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Casestudy M92 > Chapter 10 > Flashcards

Chapter 10 Flashcards

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1
Q

Q: What does the return on equity (ROE) ratio measure?
A. The ability to collect premiums
B. The efficiency of reinsurance recoveries
C. The profit generated relative to shareholders’ capital
D. The solvency margin of an insurer

A

Answer: C
Explanation: ROE measures profit after tax as a percentage of shareholders’ equity, showing how effectively capital is being used to generate profit

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2
Q

Q: What is the formula for the current ratio in liquidity analysis?
A. Current liabilities ÷ current assets
B. Cash + investments ÷ total liabilities
C. Current assets ÷ current liabilities
D. Sales ÷ cost of goods sold

A

Answer: C
Explanation: The current ratio = current assets ÷ current liabilities. It assesses short-term financial health and ability to pay debts as they fall due

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3
Q

Q: What does a high gearing ratio indicate about a company?
A. It has strong equity reserves
B. It relies more heavily on debt financing
C. It has high underwriting profits
D. It pays dividends frequently

A

Answer: B
Explanation: A high gearing ratio shows a high level of debt compared to equity, increasing financial risk

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4
Q

Q: Which of the following ratios assesses underwriting profitability?
A. Quick ratio
B. Return on capital employed
C. Combined ratio
D. ROE

A

Answer: C
Explanation: The combined ratio includes claims, expenses, and commission costs as a percentage of earned premium. A ratio below 100% indicates underwriting profit

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5
Q

Q: What would typically be considered a “good” return on equity (ROE) for insurers?
A. 1–5%
B. 5–10%
C. 15–20%
D. Over 30%

A

Answer: C
Explanation: A good ROE for insurers is typically between 15% and 20%

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6
Q

Q: The solvency coverage ratio compares which two elements?
A. Earned premium and net profit
B. Total liabilities and shareholder equity
C. Total eligible capital and solvency capital requirement
D. Cash flow and total expenses

A

Answer: C
Explanation: This ratio shows whether an insurer has sufficient capital to meet regulatory solvency requirements under Solvency II

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7
Q

Q: The quick ratio excludes which of the following from current assets?
A. Debtors
B. Investments
C. Stock (inventory)
D. Bank balances

A

Answer: C
Explanation: The quick ratio excludes inventory/stock from current assets to assess the ability to pay liabilities using only the most liquid asset

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8
Q

Q: Which ratio best reflects how frequently a company collects debts during the year?
A. Gearing ratio
B. Debtors turnover ratio
C. Expense ratio
D. Current ratio

A

Answer: B
Explanation: The debtors turnover ratio = sales ÷ debtors. It indicates how often the amount owed by customers is collected annually

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9
Q

Q: What does the claims ratio measure in an insurance company?
A. Claims incurred as a percentage of earned premium
B. Claims paid as a percentage of net profit
C. Number of claims per customer
D. Claims recoveries from reinsurers

A

Answer: A
Explanation: Claims ratio = claims incurred (net of reinsurance) ÷ earned premium (net of reinsurance) × 100

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10
Q

Q: A company’s ROCE (return on capital employed) is calculated using:
A. Profit after tax ÷ shareholders’ equity
B. Net income ÷ total assets
C. Profit before interest and tax ÷ (share capital + reserves + borrowings)
D. Gross profit ÷ sales

A

Answer: C
Explanation: ROCE measures how efficiently capital is being used before interest and tax are deducted

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11
Q

Q: What is indicated by a combined ratio of over 100%?
A. Underwriting profit
B. Underwriting loss
C. Exceptional investment return
D. High return on equity

A

Answer: B
Explanation: A combined ratio over 100% means claims and expenses exceed earned premiums, indicating an underwriting loss

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12
Q

Q: The investment return ratio is typically expressed as:
A. Investment income ÷ total premium
B. Investment income ÷ average invested assets
C. Profit before tax ÷ gross written premium
D. Investment income ÷ claims paid

