pandemics are the primary cause of increased mortality rates

30

Life insurance policies (do/do not) typically include war as a covered cause of death.

Life insurance policies do not typically include war as a covered cause of death.

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