Bionic Turtle FRM Practice Questions P1.T3. Financial Markets and Products Chapter 2. Insurance Companies and Pension Plans

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Bionic Turtle FRM Practice Questions
P1.T3. Financial Markets and Products
Chapter 2. Insurance Companies and Pension Plans

By David Harper, CFA FRM CIPM
www.bionicturtle.com
P1.T3.21.3. INSURANCE COMPANIES ........................................................................................ 3

P1.T3.21.4. RATIOS FOR PROPERTY-CASUALTY (P&C) INSURANCE COMPANIES......................... 6
P1.T3.21.5. MORAL HAZARD AND INSURANCE COMPANY PREMIUMS ............................................ 9
P1.T3.702. LIFE INSURANCE PRODUCTS AND MORTALITY TABLES ..............................................12
P1.T3.703. INSURANCE COMPANY RATIOS ...............................................................................15
P1.T3.704. INSURANCE COMPANY REGULATIONS AND PENSION FUNDS ......................................18
2

P1.T3.21.3. Insurance companies
P1.T3.21.4. Ratios for Property-Casualty (P&C) Insurance Companies
P1.T3.21.5. Moral hazard and insurance company premiums
P1.T3.702. Life insurance products and mortality tables
P1.T3.703. Insurance company ratios
P1.T3.704. Insurance company regulations and pension funds
P1.T3.21.3. Insurance companies

Learning outcomes: Describe the key features of the various categories of insurance
companies and identify the risks facing insurance companies. Describe the use of
mortality tables and calculate the premium payment for a policy holder. Distinguish
between mortality risk and longevity risk and describe how to hedge these risks.
21.3.1. Most insurance is written by either life/annuity, health, or property/casualty (aka, non-life)
insurance companies. Insurance transfers risk from an individual or company to the insurance
company. Which of the following statements is TRUE?
a) Variable life insurance exposes the policyholder to investment risk
b) Whole life insurance exposes the insurance company to longevity risk
c) Term life insurance exposes the insurance company to inflation risk
d) Property-casualty insurance exposes the insurance company to mortality risk
21.3.2. The mortality table (aka, period life table) below was extracted from actual 2021
projections by the U.S. Social Security Administration. For males and females age 30 to 37,
inclusive, this table shows the
conditional probability of death within
one year, the cumulative survival
probability, and the life expectancy.
Let's assume that an insurance