A

Answer: B
Explanation: This ratio measures the efficiency of the insurer’s investment portfolio by comparing income to average invested assets

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13
Q

Q: What does a high expense ratio suggest about an insurance company?
A. High profitability
B. Efficient cost control
C. High operating costs relative to earned premiums
D. Good claims handling

A

Answer: C
Explanation: The expense ratio shows how much of each premium pound is used to cover expenses—higher ratios suggest inefficiency

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14
Q

Q: Which of the following ratios best reflects an insurer’s core underwriting performance?
A. Combined ratio
B. Return on equity
C. Net profit margin
D. Gearing ratio

A

Answer: A
Explanation: The combined ratio specifically assesses underwriting performance by comparing claims and expenses to earned premiums

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15
Q

Q: Why do insurers separate underwriting results from investment results in analysis?
A. To compare to non-insurance sectors
B. To hide underwriting losses
C. To measure operational vs financial performance
D. Because investments are tax-free

A

Answer: C
Explanation: Underwriting and investment performance are tracked separately to assess the insurer’s core business profitability independently of market movements

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16
Q

Q: What is the claims handling expense ratio?
A. Total claims ÷ number of staff
B. Cost of settling claims ÷ net claims incurred
C. Commission paid ÷ gross premium
D. Claims incurred ÷ investment income

A

Answer: B
Explanation: This ratio measures the efficiency of the claims department in managing the cost of settling claims

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17
Q

Q: What role do trend analysis and benchmarking play in ratio analysis?
A. Predict customer behaviour
B. Help design insurance products
C. Identify performance changes over time or vs peers
D. Calculate solvency capital requirements

A

Answer: C
Explanation: Trend analysis tracks a company’s ratios over time; benchmarking compares performance with peers or industry standards

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18
Q

Q: What can distort a solvency coverage ratio temporarily?
A. Change in investment strategy
B. Seasonality in claim payments
C. One-off gains or losses
D. Changes in board structure

A

Answer: C
Explanation: Unusual gains or losses can impact capital levels or SCR, temporarily distorting the solvency ratio

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19
Q

Q: What does a low current ratio suggest about an insurer’s liquidity?
A. It has too much equity
B. It may struggle to meet short-term obligations
C. It overuses reinsurance
D. It pays too many dividends

A

Answer: B
Explanation: A current ratio below 1 suggests that liabilities exceed liquid assets, which could indicate a short-term liquidity issue

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20
Q

Q: Why is consistency important when using financial ratios for performance evaluation?
A. It ensures compliance with Solvency II
B. It helps avoid tax penalties
C. It allows meaningful comparison over time and with peers
D. It is required by the PRA

A

Answer: C
Explanation: Consistent use of definitions and methods ensures that trends and peer comparisons are valid and useful

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21
Q

What is the primary function of credit rating agencies (CRAs)?
A. Sell insurance products
B. Supervise financial regulators
C. Assess the financial strength of companies and government entities
D. Provide reinsurance to insurers

A

Answer: C
Explanation: CRAs assess the financial strength of companies and government entities, particularly their ability to meet debt obligations.

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22
Q

Question: Which of the following is not a major credit rating agency?
A. Standard & Poor’s
B. Lloyd’s of London
C. Moody’s
D. Fitch

A

Answer: B
Explanation: Lloyd’s is an insurance market, not a credit rating agency. The main CRAs include S&P, AM Best, Moody’s, and Fitch.

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23
Q

Question: Why do insurers pay CRAs to rate their financial strength?
A. To reduce regulatory requirements
B. To justify higher staff salaries
C. To provide an independent opinion of their ability to pay claims
D. To avoid paying claims

A

Answer: C
Explanation: A financial strength rating helps insurers demonstrate to policyholders and brokers their capacity to meet claims obligations.

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24
Q

What type of obligations does a CRA’s financial strength rating focus on?
A. Debt repayment obligations
B. Tax liabilities
C. Meeting policyholder claims
D. Broker commission payments

A

Answer: C
Explanation: Financial strength ratings focus on the insurer’s ability to meet policyholder obligations, not debt repayment.

