I85PREP
⌘ K
IAI SA7 study materials
IAI SA7 study resources

IAI SA7 practice questions

One question at a time. Build your IAI SA7 understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A specialist insurer writes a three-year group of term assurance contracts. No group is onerous and there are no adjustments for financial risk. Under IFRS 17, the contractual service margin is recognised in profit or loss:

  1. Only when the contracts expire or are derecognised, with any remaining balance then released to equity
  2. Systematically over the coverage period, in line with the insurance coverage provided Correct answer.
  3. In full at initial recognition, because the margin is earned when the contract is issued and the premium is received
  4. Through other comprehensive income at the transition date, as a one-off adjustment

Explanation

The contractual service margin is unearned profit, so it is released to profit or loss as the insurer provides coverage, normally using coverage units that reflect the quantity of benefits and the expected coverage period. It is not taken at inception, deferred to expiry, or routed through OCI, which carries insurance finance income or expense. Changes in estimates relating to future service adjust the margin rather than profit or loss.

Question 2Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

An insurer's liabilities have a modified duration of 11.0 years while its assets have a modified duration of 6.5 years. Which action most directly reduces the interest-rate mismatch of the surplus?

  1. Buy long-dated bonds to raise the asset duration towards the liability duration Correct answer.
  2. Increase the equity weighting so that expected returns better cover the liability discount rate
  3. Shorten asset duration further to reduce the sensitivity of the asset portfolio to interest rates
  4. Move the portfolio into money-market instruments until the interest-rate outlook becomes clearer

Explanation

Duration matching reduces the sensitivity of the surplus to parallel shifts in the yield curve, so asset duration should be raised towards the 11-year liability duration. Equities, money-market instruments and further duration reduction all widen or leave unchanged the current 4.5-year gap.

Question 3Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In an insurer's enterprise risk management framework, risk capacity is best described as:

  1. The operational limits that are cascaded to underwriting and investment desks under the framework
  2. The maximum aggregate loss produced by a single scenario within the modelled catastrophe set
  3. The maximum risk the insurer can bear given its capital, liquidity and regulatory constraints Correct answer.
  4. The risk-return trade-off the board is willing to accept in a given line of business

Explanation

Risk capacity is the outer boundary set by resources and constraints, principally capital, liquidity, regulatory minima and rating requirements. Risk appetite is the board's chosen position inside that boundary, and limits are the cascade of that appetite to business units.

Question 4Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A motor portfolio runs at a 108% combined ratio, comprising a 78% loss ratio and a 30% expense ratio. The insurer cedes 40% of the portfolio under a quota share treaty carrying a 25% ceding commission. The most likely effect on the retained account is:

  1. The retained combined ratio improves, but only if the treaty also includes a profit commission
  2. The retained combined ratio improves, because the ceding commission offsets the ceded underwriting loss
  3. The retained combined ratio worsens, while the absolute expected loss and the volatility of the result both fall Correct answer.
  4. The retained combined ratio is unchanged and the expected result is unchanged, because a proportional treaty scales premium, losses and expenses equally

Explanation

The commission of 25% is below the 30% expense ratio, so the insurer retains its full expense base while giving away 40% of premium, and the net combined ratio moves from 108% to about 111%. The absolute underwriting loss is nevertheless smaller and the variance of the retained result is reduced, which is the usual rationale for ceding a loss-making or volatile account.

Question 5Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A property insurer buys a per-occurrence catastrophe excess-of-loss cover attaching at the 1-in-50-year level and exhausting at the 1-in-200-year level. For an event at the 1-in-200-year return period, the effect on the insurer is that:

  1. Retained losses are capped near the exhaustion point, reducing tail volatility and catastrophe capital Correct answer.
  2. Retained losses are capped at the attachment point, so all catastrophe exposure above that level is removed
  3. Capital rises, because the reinsurance premium reduces own funds by more than the risk reduction achieved
  4. Capital is unchanged, because reinsurance recoveries are not recognised on the solvency balance sheet

Explanation

The layer absorbs losses between the 1-in-50 and 1-in-200-year levels, so the retained loss for events up to that severity is limited to roughly the exhaustion point, sharply reducing tail severity. Because catastrophe capital is driven by tail scenarios, the capital requirement normally falls once the risk transfer is recognised, even after allowing for the premium paid.