company uses this table to price a
two-year term life insurance policy
with a face value of USD $1.0 million
for a female policyholder who is 34
years old. The discount rate is 6.0%
per annum with annual
compounding. Which is nearest to
the minimum annual premium that
should be charged by the company
(note: inspired by GARP's EOC PQ
2.12)?
a) $97.50
b) $330.40
c) $1,020.00
d) $5,040.00
3
21.3.3. Acme Industrial Corporate is the plan sponsor for a defined benefit pension plan. At the
time of their retirements, participants are promised an annual benefit that is the product of three
components: 1.5% * Number of years of service * Average three-year salary. To hedge its
exposure to longevity risk, Acme seeks to employ derivatives. Let "MR" represent a mortality
rate. Which of the following is the best hedge against Acme's longevity risk with respect to the
defined benefit pension plan?
a) A longevity swap where Acme periodically Pays a Fixed premium and Receives Notional
Principal × (Realized MR - Prespecified MR)
b) A longevity swap where Acme periodically Pays a Fixed premium and Receives Notional
Principal × (Prespecified MR - Realized MR)
c) A longevity option that Acme purchases (long option) and that has a payoff equal to
max(0, Realized MR - Prespecified MR)
d) A longevity option that Acme sells/write (short option) and that has a payoff equal to
max(0, Prespecified MR - Realized MR)
4
Answers:
21.3.1. A. True: Variable life insurance exposes the policyholder to investment risk
In regard to (B), (C), and (D), each is FALSE. Instead, the following are TRUE statements:
 Whole life insurance exposes the insurance company primarily to mortality risk
 Term life insurance provides coverage for a pre-specified period or number of years.
Inflation would erode the value of both the future premiums and the contingent payout.
For term life, the much greater risk to the insurance company is mortality risk.
 Property-casualty insurance exposes the insurance company to asset (e.g., home, auto)
damage and/or losses related to perils such as theft or extreme weather (e.g., first)
21.3.2. C. TRUE: $1,020.00
The probability of a payout in the first year is 0.001026 and the probability of a payout in the
second year is (1 - 0.001026)*0.001075 = 0.001073897.
Therefore, the present value (PV) of the expected cost of the policy is $1,026.00/1.06^0.5 +
$1,073.90/1.06^1.5 = $1,980.56.
The first premium is at time zero. The second premium is paid one year later with a probability
of 1 - 0.001026 = 0.9989740.
If the premium is X, the PV is given by X + 0.9989740/1.06 = 1.94242830*X.
The minimum premium solves for X given that 1.94242830*X = $1,980.56, such that X =
$1,980.56/1.94242830 = $1,019.63.
21.3.3. B. TRUE: A longevity swap where Acme periodically Pays a Fixed premium and
Receives Notional Principal × (Prespecified MR - Realized MR)
Acme is exposed to longevity risk such that Acme needs the swap to payoff when the realized
mortality rate (MR) is low. An option would work but Acme would need to purchase an option
with a payoff equal to max(0, Prespecified MR - Realized MR). Writing an option is an inferior
hedge, and in any case, the short option's payoff would need to be equal to max(0, Realized
MR - Prespecified MR) so that its payoff is zero: this short option would indeed be a type of
hedge to the extent that Acme would keep the premium to mitigate the higher cost implied by a
low realized MR.
Discuss here in the forum: https://www.bionicturtle.com/forum/threads/p1-t3-21-3-insurance-

companies.23861/
5
P1.T3.21.4. Ratios for Property-Casualty (P&C) Insurance Companies

Learning outcomes: Describe defined benefit plans and defined contribution plans and
explain the differences between them. Compare the various types of life insurance
policies. Calculate and interpret loss ratio, expense ratio, combined ratio, and operating
ratio for a property-casualty insurance company.
21.4.1. For its most recent fiscal year, Acehouse Property-Casualty (APC) reports revenue of
$300.0 million. Losses due to payouts (aka, loss and loss adjustment expense) were $213.0
million. Expenses (aka, underwriting expenses) were $69.0 million. Dividends paid were $6.0
million. Investment income was $9.0 million. What was the Operating ratio; aka, Combined ratio
after dividends (CRAD) adjusted for Investment Income?
a) 7.0%
b) 23.0%
c) 93.0%
d) 106.%
21.4.2. Acme pension started the quarter with a pension plan that was fully funded with neither
a surplus nor a shortfall. During the quarter, the discount rate used to estimate the projected
benefit obligation (PBO) was increased by a rather dramatic 1.5%. If we (unrealistically) assume
no other assumptions changed (aka, ceteris paribus), which of the following is most likely to be
TRUE?
a) The pension fund will need to shift its asset allocation to include a higher percentage of
equities
b) The pension fund may be able to shift its asset allocation to include a lower percentage
of equities
c) The plan's sponsor should be able to reduce earned benefits but will not be able to alter
future benefit accruals
d) The plan's sponsor probably will be required to increase its contribution to the fund
above the previously expected level
6
21.4.3. Acme is a large, diversified insurance company with an AA+ rating and a complex
capital structure owing to its size. This year Acme will issue two debt instruments. One is a
regular corporate bond that pays a 6.0% per annum coupon. The other is a CAT (catastrophe)
bond triggered by Florida hurricane event(s). Given Acme's strong credit rating and financial
cushion, the probability of a hurricane event is significantly greater than Acme's default
probability. Of course, a CAT bond has unique features that suggest the motivations, for the
issuer (aka, Acme) and its investors, will differ from the motivations related to a regular bond. In
regard to these motivations and the advantages/disadvantages of a CAT bond, which of the
following statements is TRUE?
a) To the issuer (Acme), an advantage of the CAT bond is that it can be offered a lower
yield (i.e., cost of capital) than Acme's regular bond
b) To the issuer (Acme), a disadvantage of the CAT bond is the counterparty (risk)
exposure to the investors who might default in the event the CAT bond is triggered
c) To investors, an advantage of the CAT bond is that yield will be higher will probably be
higher than Acme's regular bond
d) To investors, a disadvantage of the CAT bond is that its high idiosyncratic risk (aka,
specific risk) will confer poor diversification benefits
7
Answers:
21.4.1. C. TRUE: 93.0%. See below.
21.4.2. B. TRUE: The pension fund may be able to shift its asset allocation to include a
lower percentage of equities
21.4.3. C. TRUE: To investors, an advantage of the CAT bond is that yield will be higher
will probably be higher than Acme's regular bond
Discuss here in the forum: https://www.bionicturtle.com/forum/threads/p1-t3-21-4-ratios-for-

