Mixed Deck — All CAA Topics Flashcards

Which of the following best describes 'opportunity cost'?

Answer: The value of the next best alternative foregone

Opportunity cost is the value of the best alternative you give up when making a choice, capturing the true economic cost of any decision.

What does the time value of money principle state?

Answer: A dollar today is worth more than a dollar in the future

The time value of money principle states that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

Which US regulatory framework requires life insurers to hold minimum reserves for individual life policies?

Answer: Statutory Accounting Principles (SAP) under NAIC model laws

US life insurers must hold statutory reserves under NAIC model laws, which apply Statutory Accounting Principles designed to ensure policyholder protection and solvency.

The Weighted Average Cost of Capital (WACC) represents:

Answer: The average return required by all capital providers, weighted by their proportions in the capital structure

WACC blends the costs of debt and equity, each weighted by their respective share of total capital, and represents the minimum return a firm must earn to satisfy all its capital providers.

What does 'peer review' mean in the context of actuarial work?

Answer: An independent check by another qualified actuary to verify methods, assumptions, and results

Peer review in actuarial practice is an independent examination by another qualified actuary to verify the appropriateness of methods, assumptions, and numerical results.

What is the primary actuarial concern with 'guaranteed issue' health insurance products that do not use medical underwriting?

Answer: The risk pool will likely include disproportionately sicker individuals, creating adverse selection and higher-than-average claims

Without medical underwriting, guaranteed issue products attract a higher proportion of unhealthy applicants, leading to adverse selection and a claims experience worse than the general population average.

What is the primary goal of risk analysis in actuarial science?

Answer: To identify, assess, and mitigate risks

Risk analysis helps identify, assess, and mitigate potential financial and operational risks to ensure stability.

What does Value at Risk (VaR) measure?

Answer: The worst expected loss over a given time frame

VaR estimates the maximum potential loss in a portfolio over a given period with a certain confidence level.

If a fair coin is flipped twice, what is the probability of getting two heads?

Answer: 1/4

Each flip has a probability of 1/2 for heads. The probability of two heads is (1/2) × (1/2) = 1/4.

What is meant by 'loss development' in property and casualty actuarial reserving?

Answer: The change in reported claim amounts over time as additional information becomes available

Loss development describes how reported claim totals change as new information emerges, requiring actuaries to project ultimate losses from immature data.

What is the formula for compound interest?

Answer: A = P(1 + r/n)^(nt)

The compound interest formula is A = P(1 + r/n)^(nt), where P is the principal, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years.

In a normal distribution, what percentage of data falls within one standard deviation of the mean?

Answer: 68%

In a normal distribution, approximately 68% of the data falls within one standard deviation of the mean.

What is the 'policy reserve' in a traditional whole life insurance policy?

Answer: The liability the insurer must hold to meet future policy obligations, funded by past premiums in excess of current costs

The policy reserve is an actuarial liability representing the present value of future benefits minus the present value of future net premiums, funded by premium overpayments in early policy years.

Which scenario would require a actuarial analyst professional to escalate a data analysis & modeling concern?

Answer: Creating feedback mechanisms that encourage continuous improvement

Creating feedback mechanisms that encourage continuous improvement is the correct approach because effective data analysis & modeling in the actuarial analyst field requires adherence to professional standards, evidence-based practices, and systematic methodology. This approach ensures consistent, high-quality outcomes while maintaining professional accountability.

What does the term 'incurred but not reported' (IBNR) mean in health insurance reserving?

Answer: An estimated liability for claims that have already occurred but have not yet been submitted to the insurer

IBNR reserves represent the actuary's estimate of the liability for medical services already rendered but for which claims have not yet been filed or recorded by the insurer.

What is the primary purpose of the actuarial control cycle in practice?

Answer: To provide a framework for defining problems, designing solutions, monitoring experience, and adjusting accordingly

The actuarial control cycle is a structured framework guiding actuaries through problem definition, solution design, experience monitoring, and iterative refinement.

In US employer-sponsored group health insurance, what is the purpose of 'experience rating'?

Answer: Rating a group based on its own historical claims experience to reflect its actual risk profile

Experience rating adjusts a group's premium based on its own historical claims data, so that groups with good (or poor) claims experience pay premiums reflecting their actual risk.

What is the primary relationship between bond prices and interest rates?

Answer: They move in opposite directions

When interest rates rise, existing bond prices fall because new bonds offer higher yields, making existing bonds less attractive to investors.

What is the recommended frequency for reviewing and updating data analysis & modeling protocols?

Answer: Monitoring outcomes through regular data collection and trend analysis

Monitoring outcomes through regular data collection and trend analysis is the correct approach because effective data analysis & modeling in the actuarial analyst field requires adherence to professional standards, evidence-based practices, and systematic methodology. This approach ensures consistent, high-quality outcomes while maintaining professional accountability.

What is 'credibility theory' used for in group health insurance ratemaking?

Answer: Blending a group's own experience with industry-wide data to produce a more reliable rate estimate

Credibility theory provides a weighted blend of a group's own experience and a broader manual rate, with the weight on own experience increasing as the group's data becomes more statistically reliable.