Question 6Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In an embedded value reporting framework, the value of in-force business is calculated as:

  1. The present value of future profits from the in-force book added to the shareholders' net assets, discounted at the risk-free rate
  2. The accumulated surplus arising on in-force business since inception, plus the shareholders' net assets
  3. The market value of assets less the best-estimate value of liabilities, with no explicit allowance for future profits or for the cost of capital
  4. The present value of future distributable profits from in-force business, net of the cost of required capital Correct answer.

Explanation

The value of in-force business is the present value of shareholder distributable profits emerging from the existing book, reduced by the frictional cost of holding required capital and, in full embedded value presentations, the cost of options and guarantees. It excludes shareholders' net assets, which are added separately to give total embedded value.

Question 7Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

Experience monitoring shows that withdrawal rates on a unit-linked savings product are materially higher than the pricing basis, concentrated in policy years three to five. The most direct consequence for the insurer is:

  1. Expected future profits fall, because acquisition costs incurred at outset are recovered over a shorter renewal period Correct answer.
  2. No change in profit recognition, because withdrawals are already allowed for in the pricing basis
  3. The contractual service margin is increased, with the increase recognised immediately in profit or loss
  4. Expected future profits rise, because fewer policies remain in force to receive the maturity benefit and the associated claims outgo falls

Explanation

Acquisition costs are incurred up front and recovered through charges over the expected policy term, so early withdrawals truncate the profit stream and can leave some policies unrecovered, producing a loss on those cohorts. The correct response is to review the persistency assumption, reprice or redesign charges, and reflect the change in the best-estimate assumptions used for reporting.

Question 8Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer writes a large volume of regular-premium business that is clearly profitable on an embedded value basis. Which statement about the resulting new business strain is correct?

  1. Upfront acquisition costs and reserve set-up exceed the first-year premium, so capital is needed even for profitable business Correct answer.
  2. Strain arises only where the business is loss-making on an embedded value basis, since profitable business finances itself
  3. Strain is a presentational convention with no effect on the insurer's financing or capital needs
  4. Strain is a feature of non-par business only, and it disappears entirely once the product is written on a unit-linked platform

Explanation

Strain is a cash and capital timing effect, not a value effect: acquisition expenses and the need to establish reserves are incurred before the margin emerges, so the insurer must fund the gap even when the business is profitable in embedded value terms. This is why fast-growing writers need shareholder capital or reinsurance financing such as financial reinsurance or a quota share.

Question 9Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A diversified insurer has two lines, each with a standalone 99.5% one-year VaR of INR 500 crore. Line A's marginal contribution to group VaR is INR 420 crore, while Line B's is INR 60 crore. Applying a marginal-contribution allocation, the most likely consequence is that:

  1. Line A bears most of the capital charge, so Line B's risk-adjusted performance appears superior despite identical standalone risk Correct answer.
  2. The allocations total INR 1,000 crore, which double-counts diversification and exceeds the capital the group actually holds
  3. Both lines are charged INR 500 crore, because standalone VaR is the only objective measure of the risk each line carries
  4. Line A must be charged at least its standalone VaR, so its allocation cannot fall below INR 500 crore under any method

Explanation

A marginal or Euler-type allocation charges each line the change in diversified group VaR caused by its presence, so the charges sum to the group total rather than to the sum of standalone figures. Line B's small marginal contribution reflects the diversification benefit it enjoys, which flatters its risk-adjusted return and can distort decisions if the line is genuinely risky on a standalone basis.

Question 10Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

An insurer must parameterise a low-frequency, high-severity operational risk for which only three internal loss events have been recorded. Which approach best manages the resulting model risk?