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25
What is the likely consequence for an insurer rated below investment grade? A. Increased underwriting capacity B. Lower reinsurance costs C. Difficulty in writing business D. Higher customer satisfaction
Answer: C Explanation: Insurers below investment grade often struggle to attract business and may need to improve their rating.
26
What does Enterprise Risk Management (ERM) evaluate? A. Policy pricing methods B. The insurer’s risk identification, mitigation, and reporting processes C. Staff performance and incentives D. Reinsurance treaties only
Answer: B Explanation: ERM assesses how an insurer identifies, measures, and manages various risks, including through internal models.
27
Which CRA rating is the highest among those listed? A. AA from S&P B. A+ from AM Best C. Aaa from Moody’s D. Baa from Moody’s
Answer: C Explanation: Aaa from Moody’s is the highest rating, signifying exceptional financial strength.
28
According to critics, what is one issue with CRAs? A. They charge too little B. They are too quick to downgrade companies C. They delay downgrades despite known issues D. They ignore market data
Answer: C Explanation: Critics argue CRAs are slow to downgrade companies, as seen in cases like Enron.
29
In S&P’s rating framework, which factor is part of the "Business Risk Profile"? A. Liquidity B. Capital and earnings C. Competitive position D. Funding structure
Answer: C Explanation: Competitive position is included under the Business Risk Profile; capital and earnings are part of the Financial Risk Profile.
30
Which of the following AM Best ratings indicates a "Superior" financial strength? A. A B. B++ C. A+ D. BBB
Answer: C Explanation: AM Best ratings of A++ and A+ indicate "Superior" financial strength.
31
What is the equivalent Moody’s rating for an S&P "AA" rating? A. Aaa B. Aa C. A D. Baa
Answer: B Explanation: "AA" from S&P corresponds to "Aa" from Moody’s, both indicating "Very Strong"/"Excellent" financial strength.
32
What is signified by the use of plus and minus signs (e.g., A+, A-) in S&P and Fitch ratings? A. Investment recommendations B. Level of claims experience C. Relative standing within a rating category D. Liquidity ranking
Answer: C Explanation: The plus and minus signs indicate relative standing within a major rating category, giving more granularity.
33
Which of the following would not typically be considered in a CRA’s financial rating of an insurer? A. Competitive position B. Management strategy C. Brand awareness D. Capital adequacy
Answer: C Explanation: Brand awareness is not a core component; CRAs focus on financial and operational factors like strategy and capital adequacy.
34
Who pays for the financial strength rating conducted by the credit rating agency (CRA)? A. The policyholders B. The Financial Conduct Authority C. The insurance company being rated D. Independent auditors
Answer: C Explanation: The insurance company pays the CRA for the rating and allows it to publish the findings.
35
What is the first formal step in the CRA rating process? A. Issuing a press release B. Annual review C. Signing a contract D. Committee vote
Answer: C Explanation: The process begins with the insurance company meeting the CRA and signing a contract.
36
How many analysts typically spend time with the insurer’s senior executives during the rating process? A. One B. Two C. Four D. Eight
Answer: B Explanation: At least two analysts spend a day with senior executives to understand the business.
37
What happens after the lead analyst recommends a rating? A. A public press release is issued B. The insurer accepts or rejects the rating C. The CRA committee debates and votes on the rating D. An internal audit is conducted
Answer: C Explanation: The recommendation is presented to a committee of eight analysts, who debate and vote on the rating.
38
What option does the insurance company have if it disagrees with the initial rating? A. File a legal objection B. Cancel the rating C. Appeal the rating and trigger a re-sit D. Request a competitor to rate them
Answer: C Explanation: The insurer can appeal the decision, and the committee will re-sit to reconsider the rating.
39
What is one concern investors may have with insurers rated AAA? A. Their creditworthiness is questionable B. They are under-capitalised C. Return on equity may be lower due to excess capital D. They are not subject to annual review
Answer: C Explanation: An AAA rating may indicate over-capitalisation, which can depress return on equity (ROE).
40
