Actuarial Science CT6 Statistical Methods Quick Review

Are you an Actuarial Science Aspirant? Are you planning to give an interview to a General Insurance company? Then you should have most probably cleared the introductory paper to General Insurance- CT-6 (Statistical Methods).

CT-6 is a very interesting subject to study. But when it comes to the interview preparation are you scared of what questions will come from this subject and how to prepare for the interview? The idea of going through the entire study material for an interview might seem to be very daunting. But from now you can keep all those worries aside. In this article, I have put together some questions that are likely to be asked by CT-6 in an interview.

CT-6 brings to you the basics one must know about the General Insurance. Since you are reading this article regarding the interview questions related to CT-6 I presume you guys know the content of this subject. Let’s have a quick review of the subject. Here is a list of some questions and answers that could be asked from CT-6.

Q. What is credibility theory? What is the use of credibility theory?
Ans: Credibility theory is a tool used by Actuaries to assess the risk when examining the data. Actuaries make mathematical models for making estimates based on the historical data. On credibility theory, there will be a historical data and base estimate on the basis of which the risks are calculated.

This theory helps actuaries understand the risk and it limits the exposure of insurance companies to claims and losses. For example, the insurance company analyzes the risk of a new insurance policy by analyzing the data of a previous similar insurance policy.

Q. What is meant by reinsurance?
Ans: In layman’s language reinsurance means insurance provided to insurance companies.  Reinsurance refers to the insurance provided to insurance companies to cover large financial risks that may be out of the insurer’s capacity. 

Just like we get ourselves insured, the insurance companies also get themselves insured using reinsurance. For instance, a heavy claim comes to an insurance company and then the company can share its financial burden with the reinsurer. So reinsurance protects an insurance company from large losses.

Policyholders pay a premium to the insurance companies in exchange for the protection. Similarly, a company that purchases reinsurance pays a premium to the reinsurance company, who in exchange would pay a share of the claims incurred by the purchasing company.

Q. What is the difference between the Bayesian Statistics and EBCT?
Ans: Under Bayesian methods, the prior distribution is fixed before any data are observed but in EBCT model the estimation is based on data only without the use of statistical distribution.

Q. Can you please give me a brief introduction to ruin theory?
Ans: Ruin theory is also known as risk theory. Ruin theory uses mathematical models to describe the insurer’s vulnerability to insolvency/ ruin. It calculates the probability of ruin for an insurance company. So once we assess the risk the company can find appropriate measures to mitigate the risk.

Q. What is meant by premium loading?
Ans: Premium loading refers to the amount an insurer needs to cover its expenses and generate profit. Fair premium is determined using premium loading and pure premium.

Q. What is the application of the Generalized Linear Model?
Ans: The Generalized Linear Model is a generalization of the general linear model. In general linear model, a dependent variable must be linearly associated with values on the independent variables whereas the relationship in the Generalized Linear Model (GLM) between the dependent variable and independent variables can be non-linear.

In Generalized Linear Model, due to the categorical dependent variable, we cannot find out the linear relationship between dependent and independent variables. Therefore, we need a function called ‘Link function’ through which we can establish a linear relation with independent variables.

Linear regressions can be used in business to evaluate trends and make estimates or forecasts.

Q. What is the application of Time Series?
Ans: Time Series analysis is the collection of data at specific intervals over a period of time, to identify the trends in the data and it is used to predict a future event based on previously observed values.

In time series analysis, data must be measured over fixed time intervals that form trends, cycles, and seasonal variances. Measurements at random intervals lose the ability to predict future events.

Q. What is meant by Simulation?
Ans: It is the technique of generating random numbers by using a base distribution- Uniform (0,1). It is used for modeling the risk or uncertainty of a system.

We can generate Uniform (0, 1) numbers using Excel, calculator, LCG method, table or it will be given.

Q. State the difference between Pseudo-Random Numbers and Truly Random Numbers.
Ans: Pseudo Random Numbers are generated from ‘Tables’ and hence it will remain fixed throughout whereas Truly Random numbers are generated using a calculator or computer and hence it cannot be repeated frequently because it changes every time.

Some advantages and disadvantages of Pseudo-Random Numbers are:

Advantages:

  • Generated through the computer algorithm
  • It is fixed and hence can be reproduced

Disadvantages

  • Not truly random

Some advantages and disadvantages of Truly Random Numbers are:

Advantages

  • Useful in the lottery, casinos, online games, art, music etc.

Disadvantages

  • Difficult to produce again
  • Storage problem
  • Time-consuming

Q. What is the use of run-off triangle?
Ans: Run-off triangles are used to calculate claim reserves in General Insurance. In other words, it is used to forecast future claim numbers and amounts.

The insurance company does not know the exact figure for total claims each year because there are claim delays i.e. there will be some time before a claim is notified or reported to the insurer and the firm must try to estimate that figure with as much confidence and accuracy as possible. To find how much is needed to be set aside now as a reserve to meet future payments to be made on the claims we use run-off triangles.

There are four methods of calculating reserves:

  1. Chain-ladder method
  2. Inflation-adjusted chain-ladder method
  3. Average cost per claim method and
  4. Bornhuetter-Ferguson method

Q. What is meant by IBNR and an outstanding reported?
Ans:
IBNR refers to the reserves required in respect of claims that have been occurred but not reported. In insurance IBNR (Incurred But Not Reported) claims is the amount owed by an insurer to all valid claimants who have covered loss but not yet reported it. Since the insurer is unaware of the claims IBNR is necessarily an estimate.

Outstanding reported refers to the reserves required in respect of claims that have been reported but have not yet been closed.

The sum of IBNR plus outstanding reported yields an estimate of total eventual liabilities the insurer will cover, known as ultimate losses.

These are the most likely asked questions from CT6 but the list does not end here. I have compiled the most frequently asked questions and answers.

For an interview to go well you should be confident and think calmly and answer the question in the best way possible. Even if you do not know any answer remain confident and never panic because your attitude is what matters the most in an interview.

Hope this article helps you.

Best Wishes!

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