  1. Fit a heavy-tailed distribution to the three observed internal losses and adopt the maximum-likelihood parameters
  2. Use the largest loss observed in the last ten years, increased by a prudent margin, as the expected severity
  3. Credibility-weight internal and external data, document the judgement and test sensitivity to alternative assumptions Correct answer.
  4. Adopt the industry average severity directly, since external data are more credible than a small internal sample

Explanation

With so few internal observations, a pure internal fit is unreliable, so credibility weighting with external or scenario data, combined with documented expert judgement and sensitivity testing, gives a defensible and transparent estimate. Governance should also include periodic validation and clear escalation when the loss experience departs from the assumptions.

Question 11Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer writes a group of profitable whole-life contracts. Under IFRS 17, the contractual service margin at initial recognition is best described as:

  1. the present value of future profits recognised immediately in profit or loss
  2. the difference between the fulfilment cash flows and the premium, taken to other comprehensive income
  3. the risk adjustment for non-financial risk included in the fulfilment cash flows
  4. the unearned profit that is released to profit or loss as coverage is provided Correct answer.

Explanation

The contractual service margin is the unearned profit in a group of insurance contracts. At initial recognition it equals the premium less the fulfilment cash flows if that amount is positive, and it is released to profit or loss as services are provided. The risk adjustment is a separate component of the fulfilment cash flows, and the margin is not recognised immediately or taken to other comprehensive income.

Question 12Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer has written a large portfolio of immediate annuities and wishes to transfer longevity risk to a reinsurer. Which arrangement achieves this most directly?

  1. an asset swap converting fixed-interest bonds into floating-rate notes
  2. a stop-loss reinsurance cover on the portfolio's annual claim amounts
  3. a mortality catastrophe bond triggered by industry-wide death counts
  4. a longevity swap that exchanges fixed payments for the portfolio's actual annuity payments Correct answer.

Explanation

A longevity swap directly transfers the risk that annuitants live longer than assumed by exchanging fixed payments for actual annuity payments. Mortality catastrophe bonds and stop-loss covers address mortality or aggregate claim volatility, while an asset swap changes investment cash-flow characteristics rather than longevity risk.

Question 13Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer's regulatory solvency ratio is available capital divided by required capital. Which action would most directly increase the ratio, all else equal?

  1. investing a larger proportion of the asset portfolio in equity shares
  2. lengthening the duration of fixed-interest assets while liabilities remain unchanged
  3. ceding quota-share reinsurance with capital relief exceeding the capital ceded Correct answer.
  4. recognising a higher risk adjustment within the insurance contract liabilities

Explanation

The solvency ratio rises when required capital falls by more than available capital. Quota-share reinsurance can produce exactly that effect because it transfers both assets and liabilities and may reduce the capital requirement for insurance and market risks by more than the capital ceded. The other actions either increase risk, increase liabilities or alter asset-liability matching without a direct capital-relief mechanism.

Question 14Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer is profit-testing a profitable regular-premium endowment product. Which change in assumption would unambiguously reduce the present value of future profits, all else equal?

  1. a fall in the assumed rate of expense inflation
  2. an increase in the assumed investment return
  3. an increase in the assumed rate of expense inflation Correct answer.
  4. a reduction in the initial commission paid to agents

Explanation

Higher expense inflation increases projected renewal expenses and therefore reduces the present value of future profits for a profitable contract. Lower commission reduces acquisition strain, lower expense inflation reduces costs, and higher investment return increases expected earnings.

Question 15Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A unit-linked product includes a guaranteed minimum maturity benefit equal to premiums accumulated at 3% a year. The insurer values the guarantee stochastically on a market-consistent basis. Which factor is the primary driver of the time value of the guarantee?

  1. the persistency assumption for regular premiums
  2. the volatility of the underlying fund Correct answer.
  3. the level of mortality assumed over the term
  4. the insurer's expense inflation assumption

Explanation

The time value of an investment guarantee arises from uncertainty in the underlying fund: greater volatility increases the chance that the guarantee ends in the money and therefore raises its stochastic value. Mortality, expense inflation and persistency affect expected cash flows, but they are not the primary source of the guarantee's option time value.