property-casualty-p-c-insurance-companies.23870/
8
P1.T3.21.5. Moral hazard and insurance company premiums

Learning outcomes: Describe moral hazard and adverse selection risks facing insurance
companies, provide examples of each, and describe how to overcome these problems.
Evaluate the capital requirements for life insurance and property-casualty insurance
companies. Compare the guaranty system and the regulatory requirements for insurance
companies with those for banks.
21.5.1. Insurance is the quintessential risk transfer product. The customer pays premiums to the
insurance company, who provides coverage by making a promise to pay (aka, the contingent
payout) in the event of a covered loss. In addition to risk transfer, another key element of
insurance is the pooling of the premium dollars: the insurance company is diversified with
respect to the loss event type. Insurance is a legal contract and very broadly, the FRM
categorizes insurance contracts as one of three types: life; property and casualty (P&C); or
health insurance. (Although sub-categories of insurance dynamically emerge, to be sure!). In
regard to the key risk types, each of the following statements is true EXCEPT which is false?
a) Moral hazard is the primary risk for life insurance companies

b) Adverse selection occurs before insurance is purchased and is a risk that is enabled due
to an asymmetric information problem
c) Moral hazard occurs after insurance is purchased and is a material risk for heath and
property-casualty (P&C) insurance companies
d) Insurance companies reduce their moral hazard risk with policy deductibles
21.5.2. Given their obligations (insurance is a legal contract), insurance companies have
internal and external (i.e., regulatory) capital requirements. In regard to regulations, capital, and
capital requirements at insurance companies, which of the following statements is TRUE?
a) In the European Union (EU), Basel IV regulates the capital requirements for international
(i.e., cross-border) insurance companies
b) The leverage ratio, as defined by assets-to-equity, is likely to be higher for a life
insurance company than a property-casualty company (ceteris paribus)
c) On the insurance company's balance sheet, the unearned premiums are assets that are
matched by liabilities such as investments in corporate bonds
d) In the United States, regulation of insurance companies is primarily conducted at the
Federal level and the Federal (U.S.) government maintains a permanent fund to protect
the policyholders of chartered insurance companies
9
21.5.3. Customers of insurance companies do not like to see their premiums increase,
obviously. At the same time, most customers care about the claims process and quality: if the
insurance doesn't pay out when it is needed, so the cheapest policy is not always the best! In
regard to an increase in the premium(s), which of the following is MOST LIKELY to be TRUE?
a) A whole life insurance premium increases in the middle of the policy because the
insurance company's shareholders have demanded an increase in the dividend
b) A variable life insurance premium increases because new genetic information (i.e.,
family tree insights) reduces the policy holder's life expectancy
c) A health insurance premium increases due to a higher cost for physician services, new
technologies and/or hospital upgrades
d) A health insurance premium increases because the policyholder develops unexpected
health problems that were unanticipated when the policy was written
10
Answers:
21.5.1. A. Moral hazard is not a key risk (and hardly the primary risk) for life insurance
companies. The key risk for life insurance is mortality risk; i.e., the risk that people die
sooner than expected.
In regard to (B), (C) and (D), each is TRUE. Specifically,

