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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

Which statement best distinguishes a life insurance company from a property-casualty (P&C) insurance company in terms of liability characteristics?

Life insurers hold long-duration liabilities with fairly predictable claims because mortality is statistically stable, while P&C insurers write short-term policies whose claims are more volatile and uncertain in timing and amount, driven by events such as catastrophes and liability suits.

  1. ALife insurers typically have long-duration liabilities with relatively predictable claims, while P&C insurers have short-duration liabilities with more uncertain claim timing and sizeCorrect
  2. BLife insurers have short-duration liabilities that are repriced annually, while P&C insurers have long-duration liabilities fixed for decades
  3. CBoth have liabilities of identical duration, differing only in the premium currency
  4. DP&C insurers have predictable mortality-driven claims, while life insurers face catastrophe-driven claims

Explanation

Life insurance contracts often run for decades and mortality is statistically predictable across large pools. P&C policies are generally one year or shorter and claims, driven by events like storms and liability suits, are more volatile in timing and size. The reversed descriptions in the other options are wrong.

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