LOMA 371 QUESTIONS AND ANSWERS
Return on Equity (ROE)
(measures operating efficiency) - answer- = Net Income / Owners' Equity
or
= (Revenues - Expenses) / Owners' Equity
Required Rate of Return - answer- = Risk-free rate of return + Risk premium*
(* this serves as the incentive for an investor to pursue a specific investment
opportunity)
Minimum Required Assets - answer- = Minimum Required Reserves + Minimum
Required Capital
Credit Risks - answer- default risk
counterparty risk
Development expenses - answer- - product design and pricing
- purchase or design of new administrative software
- product approval
- creation of product brochures and sales information
- development of customer and trade promotions
Acquisition expenses (first-year expenses) - answer- - application underwriting
- establishment of variable product subaccounts
- producer and customer service training for new products
- preparation of new contracts and new customer records
- contract issue
- first-year commissions
Maintenance expenses (expenses after first-year) - answer- - renewal/trail commissions
- premium taxes
- changes to customer records
- transaction processing
- customer service activities
- preparation and distrubution of required communications
Market Risks - answer- equity risk
interest-rate risk
reinvestment rate risk
liquidity risk
currency risk
Underwriting Risks - answer- pricing risk
policyholder behavior risk
, Operational Risks - answer- distribution risk
human resources risk
technology risk
business process risk
business partner risk
event risk
Other Risks - answer- strategy risk
regulatory risk
competition risk
reputational risk
Components of ERM - answer- - A risk control process. (identify, evaluate, monitor,
limit)
- Extreme event management. (reinsurrance)
- A risk accountability framework. (risk committee or CRO)
- A risk management culture. (risk appetite = qualitative and risk Tolerance =
quanTitative)
- Strategic risk management.
Investment expenses - answer- - costs of analyzing investment opportunities
- purchasing assets
- selling assets
- servicing assets
General and Administrative expenses - answer- Expenses for contractual benefits
Operating expenses
- development expenses
- acquisition expenses
- maintenance expenses
- overhead expenses
Operating expenses - answer- - development expenses
- acquisition expenses
- maintenance expenses
- overhead expenses
Overhead expenses - answer- - agency support
- systems support
- furniture and equipment
Return on Equity (ROE)
(measures operating efficiency) - answer- = Net Income / Owners' Equity
or
= (Revenues - Expenses) / Owners' Equity
Required Rate of Return - answer- = Risk-free rate of return + Risk premium*
(* this serves as the incentive for an investor to pursue a specific investment
opportunity)
Minimum Required Assets - answer- = Minimum Required Reserves + Minimum
Required Capital
Credit Risks - answer- default risk
counterparty risk
Development expenses - answer- - product design and pricing
- purchase or design of new administrative software
- product approval
- creation of product brochures and sales information
- development of customer and trade promotions
Acquisition expenses (first-year expenses) - answer- - application underwriting
- establishment of variable product subaccounts
- producer and customer service training for new products
- preparation of new contracts and new customer records
- contract issue
- first-year commissions
Maintenance expenses (expenses after first-year) - answer- - renewal/trail commissions
- premium taxes
- changes to customer records
- transaction processing
- customer service activities
- preparation and distrubution of required communications
Market Risks - answer- equity risk
interest-rate risk
reinvestment rate risk
liquidity risk
currency risk
Underwriting Risks - answer- pricing risk
policyholder behavior risk
, Operational Risks - answer- distribution risk
human resources risk
technology risk
business process risk
business partner risk
event risk
Other Risks - answer- strategy risk
regulatory risk
competition risk
reputational risk
Components of ERM - answer- - A risk control process. (identify, evaluate, monitor,
limit)
- Extreme event management. (reinsurrance)
- A risk accountability framework. (risk committee or CRO)
- A risk management culture. (risk appetite = qualitative and risk Tolerance =
quanTitative)
- Strategic risk management.
Investment expenses - answer- - costs of analyzing investment opportunities
- purchasing assets
- selling assets
- servicing assets
General and Administrative expenses - answer- Expenses for contractual benefits
Operating expenses
- development expenses
- acquisition expenses
- maintenance expenses
- overhead expenses
Operating expenses - answer- - development expenses
- acquisition expenses
- maintenance expenses
- overhead expenses
Overhead expenses - answer- - agency support
- systems support
- furniture and equipment
