[LOMA 371 EXAM] – EXAM-STYLE QUESTIONS AND ANSWERS | VERIFIED AND
WELL DETAILED ANSWERS | PLUS RATIONALES | GUARANTEED PASS | 2026/27
LATEST UPDATE | EXAM PREP | STUDY GUIDE | PRACTICE TEST
SECTION ONE: QUESTIONS 1 – 50
1. An insurer's internal audit function has identified a recurring pattern of
premium payments being applied to incorrect policy accounts due to data
entry errors. Which type of operational risk does this scenario primarily
exemplify?
A. Model risk
B. Outsourcing risk
C. Processing risk
D. Strategic risk
Correct Answer: C. Processing risk
*Rationale: Processing risk refers to the potential for loss resulting from inadequate
or failed internal processes, people, or systems. The scenario directly describes a
failure in the premium payment processing workflow. Model risk (A) relates to using
incorrect or misapplied models. Outsourcing risk (B) is associated with third-party
vendors. Strategic risk (D) pertains to adverse business decisions or the failure to
adapt to changes in the business environment.
2. According to the LOMA 371 framework, what is the PRIMARY purpose of a
company's reinsurance program?
,A. To increase the company's gross premium income.
B. To reduce the volatility of underwriting results and manage capital.
C. To transfer all investment risk to a third party.
D. To comply with mandatory state insurance department regulations.
Correct Answer: B. To reduce the volatility of underwriting results and manage
capital.
*Rationale: Reinsurance is fundamentally a risk management tool used by insurers
to mitigate the financial impact of large or numerous claims, thereby stabilizing
underwriting results and reducing the amount of capital required to support the
risks they assume. While it may increase premium income indirectly through ceding
commissions, its primary purpose is risk transfer and capital management, not
income generation (A). It primarily transfers underwriting risk, not investment risk
(C). While a company's reinsurance program can help with regulatory compliance,
that is a secondary benefit, not the primary purpose (D).
3. A policyholder has a universal life policy and is concerned about the policy
lapsing. She asks her agent about the minimum amount she must pay to keep
the coverage in force for the next policy year. What term best describes this
amount?
A. Premium load
B. Minimum premium
C. Target premium
D. No-lapse guarantee premium
Correct Answer: D. No-lapse guarantee premium
,*Rationale: The no-lapse guarantee premium is the minimum amount that must be
paid to keep a universal life policy in force for a specific period, typically under the
terms of a secondary guarantee. The premium load (A) is a fee deducted from the
premium. Minimum premium (B) is a general term but is not the specific term for
this guarantee. Target premium (C) is a benchmark used for commission
calculations.
4. The underwriting department at a life insurer has developed a new
predictive model to assess mortality risk. After implementation, they notice the
model is disproportionately declining applicants from certain geographic
regions, even after controlling for known risk factors. This is a potential
indication of which issue?
A. Model overfitting
B. Model drift
C. Model bias
D. Model validation failure
Correct Answer: C. Model bias
*Rationale: Model bias occurs when a model systematically produces results that
are prejudiced due to flawed assumptions or skewed data, leading to unfair or
discriminatory outcomes. The disproportionate decline of applicants from a specific
region, when other risk factors are controlled, suggests the model may be unfairly
penalizing a protected characteristic, which is a classic sign of bias. Overfitting (A) is
when a model performs well on training data but poorly on new data. Model drift
(B) is the degradation of a model's predictive power over time. Validation failure (D)
is a broader issue where the model does not meet pre-defined acceptance criteria.
, 5. In enterprise risk management, what is the most accurate definition of "risk
appetite"?
A. The total amount of risk an organization can assume before becoming
insolvent.
B. The amount and type of risk an organization is willing to accept in pursuit of its
strategic objectives.
C. The specific risk limits established by a company's board of directors for its
investment portfolio.
D. The process of identifying, assessing, and mitigating all potential threats.
Correct Answer: B. The amount and type of risk an organization is willing to
accept in pursuit of its strategic objectives.
*Rationale: Risk appetite is a high-level, strategic concept that defines the overall
willingness of an organization to take on risk to achieve its goals. It is not just about
solvency (A), which is the risk capacity. It is broader than specific investment limits
(C). The process of identifying and mitigating risks is risk management, not risk
appetite (D).
6. A life insurance company is evaluating its asset portfolio. Which of the
following would be classified as the MOST liquid asset on its balance sheet?