 Adverse selection occurs before insurance is purchased and is a risk that is enabled due
to an asymmetric information problem: high-risk customers know more about their risks
than the insurance company. The insurance company must be able to differentiate its
pricing according to risk.
 Moral hazard occurs after insurance is purchased and is a material risk for heath and
property-casualty (P&C) insurance companies, but according to GARP, "Moral hazard is
not a big problem in life insurance."
 Insurance companies reduce their moral hazard risk with policy deductibles
21.5.2. B. TRUE: The leverage ratio, as defined by assets-to-equity, is likely to be higher

for a life insurance company than a property-casualty company (ceteris paribus)
In regard to (A), (C) and (D), each is FALSE. Instead:

 In the European Union (EU), Solvency II (https://en.wikipedia.org/wiki/Solvency_II)
governs the capital requirements for insurance companies
 On the insurance company's balance sheet, the unearned premiums are liabilities and
investments in corporate bonds are examples of assets.
 In regard to insurance regulation, there exists no global regulatory requirements
analogous to the Basel III/IV requirements for banks. In the United States, insurance is
regulated by states rather than the U.S. Federal government. There does exists the
National Association of Insurance Commissions (NAC).
21.5.3. C. TRUE: A health insurance premium increases due to a higher cost for
physician services, new technologies, and/or hospital upgrades
In regard to (A), (B) and (D), each is FALSE. Instead,

 The life insurance company cannot increase the premium during the policy; they can
increase the premium when the policy renews
 The Affordable Care Act modified the treatment of pre-existing conditions
(https://en.wikipedia.org/wiki/Pre-existing_condition). The problem with pre-existing
conditions is that the insurance company is exposed to adverse selection which limits
their ability to properly pool risk. However, the development of a health problem
subsequent to the policy's inception is precisely the situation that insurance is meant for!
Discuss here in the forum: https://www.bionicturtle.com/forum/threads/p1-t3-21-5-moral-

hazard-and-insurance-company-premiums.23884/
11
P1.T3.702. Life insurance products and mortality tables

Learning objective: Describe the key features of the various categories of insurance
companies and identify the risks facing insurance companies. Describe the use of
mortality tables and calculate the premium payment for a policy holder.
702.1. Below is an extract (selected rows) from a mortality table:
Which is nearest to the probability of a man aged 80 years old dying in the second year
(between ages 81 and 82)?
a) 0.39%
b) 1.76%
c) 6.20%
d) 7.31%
12
702.2. Below is an extract from a mortality table (ages 30 to 34 for males and females):
Suppose a woman aged 30 years old buys a $1.0 million whole life insurance policy and she
pays an annual premium of $6,000. What is approximately the surplus premium in the first year
of the policy?
a) There is no surplus premium; i.e., zero
b) $5,336.00
c) $5,885.00
d) $5,919.00
702.3. There are many different life insurance products, including term, whole, variable,
universal, variable-universal, and endowment. Each of the following definitions is
correct EXCEPT which is false?
a) Whole life insurance lasts for the whole life of the policyholder, while term life insurance
lasts a fixed period (e.g., five years or ten years)
b) Universal life insurance is a type of whole life insurance where the premium can be
reduced to a specified minimum level without the policy lapsing
c) Variable life insurance is a type of term life insurance where the cash value grows at a
variable interest rate; e.g., a variable index such as LIBOR plus a margin
d) Endowment life insurance lasts for a specified period and pays a lump sum either (i)
when the policyholder dies or (ii) at the end of the period, whichever happens first
13
Answers:
702.1. C. 6.20%. This is the probability that he does not die in the first year multiplied by the
probability that he does die in the second year, which is given by (1 - 0.0594030) * 0.0658730 =
0.0619599 = 6.19599%
702.2. B. $5,336.00. For a 30-year female, the conditional one-year probability of death is
0.000664 such that the surplus premium is equal to $6,000 - ($1,000,000 * 0.0006640) = $6,000
- $664 = $5,336.00
702.3. C. False. Variable life insurance is a type of whole life insurance where the policyholder
can specify how the funds generated in early years (the excess of the premiums over the
actuarial cost of the insurance) are invested. There is a minimum payout on death, but the
payout can be more than the minimum if the investments do well.
In regard to (A), (B) and (D) each are true. To summarize:

 Term Life Insurance (aka, temporary life insurance) expires after a specified number of
years. If the policyholder dies during the policy’s life, the beneficiaries are paid the face
value of the policy. Otherwise, no payment is made. A typical motivation for term life
insurance is to enable the policyholder’s dependents to pay off a mortgage.
 Whole Life Insurance (aka, permanent life insurance) provides insurance for the entire
life of the policyholder. The policyholder makes regular (monthly or annual) payments
until she dies. Upon death, the face value of the policy is paid to the designated
beneficiaries. As such, whole life insurance is guaranteed to eventually make a payment;
the uncertainty regards only the timing (conditional on a currency policy of course). In a
typical whole life policy, the payments and face value are constant.
 Variable Life Insurance: as above
Discuss here in forum: https://www.bionicturtle.com/forum/threads/p1-t3-702-life-insurance-

products-and-mortality-tables-hull.10 259/
14
P1.T3.703. Insurance company ratios

Learning objective: Calculate and interpret loss ratio, expense ratio, combined ratio, and
operating ratio for a property-casualty insurance company. Describe moral hazard and
adverse selection risks facing insurance companies, provide examples of each, and
describe how to overcome the problems.
703.1. In its annual report, Acehouse Property-Casualty presents a summary of selected key
ratios (but where we've hidden four of the values):
Each of the following statements it true EXCEPT which is false?

a) The Expense Ratio of 30.0% includes loss adjustment expenses
b) The Expense Ratio of 30.0% includes marketing expenses and commissions paid to
brokers
c) Because its combined ratio is greater than 100.0%, Acehouse is NOT a profitable
business
d) For each $1.00 in premiums received, Acehouse pays out (and/or reserves for payouts)
about $0.75 in claims to its customers
703.2. Two of the key risks facing insurance companies are moral hazard and adverse
selection. Three of the following examples are illustrations of moral hazard, but one is an
example of adverse selection. Which is the example of adverse selection?
a) An individual buys health insurance and consequently increases their demand for health
care services
b) A cell phone owner buys a "total equipment protection" insurance plan and,
consequently, becomes more careless with the phone
c) Because it is backed by a government-sponsored deposit insurance plan, a bank is less
worried about losing depositors and consequently it takes on more risks
d) A health insurance company is mandated by government to offer the same price
(premium cost) to all new customers so that it cannot increase the relative price of riskier
customers and consequently it attracts more high-risk customers
15
703.3. Catastrophe (CAT) bonds are a popular derivative instrument for hedging catastrophic
risk. A CAT bond pays a higher-than-normal interest rate and is often issued by a subsidiary of
an insurance company. Each of the following is TRUE about the features of a CAT
bond EXCEPT which is false?
a) For an insurance company, issuing CAT bonds is an alternative to reinsurance: the
interest or principal can be used to meet claims
b) CAT bonds tend to have little or no correlation to market returns such that their total risk
can be diversified away in a large portfolio
c) A drawback of CAT bonds is the covered loss depends on a definition of "catastrophic
loss" which is inevitably subjective and qualitative so that the issuer's basis risk is high
d) An inevitable feature of catastrophic risk is that the loss events are highly dependent on
each other; the loss events are not independent and usually they are not even nearly
independent
16
Answers:
703.1. C. False, as this ignores the insurance company's float (its investment income). In
Hull's Table 3.2 (which is the basis for this question), Dividends equal 1.0% and Investment
Income equals 9.0% such that the Combined ratio (after dividends) = 105% + 1% = 106% and
the Operating ratio = 106% - 9% = 97% such that the firm is profitable. Here is Hull's actual
Table 3.21:
In regard to (A), (B) and (D), each is TRUE.