Question 16Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

An insurer buys a risk-attaching excess-of-loss reinsurance treaty. Under this structure, a claim is allocated to the reinsurance year in which:

  1. the claim is notified to the reinsurer
  2. the reinsurance treaty was signed
  3. the loss event occurs Correct answer.
  4. the policy was originally underwritten

Explanation

Risk-attaching excess-of-loss cover allocates claims by the date of the loss event, not by the date the policy was written or the claim was notified. This contrasts with claims-made cover, where allocation depends on notification or claims-made period.

Question 17Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer operates a unit-linked bond with daily dealing and no surrender penalty. In a market downturn, a surge in surrenders is most likely to create liquidity risk because:

  1. regulatory capital requirement will fall
  2. assets must be sold to meet withdrawals as fund values fall Correct answer.
  3. mortality charges will increase over time
  4. fixed expenses will fall as policies lapse

Explanation

Liquidity risk arises when the insurer must meet cash outflows from surrenders by selling assets, particularly if asset values are falling and dealing is daily. Falling fixed expenses and lower capital requirements would ease, not worsen, liquidity pressure, and mortality charges are not the main issue.

Question 18Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

Under a risk-based capital framework, which instrument is typically classified as tier 2 capital for a life insurer?

  1. a reconciliation reserve arising from surplus assets
  2. subordinated debt with a fixed maturity Correct answer.
  3. retained earnings
  4. ordinary share capital

Explanation

Tier 2 capital generally includes subordinated liabilities and hybrid instruments that provide loss absorption but rank behind policyholders and senior creditors. Ordinary share capital, retained earnings and surplus reconciliation reserves are higher-quality tier 1 items.

Question 19Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer is setting mortality assumptions for a portfolio of immediate annuities. Which risk is most significant for the insurer's solvency?

  1. lapse rates rising above assumptions
  2. mortality deterioration being faster than assumed
  3. expense inflation being lower than assumed
  4. mortality improvement being faster than assumed Correct answer.

Explanation

For immediate annuities the insurer pays income for life, so faster mortality improvement lengthens payment durations and increases liabilities. Mortality deterioration reduces annuity payments and is favourable, while lapse and expense assumptions are less material for this risk.

Question 20Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A profit test of a life product gives a risk discount rate of 11%, a net present value of INR 40 lakh at that rate and an internal rate of return of 13%. If the insurer raises the risk discount rate to 14%, what is the most likely outcome?

  1. NPV stays positive and the IRR rises
  2. NPV rises and the IRR stays at 13%
  3. NPV turns negative and the IRR stays at 13% Correct answer.
  4. NPV falls and the IRR falls to 14%

Explanation

Net present value falls as the discount rate rises; with an IRR of 13% and a discount rate of 14%, the NPV becomes negative. The IRR is the break-even discount rate at which NPV is zero and does not change when the test discount rate changes.

Question 21Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

Under IFRS 17, the risk adjustment for non-financial risk in the measurement of a group of life insurance contracts represents:

  1. compensation for uncertainty in the amount and timing of future cash flows Correct answer.
  2. the unearned profit that is released as insurance services are provided
  3. the present value of future premiums less future claims and future expenses
  4. the amount of capital that the insurer must hold until every claim has been paid

Explanation

The risk adjustment is the explicit amount included in the fulfilment cash flows to reflect the compensation the insurer requires for bearing non-financial risk. It is not a capital requirement, nor is it the expected present value of premiums and claims, and it is separate from the contractual service margin, which represents unearned profit.

Question 22Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer enters into a reinsurance arrangement in which it cedes a fixed 30% of all premiums and receives reimbursement of 30% of all claims on a defined block of policies. This arrangement is best described as:

  1. excess of loss reinsurance
  2. quota share reinsurance Correct answer.
  3. stop loss reinsurance
  4. facultative proportional reinsurance

Explanation

Quota share reinsurance cedes a fixed percentage of every premium and every claim within the covered block. Facultative cover is arranged case by case, while excess of loss and stop loss protect against losses above a specified threshold rather than sharing all amounts proportionally.