Who pays for the work involved in assigning a credit rating to an insurer? A. The PRA B. The credit rating agency C. The insurance company D. The investors
Answer: C. The insurance company Explanation: The insurer pays the credit rating agency for the work and allows the agency to publish its findings.
41
Which of the following is not typically included in a risk appetite statement? A. Target profit margin B. Acceptable risks C. Probability of failure D. Maximum loss from a single event
Answer: A. Target profit margin Explanation: A risk appetite statement focuses on acceptable risks, probability of failure, and limits on losses, not profit margins.
42
Which tier of capital under Solvency II is considered the highest quality? A. Tier 1 B. Tier 2 C. Tier 3 D. Tier 4
Answer: A. Tier 1 Explanation: Tier 1 capital (e.g. common equity and retained earnings) is the highest quality capital, designed to absorb losses on a going-concern basis.
43
Apart from calculating capital requirements, which of the following is not a use of internal models? A. Pricing B. Dividend decisions C. Marketing strategies D. Investment selection
Answer: C. Marketing strategies Explanation: Internal models can support pricing, portfolio returns, investment decisions, and dividends, but not marketing.
44
What is the purpose of the Minimum Capital Requirement (MCR) under Solvency II? A. To cover unexpected operational expenses B. To ensure firms can pay dividends C. To avoid placing policyholders at an unacceptable level of risk D. To calculate reinsurance exposure
Answer: C. To avoid placing policyholders at an unacceptable level of risk Explanation: MCR corresponds to a level of capital below which the insurer poses unacceptable risk to policyholders, and is calculated at an 85% confidence level.
45
Which pillar of Solvency II covers reporting and disclosure requirements? A. Pillar 1 B. Pillar 2 C. Pillar 3 D. Pillar 4
Answer: C. Pillar 3 Explanation: Pillar 3 ensures transparency by requiring insurers to publish information about risks, capital adequacy, and risk management practices.
46
Under the Solvency II internal model approval process, what does the "Use Test" aim to confirm? A. That the model includes data from at least five financial years B. That the internal model is only used for regulatory reporting C. That the internal model is embedded in the firm's risk management and decision-making D. That the internal model matches industry benchmarks
Answer: C. That the internal model is embedded in the firm's risk management and decision-making Explanation: The Use Test ensures internal models are genuinely used for strategic decision-making, not just to meet regulatory requirements.
47
What is the confidence level associated with the Solvency Capital Requirement (SCR) under Solvency II? A. 85% B. 90% C. 95% D. 99.5%
Answer: D. 99.5% Explanation: SCR must be calculated using a 99.5% confidence level, meaning the insurer should be able to withstand all but the most extreme risks that occur less than once every 200 years.
48
Which of the following is not a required standard for an internal model to gain regulatory approval under Solvency II? A. Statistical quality B. Model complexity C. Calibration D. Validation
Answer: B. Model complexity Explanation: While a model must be robust and fit for purpose, "model complexity" is not a required approval standard. The focus is on quality, calibration, validation, and documentation.
49
What happens if a firm breaches its SCR under Solvency II? A. It must cease writing all new business immediately B. It must submit a plan to restore capital and/or reduce risk C. It is allowed a 12-month grace period D. Its authorisation is automatically withdrawn
Answer: B. It must submit a plan to restore capital and/or reduce risk Explanation: Breaching the SCR triggers supervisory intervention, where the firm must act to restore its capital or reduce risk exposures.
50
Which tier of capital under Solvency II is considered the highest quality and must absorb losses on a going concern basis? A. Tier 1 B. Tier 2 C. Tier 3 D. Tier 4
Answer: A. Tier 1 Explanation: Tier 1 capital includes common equity and retained earnings. It must absorb losses during normal operations, not just in insolvency.
51
Flashcard 12: Market-Consistent Valuations Question: Under Solvency II, how are insurance liabilities valued? A. Using original accounting values B. At historical cost C. By estimating future cash flows and discounting them using risk-free rates D. Based on average claim settlement times