 The expense ratio is the ratio of expenses to earned premiums; these expenses include
adjustment expenses, marketing expenses, and paid broker commissions
 The combined ratio is the loss ratio plus the expense ratio.
703.2. D. This is an example of adverse selection, but (A), (B) and (C) are examples of
moral hazard.
Moral hazard is the problem that the existence of insurance may promote riskier behavior. The
deductible is one way to overcome the problem of moral hazard. Additional partial solutions
include policy limits and co-insurance provisions. Adverse selection is problem that faces the
insurance company when it cannot identify the difference between good and bad risks. Due
diligence helps to overcome (or alleviate) the problem of adverse selection.
703.3. C. False. The catastrophe loss is contractually defined an depends on the trigger
which can be an indemnity trigger, an index (aka, industry) trigger, a parametric trigger,
or a modeled trigger. None of these are subjective. In the case of an indemnity trigger,
basis risk is low.
Discuss here in forum: https://www.bionicturtle.com/forum/threads/p1-t3-703-insurance-

company-ratios-hull.10267/
1
John C. Hull, Risk Management and Financial Institutions, 5th edition (Hoboken, New Jersey: John Wiley & Sons,
2018). But the displayed spreadsheet was created by David Harper.
17
P1.T3.704. Insurance company regulations and pension funds

Learning objectives: Distinguish between mortality risk and longevity risk and describe
how to hedge these risks. Evaluate the capital requirements for life insurance and
property-casualty insurance companies. Compare the guaranty system and the
regulatory requirements for insurance companies with those for banks. Describe a
defined benefit plan and a defined contribution plan for a pension fund and explain the
differences between them.
704.1. A defined benefit pension fund is 50.0% invested in equities and 50.0% invested in
bonds. If we assume the simplest possible balance sheet, which is MOST LIKELY to be the net
effect of a scenario where equities are approximately flat, but interest increase by 100 basis
points? Please note this inspired by Hull's EOC Question 3.182, so it makes simplifying
assumptions such as (i) the rate increase is a parallel shift of both short- and long-term interest
rates, (ii) durations are not managed, and (iii) the fund is not hedged.
a) Improvement in funded status because present value of liabilities decreases more than
assets decrease
b) Improvement in funded status because present value of assets increases more than
liabilities increase
c) Deterioration in funded status because present value of liabilities increases more than
assets increase
d) Deterioration in funded status because present value of liabilities decreases more than
assets decrease
704.2. In regard to these statements about insurance companies, each is generally

true EXCEPT which is false?
a) Property-casualty insurance companies hold more capital than life insurance companies
b) Annuity contracts are exposed to longevity risk, but life insurance contracts are exposed
to mortality risk
c) Basel II and Basel III determine the regulatory capital requirements for life insurance and
property-casualty insurance companies in both the U.S. and European Union (EU)
d) In regard to the guaranty system in the US: there is a permanent federal fund for banks,
but there are insurance companies that do not have a permanent fund
2
2018).
18
704.3. Suppose the following assumptions for a certain defined benefit pension plan:
 Employees work for 35.0 years earning wages that increase with inflation.
 They retire with a pension equal to 70.0% of their final salary.
 This pension also increases with inflation. The pension is received for 18.0 years.
 The pension fund's income is invested in bonds that earn the inflation rate.
Which of the following is nearest to an estimate of the percentage of an employee's salary that
must be contributed to the pension plan if it is to remain solvent? Hint: Do all calculations in real
rather than nominal dollars. (Please note this is inspired by Hull's EOC Question 3.15)3
a) 9.0%
b) 18.0%
c) 36.0%
d) 72.0%
3
2018).
19
Answers:
704.1. A. TRUE. Improvement in funded status because present value of liabilities