A. Corporate bonds
B. Commercial mortgages
C. Common equities
D. U.S. Treasury bills
WELL DETAILED ANSWERS | PLUS RATIONALES | GUARANTEED PASS | 2026/27
LATEST UPDATE | EXAM PREP | STUDY GUIDE | PRACTICE TEST
SECTION ONE: QUESTIONS 1 – 50
1. An insurer's internal audit function has identified a recurring pattern of
premium payments being applied to incorrect policy accounts due to data
entry errors. Which type of operational risk does this scenario primarily
exemplify?
A. Model risk
B. Outsourcing risk
C. Processing risk
D. Strategic risk
Correct Answer: C. Processing risk
*Rationale: Processing risk refers to the potential for loss resulting from inadequate
or failed internal processes, people, or systems. The scenario directly describes a
failure in the premium payment processing workflow. Model risk (A) relates to using
incorrect or misapplied models. Outsourcing risk (B) is associated with third-party
vendors. Strategic risk (D) pertains to adverse business decisions or the failure to
adapt to changes in the business environment.
2. According to the LOMA 371 framework, what is the PRIMARY purpose of a
company's reinsurance program?
,A. To increase the company's gross premium income.
B. To reduce the volatility of underwriting results and manage capital.
C. To transfer all investment risk to a third party.
D. To comply with mandatory state insurance department regulations.
Correct Answer: B. To reduce the volatility of underwriting results and manage
capital.
*Rationale: Reinsurance is fundamentally a risk management tool used by insurers
to mitigate the financial impact of large or numerous claims, thereby stabilizing
underwriting results and reducing the amount of capital required to support the
risks they assume. While it may increase premium income indirectly through ceding
commissions, its primary purpose is risk transfer and capital management, not
income generation (A). It primarily transfers underwriting risk, not investment risk
(C). While a company's reinsurance program can help with regulatory compliance,
that is a secondary benefit, not the primary purpose (D).
3. A policyholder has a universal life policy and is concerned about the policy
lapsing. She asks her agent about the minimum amount she must pay to keep
the coverage in force for the next policy year. What term best describes this
amount?
A. Premium load
B. Minimum premium
C. Target premium
D. No-lapse guarantee premium
Correct Answer: D. No-lapse guarantee premium
,*Rationale: The no-lapse guarantee premium is the minimum amount that must be
paid to keep a universal life policy in force for a specific period, typically under the
terms of a secondary guarantee. The premium load (A) is a fee deducted from the
premium. Minimum premium (B) is a general term but is not the specific term for
this guarantee. Target premium (C) is a benchmark used for commission
calculations.
4. The underwriting department at a life insurer has developed a new
predictive model to assess mortality risk. After implementation, they notice the
model is disproportionately declining applicants from certain geographic
regions, even after controlling for known risk factors. This is a potential
indication of which issue?
A. Model overfitting
B. Model drift
C. Model bias
D. Model validation failure
Correct Answer: C. Model bias
*Rationale: Model bias occurs when a model systematically produces results that
are prejudiced due to flawed assumptions or skewed data, leading to unfair or
discriminatory outcomes. The disproportionate decline of applicants from a specific
region, when other risk factors are controlled, suggests the model may be unfairly
penalizing a protected characteristic, which is a classic sign of bias. Overfitting (A) is
when a model performs well on training data but poorly on new data. Model drift
(B) is the degradation of a model's predictive power over time. Validation failure (D)
is a broader issue where the model does not meet pre-defined acceptance criteria.
, 5. In enterprise risk management, what is the most accurate definition of "risk
appetite"?
A. The total amount of risk an organization can assume before becoming
insolvent.
B. The amount and type of risk an organization is willing to accept in pursuit of its
strategic objectives.
C. The specific risk limits established by a company's board of directors for its
investment portfolio.
D. The process of identifying, assessing, and mitigating all potential threats.
Correct Answer: B. The amount and type of risk an organization is willing to
accept in pursuit of its strategic objectives.
*Rationale: Risk appetite is a high-level, strategic concept that defines the overall
willingness of an organization to take on risk to achieve its goals. It is not just about
solvency (A), which is the risk capacity. It is broader than specific investment limits
(C). The process of identifying and mitigating risks is risk management, not risk
appetite (D).
6. A life insurance company is evaluating its asset portfolio. Which of the
following would be classified as the MOST liquid asset on its balance sheet?
A. Corporate bonds
B. Commercial mortgages
C. Common equities
D. U.S. Treasury bills