Answer: C. By estimating future cash flows and discounting them using risk-free rates Explanation: Solvency II requires a "best estimate" of future cash flows, plus a risk margin, to reflect the market-consistent value of liabilities.
52
What percentage reduction in the Risk Margin (RM) has been introduced under UK Solvency II reforms for general insurance? A. 10% B. 30% C. 50% D. 65%
Answer: B. 30% Explanation: The PRA’s reforms reduce the RM for general insurance by 30% to simplify requirements and encourage competitiveness.
53
How can reinsurance be used under Solvency II in relation to capital requirements? A. To increase gross premium income B. As a substitute for Tier 3 capital C. To reduce capital requirements by transferring risk D. To boost investment returns
Answer: C. To reduce capital requirements by transferring risk Explanation: Reinsurance reduces an insurer’s retained risk, thereby lowering its capital requirement and acting as a capital substitute.
54
Which of the following is a valid use of an internal model other than calculating the SCR? A. Appointing a new CEO B. Pricing insurance products C. Calculating corporate tax D. Complying with IFRS 17
Answer: B. Pricing insurance products Explanation: Internal models can support business decisions such as pricing, reinsurance strategy, portfolio returns, and dividend planning.
55
What is the primary focus of Pillar 2 under Solvency II? A. Quantitative capital requirements B. Investment performance analysis C. Governance and risk management requirements D. Claims reserving methodology
Answer: C. Governance and risk management requirements Explanation: Pillar 2 sets qualitative requirements, including governance standards and risk management processes like the ORSA.
56
What is the main purpose of the Own Risk and Solvency Assessment (ORSA)? A. To estimate future investment returns B. To calculate technical provisions C. To assess risk management adequacy and solvency under various scenarios D. To ensure compliance with tax regulations
Answer: C. To assess risk management adequacy and solvency under various scenarios Explanation: ORSA is an internal tool to evaluate an insurer’s risk and solvency position under normal and stressed conditions.
57
Which of the following types of risks is the ORSA particularly useful in addressing? A. Only financial risks B. Only short-term risks C. Risks not fully captured by capital models, such as climate change D. Risks related only to policyholder behavior
Answer: C. Risks not fully captured by capital models, such as climate change Explanation: ORSA helps firms consider long-term and difficult-to-quantify risks like cyber risk and climate change.
58
Which of the following statements about the ORSA is correct? A. It is only required in the UK and EU B. It is used solely to satisfy auditors C. It is required in multiple jurisdictions, including the US D. It is a one-time requirement for new insurers
Answer: C. It is required in multiple jurisdictions, including the US Explanation: The ORSA is recognized globally as a valuable process for risk management and is mandated in countries like the US.
59
What is the main objective of the Senior Managers and Certification Regime (SM&CR)? A. To control the pricing of insurance policies B. To enhance accountability of senior management C. To set investment return benchmarks D. To approve reinsurance contracts
Answer: B. To enhance accountability of senior management Explanation: The SM&CR ensures that senior managers act with integrity and are accountable for their responsibilities.
60
Why does Solvency II include additional governance requirements for insurance groups? A. To enforce uniform branding B. To manage risks unique to individual policies C. Because group structures may conceal hidden or systemic risks D. To support mergers and acquisitions
Answer: C. Because group structures may conceal hidden or systemic risks Explanation: Complex groups may include both regulated and unregulated entities, making certain risks harder to identify.
61
What is meant by “leveraging of capital” in a group context under Solvency II? A. Increasing underwriting capacity through reinsurance B. Reducing taxes on capital gains C. Artificially improving the quality of capital through intra-group transfers D. Diversifying capital across multiple markets
Answer: C. Artificially improving the quality of capital through intra-group transfers Explanation: Leveraging refers to transferring lower-tier capital down a group and treating it as higher-quality capital.
62