Question 23Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a with-profits life insurance contract, a bonus that is declared periodically and, once added, forms part of the guaranteed benefits is called:

  1. a reversionary bonus Correct answer.
  2. an interim bonus
  3. a terminal bonus
  4. a special bonus

Explanation

A reversionary bonus is declared regularly and, once added, becomes guaranteed and cannot be removed. A terminal bonus is added only on maturity, death, or surrender, so it is not part of the regular guaranteed benefit stream.

Question 24Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In an embedded value report, the required capital for the in-force business is best described as:

  1. the market value of assets held in excess of the statutory minimum requirement
  2. the present value of future shareholder cash flows arising from the in-force business
  3. capital held to support the in-force business and released as it runs off Correct answer.
  4. the accumulated surplus that has already been distributed to shareholders

Explanation

Required capital is the amount the insurer must hold to satisfy regulatory and internal capital needs for the in-force block; it is not free surplus and is released over time as the business runs off. The present value of future shareholder cash flows is the value of in-force business, not the capital itself.

Question 25Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer has matched the modified duration of its assets and liabilities but remains exposed to interest rate risk because the cash flows are not perfectly matched. Which measure is most useful for assessing this residual risk?

  1. convexity Correct answer.
  2. credit spread duration
  3. liquidity ratio
  4. expense ratio

Explanation

Duration matching addresses first-order sensitivity to interest rate changes. Convexity captures the second-order curvature of the price-yield relationship and therefore the residual risk when asset and liability cash flows are not perfectly matched.

Question 26Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a life insurance profit test, the internal rate of return (IRR) of a product is:

  1. the risk discount rate required by the insurer's board for new business
  2. the rate of return earned on the insurer's invested assets over the calendar year
  3. the ratio of first-year profit to first-year premium expressed as a percentage
  4. the discount rate at which NPV of shareholder cash flows is zero Correct answer.

Explanation

The IRR is the discount rate that equates the present value of a product's shareholder cash flows to zero. It is a derived output of the profit test, not the insurer's investment return or the risk discount rate chosen by management.

Question 27Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

For a unit-linked life insurance contract where the policyholder bears the investment risk, which risk remains with the insurer?

  1. the risk that interest rates rise
  2. the risk that the policyholder's fund underperforms the market
  3. the risk that unit prices fall
  4. the risk that expenses are higher than assumed Correct answer.

Explanation

In a unit-linked contract the policyholder normally bears investment risk, including falls in unit prices and poor fund performance. The insurer retains risks such as expense risk, mortality risk, and lapse risk because these affect its charges and obligations.

Question 28Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer has written deferred annuity contracts that include a guaranteed annuity rate (GAR) option. The option allows policyholders to convert their accumulated fund into an annuity at a rate fixed at contract inception. Which combination of risks is most directly created by this option?

  1. credit risk arising from reinsurer default and liquidity risk
  2. currency risk on overseas assets and basis risk between indices
  3. longevity risk and interest rate risk Correct answer.
  4. expense risk from higher maintenance costs and persistency risk

Explanation

A GAR gives the policyholder the right to annuitise at a rate fixed in advance. If interest rates fall, the insurer cannot reinvest the fund at the assumed yield, and if annuitants live longer than expected, the annuity payments last longer; both increase the cost of the guarantee.

Question 29Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

An insurer is projecting mortality for a portfolio of immediate annuities. It observes that mortality has improved steadily over time and that each generation has experienced lower mortality than the previous one. Which approach best captures this pattern?

  1. a period life table that makes no allowance for future mortality improvement
  2. a cohort projection model allowing for generation effects Correct answer.
  3. a crude mortality rate calculated from the portfolio's total deaths and exposed-to-risk
  4. a static mortality table based only on the most recent calendar year of experience

Explanation

Cohort projection models explicitly allow for generation effects, so each birth cohort can experience its own mortality improvement pattern. Period tables, static tables, and crude rates based on a single year do not capture the continuing improvement across generations.