decreases more than assets decrease
An increase in the interest rate implies an increase in the discount rate used to value the
liabilities; this decreases the present value of the liabilities. An increase in the interest should
affect a decrease in the value of the bonds (on the asset site) per the typical inverse relationship
between bond prices and yields. However, bonds are only 50% of the asset mix so that the
liability impact should be greater than the asset impact, for a net positive effect on the pension's
funded status.
And for further reference, this question is based on Hull's end-of-chapter (EOC) question 3.184:
 Hull's EOC Question 3.18 Question: During a certain year, interest rates fall by 200
basis points (2%) and equity prices are flat. Discuss the effect of this on a defined
benefit pension plan that is 60% invested in equities and 40% invested in bonds.
 Answer: "The value of a bond increases when interest rates fall. The value of the bond
portfolio should therefore increase. However, a lower discount rate will be used in
determining the value of the pension fund liabilities. This will increase the value of the
liabilities. The net effect on the pension plan is likely to be negative. This is because the
interest rate decrease affects 100% of the liabilities and only 40% of the assets."4
704.2. C. False. In the EU, Solvency II is the major directive

(https://en.wikipedia.org/wiki/Solvency_II_Directive_2009) which determines the regulatory
capital requirements for insurance companies. In the US, as Hull discusses, insurance
companies are regulated at the state level.

 In regard to true (A): The payouts by property-causality (P&C) are more variable than life
insurance payouts due to the low-frequency, high-severity (LFHS) of catastrophes.
 In regard to true (B): longevity risk is the risk of prolonged life due to, for example,
lifestyle improvements and/or medical advances; longevity risk adversely impacts
annuity contracts. Mortality risk is the risk that people will die sooner than expected due
to, for example, pandemic; mortality risk adversely impacts life insurance contracts.
 In regard to true (D): In regard to the guaranty system in the US: there is a permanent
federal fund for banks, but there are insurance companies that do not have a permanent
fund.
704.3. C. 36.0%
The employee’s wages are constant in real terms. Suppose that they are X per year. (The units
for X do not matter for the purposes of our calculation.) The pension is 0.70*X. The real return
earned is zero. Because employees work for 35.0 years, the present value of the contributions
made by one employee is 35.0*X*R where R is the contribution rate as a percentage of the
4
2018).
20
employee’s wages. The present value of the benefits is 18 * 70% = 12.6 * X. The value of R that
is necessary to adequately fund the plan must therefore satisfy: 35.0*X*R = 12.6 * X, so that R =
12.6/35.0 = 36.0%.
Discuss here in forum: https://www.bionicturtle.com/forum/threads/p1-t3-704-insurance-

company-regulations-and-pension-funds-hull.10277/
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Bionic Turtle FRM Practice Questions

P1.T3. Financial Markets and Products

Chapter 2. Insurance Companies and Pension Plans

Chapter 2. Insurance Companies and Pension Plans

P1.T3.21.3. INSURANCE COMPANIES ........................................................................................ 3

Chapter 2. Insurance Companies and Pension Plans

P1.T3.21.3. Insurance companies

Let's assume that an insurance

21.3.2. C. TRUE: $1,020.00

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P1.T3.21.4. Ratios for Property-Casualty (P&C) Insurance Companies

21.4.1. C. TRUE: 93.0%. See below.

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P1.T3.21.5. Moral hazard and insurance company premiums

a) Moral hazard is the primary risk for life insurance companies

In regard to (B), (C) and (D), each is TRUE. Specifically,

21.5.2. B. TRUE: The leverage ratio, as defined by assets-to-equity, is likely to be higher

In regard to (A), (C) and (D), each is FALSE. Instead:

In regard to (A), (B) and (D), each is FALSE. Instead,

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P1.T3.702. Life insurance products and mortality tables

702.1. Below is an extract (selected rows) from a mortality table:

In regard to (A), (B) and (D) each are true. To summarize:

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P1.T3.703. Insurance company ratios

Each of the following statements it true EXCEPT which is false?

In regard to (A), (B) and (D), each is TRUE.

In regard to (A), (B) and (D), each is TRUE.

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P1.T3.704. Insurance company regulations and pension funds

704.2. In regard to these statements about insurance companies, each is generally

704.1. A. TRUE. Improvement in funded status because present value of liabilities

704.2. C. False. In the EU, Solvency II is the major directive

In regard to (A), (B) and (D), each is TRUE.

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