Under Solvency II, what is expected of individuals who manage insurance companies? A. They must be financial analysts B. They must operate independently of regulation C. They must act with honesty, integrity, and competence D. They must avoid all risk
Answer: C. They must act with honesty, integrity, and competence Explanation: Strong governance depends on clear responsibilities and ethical, competent leadership.
63
Under Solvency II, the ‘prudent person principle’ applies to: A. Reserving accuracy B. Claims handling timelines C. Investment decision-making D. Risk margin calibration
Answer: C. Investment decision-making Explanation: It gives firms flexibility in investments, relying on management to make prudent choices and manage associated risks.
64
Which of the following best describes the difference between Pillar 1 and Pillar 2 of Solvency II? A. Pillar 1 is optional; Pillar 2 is mandatory B. Pillar 1 focuses on solvency capital; Pillar 2 focuses on governance and risk management C. Pillar 1 is for life insurers only D. Pillar 2 regulates claims practices
Answer: B. Pillar 1 focuses on solvency capital; Pillar 2 focuses on governance and risk management Explanation: Pillar 1 is quantitative, covering capital; Pillar 2 is qualitative, covering governance and risk controls.
65
What is the primary goal of the reporting and disclosure requirements under Pillar 3 of Solvency II? A. To reduce the insurer's capital requirement B. To assist in claims handling C. To improve transparency and strengthen market discipline D. To simplify underwriting procedures
Answer: C. To improve transparency and strengthen market discipline Explanation: Pillar 3 enhances market discipline through improved public and regulatory disclosure of insurers’ risk and financial positions.
66
What is the Solvency and Financial Condition Report (SFCR)? A. A confidential document only seen by regulators B. An annual public report detailing an insurer’s solvency position and risk management C. A monthly performance summary D. A report showing claim settlement speeds
Answer: B. An annual public report detailing an insurer’s solvency position and risk management Explanation: The SFCR is published annually and provides transparency on the firm's approach to Solvency II.
67
Which report under Pillar 3 is disclosed privately to regulators rather than the public? A. Financial Summary Bulletin B. Insurance Risk Statement C. Regulatory Supervisory Report D. Internal Governance Manual
Answer: C. Regulatory Supervisory Report Explanation: This report is submitted confidentially to supervisors, offering detailed regulatory information not included in public disclosures.
68
If an insurer uses an internal model to calculate its capital requirements, what must it do in its SFCR? A. Keep the model confidential B. Disclose and explain the use of the internal model C. Obtain an annual tax audit D. Replace it with the standard formula
Answer: B. Disclose and explain the use of the internal model Explanation: The SFCR must include clear explanation of internal model use and its impact on solvency calculations.
69
Under Solvency II Pillar 3, what must firms do if they have significantly breached regulatory solvency requirements? A. Wait for the next SFCR to address the issue B. Report it to policyholders only C. Disclose the breach in the SFCR, explaining causes, consequences, and remedies D. Avoid disclosing it unless instructed by regulators
Answer: C. Disclose the breach in the SFCR, explaining causes, consequences, and remedies Explanation: Transparency in breaches helps maintain market discipline and regulatory oversight.
70
Which of the following is true about the PRA’s involvement in stress testing? A. The PRA only observes stress tests conducted by firms B. The PRA runs system-wide stress tests on all EU insurers C. The PRA periodically runs its own stress tests on selected firms D. The PRA delegates all testing responsibilities to the FCA
Answer: C. The PRA periodically runs its own stress tests on selected firms Explanation: The PRA conducts stress testing on high-impact firms and others when necessary to assess capital resilience under stress.
71
How does reverse stress testing differ from standard stress testing? A. It assumes market stability and tests for long-term growth B. It only applies to reinsurers C. It identifies scenarios that make the business model unviable D. It focuses exclusively on liquidity forecasting
Answer: C. It identifies scenarios that make the business model unviable Explanation: Reverse stress testing explores extreme but plausible scenarios that could lead to business failure, revealing vulnerabilities.
