Actuary Certification ACTUARY Professional and Practical Applications 2 — Questions and Answers
Question 1: An actuary is asked to certify a pension plan's actuarial valuation. Which professional standard most directly governs this certification?
- ASOP No. 4 – Measuring Pension Obligations (Correct answer)
- ASOP No. 25 – Credibility Procedures
- ASOP No. 41 – Actuarial Communications
- ASOP No. 56 – Modeling
Correct answer: ASOP No. 4 – Measuring Pension Obligations
ASOP No. 4 specifically governs the measurement of pension obligations and pension plan costs for actuarial certifications.
Question 2: Under the Code of Professional Conduct, an actuary who discovers a material error in prior work issued by another actuary should:
- Immediately report it to the applicable regulatory body
- Inform the principal and encourage disclosure or correction (Correct answer)
- Correct the error silently in the current work product
- Decline further engagement until the prior actuary resolves it
Correct answer: Inform the principal and encourage disclosure or correction
Precept 13 of the Code requires the actuary to advise the principal of the error and encourage appropriate disclosure or correction.
Question 3: A casualty actuary is reserving a long-tail liability line. Which method is most appropriate when the loss development pattern is still immature?
- Paid loss development method
- Bornhuetter-Ferguson method (Correct answer)
- Average paid loss method
- Case reserve adequacy analysis
Correct answer: Bornhuetter-Ferguson method
The Bornhuetter-Ferguson method blends expected losses with emerged experience, making it more stable for immature long-tail lines.
Question 4: In life insurance, which reserve standard requires reserves to equal the present value of future benefits minus the present value of future net premiums?
- CARVM
- Commissioners Reserve Valuation Method (CRVM)
- Net Premium Reserve method (Correct answer)
- Asset Adequacy Analysis
Correct answer: Net Premium Reserve method
The Net Premium Reserve method defines reserves as PV(future benefits) – PV(future net premiums) using prescribed mortality and interest.
Question 5: An actuary working in enterprise risk management assigns a 99.5th percentile Value-at-Risk (VaR) to a risk. What does this measure represent?
- The expected loss in the worst 0.5% of scenarios
- The maximum loss the company will ever face
- The loss level exceeded only 0.5% of the time (Correct answer)
- The average loss given that losses exceed the 95th percentile
Correct answer: The loss level exceeded only 0.5% of the time
VaR at the 99.5th percentile is the loss threshold exceeded with only 0.5% probability over the specified horizon.
Question 6: Which credibility formula correctly expresses the full-credibility standard for claim counts when Z = 1 is desired?
- n ≥ (z_α/2 / r)² × (1 + CV²) (Correct answer)
- n ≥ (z_α/2)² / p(1-p)
- n ≥ z_α/2 × σ / r
- n ≥ (z_α/2 / r)² × (1 + CV²_s)
Correct answer: n ≥ (z_α/2 / r)² × (1 + CV²)
Full credibility for claim counts requires n ≥ (z_{α/2}/r)² × (1 + CV² of severity) when claim sizes vary.
Question 7: The Actuarial Standards Board (ASB) issues ASOPs. What is the primary purpose of an ASOP?
- To impose legal liability on actuaries who deviate from standards
- To provide enforceable regulations equivalent to state insurance law
- To identify appropriate actuarial practices and the documentation needed (Correct answer)
- To set minimum educational requirements for actuarial credentialing
Correct answer: To identify appropriate actuarial practices and the documentation needed
ASOPs identify what the actuary should consider, document, and disclose — they are guidance standards, not laws.
Actuary Certification ACTUARY Professional and Practical Applications 2
An actuary is asked to certify a pension plan's actuarial valuation.
Which professional standard most directly governs this certification?