Question 30Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

Under a risk-based capital framework for a life insurer, which item is typically deducted from available capital rather than included as a tier of capital?

  1. subordinated debt with a fixed maturity
  2. retained earnings
  3. ordinary share capital
  4. goodwill Correct answer.

Explanation

Goodwill is an intangible asset and is normally deducted from available capital because it cannot absorb losses on a going-concern or run-off basis. Ordinary share capital and retained earnings are tier 1 capital, while qualifying subordinated debt may count as tier 2 capital.

Question 31Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a life insurance profit test, the risk discount rate is used to discount projected shareholder cash flows. What does this rate primarily represent?

  1. The expected long-term yield on the insurer's fixed-income portfolio
  2. The regulator's prescribed valuation rate for mathematical reserves
  3. The shareholders' required return for bearing the product's risk Correct answer.
  4. The maximum rate at which policy loans may be granted

Explanation

The risk discount rate is the shareholder required return used to discount projected distributable profits; it reflects the opportunity cost and risk of the product. It is not the asset yield, a policy loan rate or a regulatory reserve valuation rate.

Question 32Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a unit-linked life insurance policy, which charge is intended to recover the cost of providing the death benefit cover?

  1. Mortality charge Correct answer.
  2. Surrender charge
  3. Policy administration charge
  4. Fund management charge

Explanation

The mortality charge recovers the cost of life cover and is normally deducted by cancelling units. Fund management, administration and surrender charges recover different expenses or early exit costs.

Question 33Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer wants reinsurance for a single large corporate key-person risk that falls outside its normal treaty arrangements. Which reinsurance type is most appropriate?

  1. Facultative reinsurance Correct answer.
  2. Quota share treaty
  3. Stop-loss treaty
  4. Surplus treaty

Explanation

Facultative reinsurance is arranged for an individual risk that is offered separately to the reinsurer, which may accept or decline it. Treaties such as quota share, surplus and stop-loss cover defined classes or portfolios automatically.

Question 34Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

An insurer writes a one-year renewable term contract. At each renewal, the insurer can reassess and reprice the risk for that policyholder. Under IFRS 17, how far do the contract's cash flows extend?

  1. To the end of the current period plus one renewal, because renewal is substantive
  2. To the policyholder's expected lifetime, because renewal is expected
  3. Until the policyholder reaches age 65, the maximum renewal age
  4. To the end of the current one-year coverage period Correct answer.

Explanation

IFRS 17 contract boundary includes cash flows only while the insurer is obliged to provide coverage and cannot reprice or reassess risk at individual contract level. Because the insurer can reprice each renewal, cash flows beyond the current coverage period are outside the boundary.

Question 35Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer is calculating the value of new business for a regular-premium protection product. All else being equal, which change would increase the reported value of new business?

  1. An increase in the initial commission paid to distributors
  2. A decrease in the expected premium persistency
  3. An increase in the risk discount rate
  4. A decrease in the risk discount rate Correct answer.

Explanation

A lower risk discount rate increases the present value of projected future shareholder profits, raising value of new business. Higher commission and weaker persistency reduce profits, while a higher discount rate lowers their present value.

Question 36Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer has two business units. Their standalone required capital amounts are INR 100 crore and INR 80 crore. After recognising diversification, the required capital for the combined portfolio is INR 150 crore. What is the diversification benefit?

  1. INR 30 crore Correct answer.
  2. INR 50 crore
  3. INR 20 crore
  4. INR 180 crore

Explanation

The diversification benefit is the difference between the sum of standalone required capital and the combined required capital: (100 + 80) - 150 = INR 30 crore. It arises because risks are not perfectly correlated.

Question 37Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a universal life contract, the insurer deducts a cost-of-insurance charge each month. This charge is normally applied to which amount?

  1. The full account value accumulated under the policy
  2. The net amount at risk on the policy Correct answer.
  3. The surrender value after deduction of outstanding policy loans
  4. The total premiums paid since inception plus interest

Explanation

Universal life cost-of-insurance charges recover the mortality cost on the net amount at risk, which is the death benefit less the account value. Applying the charge to the full account value, premiums or surrender value is not the standard COI base.