72
What is the main purpose of reverse stress testing for insurers? A. To comply with EU data protection laws B. To forecast customer satisfaction trends C. To test for administrative delays D. To identify vulnerabilities and tail risks in the business model
Answer: D. To identify vulnerabilities and tail risks in the business model Explanation: Reverse stress testing helps firms understand extreme risks that could cause business failure and explore mitigation options.
73
How should firms approach stress testing according to the PRA’s guidance? A. All firms must follow identical stress test procedures B. Firms should scale their testing based on business size and complexity C. Only multinational firms are required to perform stress testing D. Stress testing is voluntary for smaller firms
Answer: B. Firms should scale their testing based on business size and complexity Explanation: The PRA requires stress testing to be proportionate to a firm’s nature, scale, and complexity.
74
Under Solvency II, what is the requirement regarding the actuarial function in an insurer? A. It must be outsourced to an external consulting firm B. It must be carried out only by fully qualified actuaries C. It must be fulfilled by individuals with sufficient actuarial and financial mathematical knowledge D. It is optional for firms with under £10 million in gross written premiums
Answer: C. It must be fulfilled by individuals with sufficient actuarial and financial mathematical knowledge Explanation: Solvency II allows flexibility in qualification but insists the role be carried out by individuals with appropriate expertise and experience.
75
Which of the following is not a responsibility of the actuarial function under Solvency II? A. Design and calibration of the internal model B. Selling new insurance products C. Providing insight into reserve volatility D. Contributing to risk management processes
Answer: B. Selling new insurance products Explanation: The actuarial function focuses on technical and risk-based responsibilities, not sales.
76
How does the actuarial function make use of the internal model? A. Only to produce the Solvency and Financial Condition Report (SFCR) B. To understand reserve volatility and assess technical provisions C. To outsource underwriting decisions D. To forecast shareholder dividends
Answer: B. To understand reserve volatility and assess technical provisions Explanation: Actuarial teams use internal model outputs to better understand and manage reserve uncertainty.
77
Why do regulators consider access to actuarial knowledge essential? A. It replaces the need for an external auditor B. It ensures efficient product pricing C. It is indispensable to an adequate system of governance D. It guarantees investment return predictions
Answer: C. It is indispensable to an adequate system of governance Explanation: Actuarial insight is critical for governance, particularly in risk and capital management.
78
In light of Solvency II reform, what must firms ensure regarding financial statement validation? A. That the internal audit team signs off all SFCRs B. That brokers approve all actuarial assumptions C. That robust validation and governance processes are in place D. That all models are annually submitted to the European Commission
Answer: C. That robust validation and governance processes are in place Explanation: Firms must strengthen governance, especially around actuarial validation of financial statements and models.
79
What is a shared objective of both Solvency II and IFRS 17? A. To impose strict investment restrictions on insurers B. To enable comparability and transparency for external stakeholders C. To recognise profits immediately at contract inception D. To limit the use of actuarial judgment in reporting
Answer: B. To enable comparability and transparency for external stakeholders Explanation: Both frameworks aim to improve transparency and comparability of financial and regulatory information.
80
How does profit recognition differ between Solvency II and IFRS 17? A. Solvency II recognises profits over the life of the contract; IFRS 17 recognises immediately B. IFRS 17 does not require profit recognition C. Solvency II recognises profits immediately at inception; IFRS 17 recognises profits over the life of the contract D. Both recognise profits immediately at inception
Answer: C. Solvency II recognises profits immediately at inception; IFRS 17 recognises profits over the life of the contract Explanation: This is a key conceptual difference in how profit timing is handled.
