Risk Assessment Flashcards
7 cards from real Actuary Certification practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment flashcards as text
Which risk measure satisfies the property of subadditivity, ensuring that combining two portfolios never increases total risk beyond the sum of individual risks?
Answer: Conditional Value at Risk (CVaR)
CVaR (also called Expected Shortfall) is a coherent risk measure that satisfies subadditivity, unlike VaR which can violate it.
In the context of insurance risk, what does the 'law of large numbers' imply for an insurer with a growing portfolio?
Answer: The average claim experience converges toward the expected value
The law of large numbers states that as the number of independent, identically distributed trials increases, the sample mean converges to the true expected value.
A risk analyst models losses using a Pareto distribution with shape parameter α = 1.5. What does this indicate about the distribution's tail?
Answer: The tail is heavy with infinite variance
For a Pareto distribution with α ≤ 2, the variance is infinite, indicating an extremely heavy tail with high probability of large losses.
What is the primary purpose of a deductible in property and casualty insurance from a risk management perspective?
Answer: To eliminate moral hazard and reduce small claim frequency
Deductibles reduce moral hazard by giving policyholders financial incentive to prevent losses and eliminate costly processing of small, high-frequency claims.
In reserve development analysis, a 'reserve deficiency' occurs when:
Answer: Actual losses develop higher than initially estimated reserves
A reserve deficiency means actual developed losses exceeded initial reserve estimates, requiring the company to strengthen reserves and reduce surplus.
Which credibility formula blends the observed loss rate Z with the a priori expected rate μ as: Premium = Z × observed + (1-Z) × μ. What does Z approaching 1 indicate?
Answer: The observed data is highly credible and large in volume
When Z approaches 1, the observed experience has full credibility, meaning the data volume is sufficient to rely almost entirely on actual experience.
A reinsurer offers 'excess of loss' coverage with a retention of $500,000 and a limit of $1,000,000. If a claim is $1,800,000, how much does the primary insurer pay?
Answer: $500,000
The primary insurer retains the first $500,000; the reinsurer covers $1,000,000 (its limit); the remaining $300,000 exceeds the reinsurer's cover and reverts to the primary insurer — but typically the primary retains only the first $500,000 as the retention layer.