Question 38Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer has matched the durations of its assets and liabilities but its liabilities have greater convexity than its assets. If interest rates fall sharply, what is the most likely effect on the insurer's surplus?

  1. Surplus is unchanged, because durations are matched
  2. Surplus increases, because liabilities rise less than assets
  3. Surplus decreases, because liabilities rise more than assets Correct answer.
  4. Surplus increases, because higher convexity always benefits the insurer

Explanation

With duration matched, convexity governs the surplus effect for large rate moves. Greater liability convexity means liability values rise more than asset values when rates fall, so the surplus falls.

Question 39Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer transfers longevity risk through a swap that references a national population mortality index, while its own annuity portfolio has experienced significantly lighter mortality. Which risk remains most relevant to the insurer?

  1. Basis risk against the population index Correct answer.
  2. Credit risk on the reinsurer's shareholders' equity
  3. Mortality risk from unexpected increases in death rates
  4. Currency risk on the swap settlement payments

Explanation

A longevity swap referencing a population index leaves the insurer exposed to basis risk if its own annuitants' mortality improves differently from the index. The swap hedges longevity risk but does not necessarily track the insurer's bespoke experience.

Question 40Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a with-profits life fund, the asset share of a policy is best described as which of the following?

  1. Premiums accumulated less outgo plus investment return Correct answer.
  2. The regulatory minimum reserve required for the policy
  3. The amount guaranteed to be paid on surrender at any time
  4. The present value of future bonuses declared by the insurer

Explanation

The asset share is a retrospective accumulation of premiums less claims, expenses and other outgo, credited with the fund's investment return. It is not a guaranteed surrender value, a declaration of future bonuses or a regulatory minimum reserve.

Question 41Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a conventional without-profit term assurance contract, mortality profit in a financial year is best described as the amount by which:

  1. the investment return exceeds the valuation rate of interest
  2. actual claims are below expected claims plus reserve release Correct answer.
  3. the closing reserve exceeds the opening reserve for the portfolio
  4. premiums received exceed claims paid in the year

Explanation

Mortality profit is the surplus arising when deaths are lighter than assumed. It equals expected death claims plus the release of the reserve held for those claims, less actual death claims. It is not simply premiums less claims, because reserves are also released when a policyholder dies.

Question 42Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

For a traditional endowment assurance policy, the guaranteed surrender value is best described as:

  1. the present value of all future premiums payable under the policy
  2. the full asset share that has accumulated for the policy since commencement
  3. the sum assured discounted from the maturity date to the surrender date
  4. a regulatory minimum, often a specified proportion of premiums paid Correct answer.

Explanation

Guaranteed surrender values are regulatory minima, often expressed as a proportion of premiums paid, and are set out in the policy. They are not the asset share, which may be higher or lower, and they are not a discount of the sum assured. The guarantee protects the policyholder on early surrender.

Question 43Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In the context of a life insurer's regulatory balance sheet, 'free assets' typically means:

  1. the mathematical reserves held for policyholder liabilities
  2. assets held in the unit-linked funds and not available to meet other liabilities
  3. the paid-up share capital and share premium account
  4. the surplus of admissible assets over liabilities and required capital Correct answer.

Explanation

Free assets are the surplus capital available after admissible assets have covered mathematical reserves and the required solvency margin. They provide a buffer against adverse experience and support future new business. Unit-linked assets, mathematical reserves and share capital are separate balance sheet items.

Question 44Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer writes a large volume of regular-premium without-profit endowment business with high initial commission. All else being equal, the immediate effect on the insurer's free assets is:

  1. an increase, because the reserves are released immediately
  2. no change, because the business is profitable on a going-concern basis
  3. a decrease, because initial costs exceed premiums and reserves are set up Correct answer.
  4. an increase, because the premiums are received at the start of the policy

Explanation

New business strain arises because initial expenses, including commission, are incurred before premiums are received and reserves must be set up immediately. This reduces free assets at outset, even if the business is profitable over its lifetime. The strain is later recouped through margins in premiums.