81
Which of the following is true regarding the discount rates used in Solvency II and IFRS 17? A. Both use only the risk-free rate B. Solvency II uses risk-free rate plus liquidity premium; IFRS 17 has no restriction on liquidity premium C. IFRS 17 uses a fixed discount rate set by regulators D. Neither framework uses liquidity premium in the discount rate
Answer: B. Solvency II uses risk-free rate plus liquidity premium; IFRS 17 has no restriction on liquidity premium Explanation: Solvency II specifies both elements, IFRS 17 allows more flexibility on liquidity premium.
82
What is a challenge insurers face when complying with both Solvency II and IFRS 17? A. Both frameworks require the same software systems B. Terminology differences (e.g., portfolio definitions and contract boundaries) may complicate governance and control frameworks C. IFRS 17 does not require actuarial input, unlike Solvency II D. Solvency II does not require data alignment with business planning
Answer: B. Terminology differences (e.g., portfolio definitions and contract boundaries) may complicate governance and control frameworks Explanation: Terminology and framework differences require flexible systems and governance.
83
Which of the following is a similarity between Solvency II and IFRS 17? A. Both frameworks require profits to be recognised immediately B. Both use a best estimate basis for expected future cash flows C. Both forbid the use of the insurer’s own risk assessments D. Both have identical data and reporting requirements
Answer: B. Both use a best estimate basis for expected future cash flows Explanation: Both frameworks are principle-based and allow risk and own assessment of future cash flows.
84
What is the primary aim of stress testing in insurance firms? A. To meet annual financial reporting deadlines B. To identify and manage risks in adverse conditions C. To increase the number of policyholders D. To reduce employee turnover
Answer: B. To identify and manage risks in adverse conditions Explanation: Stress testing evaluates the impact of adverse scenarios on a firm’s capital and liquidity to support effective risk management.
85
Which credit rating agency uses the 'Superior' rating category? a) AM Best b) Standard & Poor's c) Fitch d) Moody's
Answer: a) AM Best Explanation: AM Best uses the 'Superior' rating category, corresponding to A++ and A+ ratings, specifically for insurance companies.
86
Which rating is equivalent to AAA in Moody's system? a) Aaa b) Aa c) A+ d) A
Answer: a) Aaa Explanation: AAA (Standard & Poor's and Fitch) corresponds to Aaa in Moody’s system, indicating the highest financial strength.
87
Which agency primarily focuses on the insurance industry? a) AM Best b) Standard & Poor's c) Fitch d) Moody's
Answer: a) AM Best Explanation: AM Best specializes in assessing the financial strength of insurance companies.
88
What does the rating 'A+' signify in AM Best's system? a) Superior b) Excellent c) Very Good d) Good
Answer: a) Superior Explanation: In AM Best’s system, 'A+' falls within the 'Superior' financial strength category.
89
Which rating category is considered 'investment grade'? a) BBB and above b) BB and above c) CCC and above d) AA and above
Answer: a) BBB and above Explanation: BBB and above are considered investment grade, meaning relatively lower credit risk.
90
What does 'AAA' signify in Standard & Poor's system? a) Extremely strong b) Very strong c) Strong d) Adequate
Answer: a) Extremely strong Explanation: AAA is the highest rating in Standard & Poor's system, indicating exceptional financial strength.
91
Which rating agency uses the term 'Exceptional' for its highest rating? a) Moody's b) AM Best c) Standard & Poor's d) Fitch
Answer: a) Moody's Explanation: Moody’s highest rating is Aaa, which is classified as "Exceptional."
92
What does 'Baa' signify in Moody's system? a) Adequate b) Good c) Strong d) Very Good
Answer: a) Adequate Explanation: Baa in Moody’s system signifies Adequate financial strength, meaning moderate risk.
93
Which rating corresponds to 'Very Strong' in Standard & Poor's system? a) AA b) AAA c) A+ d) BBB
Answer: a) AA Explanation: AA is classified as 'Very Strong' in Standard & Poor's system, indicating high financial stability.
94
What does the rating 'BBB' signify? a) Good b) Superior c) Very Strong d) Exceptional
Answer: a) Good Explanation: BBB represents 'Good' financial strength, meaning it is investment-grade but with moderate risk.

Casestudy M92 (10 decks)

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