LOMA 361 STUDY GUIDE EXAMS ANSWERS AND
QUESTIONS SET A+
✔✔Insurance Regulatory Information System (IRIS) ratios - ✔✔Specific financial ratios
used by insurance regulators in the U.S. used to identify insurance companies with the
greatest potential need for regulatory attention.
Ratios 1-8 test solvency and profitability.
Ratios 9-12 test financial stability.
✔✔IRIS Phases - ✔✔1. Statistical phase.
2. Analytical phase.
✔✔statistical phase - ✔✔IRIS phase which uses the 12 standardized financial IRIS
ratios to identify companies that show results outside a usual range. A report showing
percentile rankings among all life insurance companies after ratios are calculated using
data from the U.S. Annual Statement.
✔✔exception - ✔✔Result outside the usual range.
✔✔analytical phase - ✔✔IRIS phase which a team of financial examiners analyze the
U.S. Annual Statement and IRIS ratio results of specified insurance companies, typically
whose statistical phase revealed 4 or more ratios outside the usual range.
✔✔scenario analysis - ✔✔Technique that employs quantitative modeling, involves
entering different sets of data into a model and then determining how changes in the
input data affect the mode's output.
✔✔Financial Analysis and Solvency Tracking (FAST) System - ✔✔System used by the
NAIC to detect financial distress in large insurers' financial statement information:
1. Ratio analysis of the insurer's most recent financial statements.
2. Five-year history analysis of specific aspects of the insurer's financial statements.
, ✔✔cash-flow testing (CFT) - ✔✔Type of scenario analysis projecting the cash flows
associated with an insurer's existing business and comparing the timing and amounts of
cash flows for assets and liabilities after the valuation date.
Performed using scenarios of assumed future economic and operating conditions.
Commonly used for valuing an insurer's liabilities whose cash flows are sensitive to
interest rate fluctuations.
✔✔dynamic financial analysis (DFA) - ✔✔Type of scenario analysis which uses
simulation modeling and multiple-scenario testing to project future values for the
insurer's assets, liabilities, and owners' equity.
It tests a larger number of randomly generated, user-defined assumptions over a series
of multiple iterations for a given product.
Helps identify a likely range of values for various aspects of a product's future
experience, given a set of product management strategies.
Helps identify scenarios that may pose financial problems and actions to resolve them.
✔✔capital adequacy - ✔✔The minimum amount of capital that an insurer must have to
meet a specified standard for capital.
✔✔liquidity adequacy - ✔✔The minimum amount of liquidity that an insurer must have
to meet its requirements for cash.
✔✔risk-based capital (RBC) requirements - ✔✔Requirements set by the NAIC which
determine the minimum capital level for an insurer based on that insurer's size and risk
profile, as identified by a risk-weighted formula relative to 4 classifications of
contingency risks.
✔✔contingency risks (C-risks) - ✔✔Risks which determine an insurer's minimum level
of liquidity and capital. These risks are evaluated relative to its invested assets and the
products that it underwrites.
✔✔C-1 risk (asset risk) - ✔✔Risk that the insurer will lose asset value to its investment
such as stocks, bonds, mortgages, and real estate.
✔✔C-1 Risk Examples - ✔✔1. Loss in market value of assets (except if caused by
interest-rate movements).
2. Borrower's failure to pay principle and/or interest owed to the insurer.
QUESTIONS SET A+
✔✔Insurance Regulatory Information System (IRIS) ratios - ✔✔Specific financial ratios
used by insurance regulators in the U.S. used to identify insurance companies with the
greatest potential need for regulatory attention.
Ratios 1-8 test solvency and profitability.
Ratios 9-12 test financial stability.
✔✔IRIS Phases - ✔✔1. Statistical phase.
2. Analytical phase.
✔✔statistical phase - ✔✔IRIS phase which uses the 12 standardized financial IRIS
ratios to identify companies that show results outside a usual range. A report showing
percentile rankings among all life insurance companies after ratios are calculated using
data from the U.S. Annual Statement.
✔✔exception - ✔✔Result outside the usual range.
✔✔analytical phase - ✔✔IRIS phase which a team of financial examiners analyze the
U.S. Annual Statement and IRIS ratio results of specified insurance companies, typically
whose statistical phase revealed 4 or more ratios outside the usual range.
✔✔scenario analysis - ✔✔Technique that employs quantitative modeling, involves
entering different sets of data into a model and then determining how changes in the
input data affect the mode's output.
✔✔Financial Analysis and Solvency Tracking (FAST) System - ✔✔System used by the
NAIC to detect financial distress in large insurers' financial statement information:
1. Ratio analysis of the insurer's most recent financial statements.
2. Five-year history analysis of specific aspects of the insurer's financial statements.
, ✔✔cash-flow testing (CFT) - ✔✔Type of scenario analysis projecting the cash flows
associated with an insurer's existing business and comparing the timing and amounts of
cash flows for assets and liabilities after the valuation date.
Performed using scenarios of assumed future economic and operating conditions.
Commonly used for valuing an insurer's liabilities whose cash flows are sensitive to
interest rate fluctuations.
✔✔dynamic financial analysis (DFA) - ✔✔Type of scenario analysis which uses
simulation modeling and multiple-scenario testing to project future values for the
insurer's assets, liabilities, and owners' equity.
It tests a larger number of randomly generated, user-defined assumptions over a series
of multiple iterations for a given product.
Helps identify a likely range of values for various aspects of a product's future
experience, given a set of product management strategies.
Helps identify scenarios that may pose financial problems and actions to resolve them.
✔✔capital adequacy - ✔✔The minimum amount of capital that an insurer must have to
meet a specified standard for capital.
✔✔liquidity adequacy - ✔✔The minimum amount of liquidity that an insurer must have
to meet its requirements for cash.
✔✔risk-based capital (RBC) requirements - ✔✔Requirements set by the NAIC which
determine the minimum capital level for an insurer based on that insurer's size and risk
profile, as identified by a risk-weighted formula relative to 4 classifications of
contingency risks.
✔✔contingency risks (C-risks) - ✔✔Risks which determine an insurer's minimum level
of liquidity and capital. These risks are evaluated relative to its invested assets and the
products that it underwrites.
✔✔C-1 risk (asset risk) - ✔✔Risk that the insurer will lose asset value to its investment
such as stocks, bonds, mortgages, and real estate.
✔✔C-1 Risk Examples - ✔✔1. Loss in market value of assets (except if caused by
interest-rate movements).
2. Borrower's failure to pay principle and/or interest owed to the insurer.