Question 45Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a proportional reinsurance treaty with an experience refund provision, the refund payable by the reinsurer to the cedant is typically based on:

  1. the reinsurer's investment return on the ceded reserves
  2. a share of reinsurance profit after the reinsurer's expenses and margin Correct answer.
  3. the cedant's gross premium income under the treaty
  4. the amount of claims exceeding a specified retention under the treaty

Explanation

An experience refund returns part of the reinsurance profit to the cedant, usually after deducting the reinsurer's expenses and a profit margin. It aligns the cedant's interests with the reinsurer's and is not based on gross premiums, investment return or claims excess. The calculation is defined in the treaty.

Question 46Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In an analysis of change in embedded value, the 'operating experience variance' for a period captures:

  1. the effect of changes in economic assumptions such as interest rates and inflation
  2. the effect of changes in the required capital held
  3. actual operating experience versus the assumptions used in the EV calculation Correct answer.
  4. the value of new business written during the period, net of acquisition costs

Explanation

The operating experience variance isolates the effect of actual operating experience differing from the assumptions used in the embedded value calculation. It typically covers mortality, morbidity, lapses and expenses. Economic variances, new business and capital changes are reported separately.

Question 47Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

In a with-profits fund, the main purpose of a terminal bonus is to:

  1. distribute final surplus so the payout reflects asset share Correct answer.
  2. meet the insurer's solvency capital requirement at all times
  3. provide a guaranteed minimum return to policyholders throughout the term
  4. smooth the regular bonus rate over the whole policy term

Explanation

A terminal bonus distributes surplus that has accumulated over the policy term, aiming to bring the total payout closer to the policy's asset share. It is not guaranteed and can be reduced or removed. Regular bonuses smooth returns, while the terminal bonus provides the final adjustment.

Question 48Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

Under a market-consistent embedded value (MCEV) methodology, the time value of financial options and guarantees is best described as:

  1. the amount of capital required to be held against the options and guarantees under the regulator's standard formula
  2. the intrinsic value of the options and guarantees at the valuation date
  3. the excess of stochastic value over deterministic intrinsic value, reflecting asymmetry and volatility Correct answer.
  4. the cost of hedging the options and guarantees with derivative instruments

Explanation

The time value of options and guarantees is the additional value arising from volatility and asymmetry, measured as the stochastic value less the deterministic intrinsic value. It is not the intrinsic value itself, nor the cost of hedging, nor a regulatory capital charge. MCEV requires this to be valued on a market-consistent basis.

Question 49Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer calculates economic capital as the amount needed to cover unexpected losses over a one-year horizon at a 99.5% confidence level. Compared with regulatory capital, economic capital is typically:

  1. lower, because it ignores diversification benefits across business lines
  2. based only on accounting reserves and required solvency margin
  3. more aligned to its own risk profile and may add extra risks Correct answer.
  4. identical, because both are set by the regulator using the same formula

Explanation

Economic capital is an internal risk-based measure tailored to the insurer's own risk profile, and it may capture risks the regulatory formula does not fully reflect. It is not necessarily identical to or lower than regulatory capital, and it is not based only on accounting reserves. It can be higher or lower depending on the risks.

Question 50Specialist Advanced syllabus for SA7 - domain breakdown not enumerated in the official source

A life insurer cedes business to a reinsurer. The main credit risk arising from this arrangement is that:

  1. the cedant may lose investment returns on the ceded premium
  2. the reinsurer may demand substantially higher premiums at the next renewal date
  3. the reinsurer may compete with the cedant for new business
  4. the reinsurer may fail to pay valid claims or may default Correct answer.

Explanation

Credit risk in reinsurance is the risk that the reinsurer defaults or fails to pay valid claims, leaving the cedant exposed to the retained liability. Premium increases, lost investment return and competition are business or market risks, not credit risk. Insurers monitor reinsurer credit quality and may require collateral.