CIA.FCT-1

Question 1

What is the forecast period for FCT

Answer 1

Forecast period should be long enough to capture:
(1) risk emergence
(2) financial impacts
(3) ripple effects
(4) corrective action

Question 2

How do you determine the materiality standard for FCT

Answer 2

FCT sets the materiality standard with management input and by specifically considering:
- size of insured
- financial position
- nature of regulatory test

Question 3

Define the term base scenario

Answer 3

a set of assumption on risk factors that are consistent with the business plan over the forecast period

Question 4

Define the term adverse scenario

Answer 4

a scenario that is developed by stress-testing assumptions used in the business plan

Question 5

Define the term solvency scenario

Answer 5

a plausible adverse scenario:
- should fall above the 95th percentile on the loss distribution
- or possible as high as the 99th percentile and beyond depending on circumstances

Question 6

Define the term going-concern scenario

Answer 6

an adverse scenario that is more likely and less severe than a solvency scenario:
- should fall above the 90th percentile on the loss distribution

Question 7

What is a ripple effect

Answer 7

an event that occur when an adverse scenario triggers a change in 1 or more inter-dependent assumptions

Question 8

What is an integrated scenario for FCT

Answer 8

a scenario created by combining 2 or more risks factors to produce a new plausible adverse scenario

Question 9

Identify considerations in the development of a climate change scenario (3)

Answer 9

Physical risk: frequency and severity of wildfires, floods, winds events, rising sea levels

Transition risk: due to the economic shift to greener technologies

Liability risk: exposure to climate-related litigation

Question 10

When is a stochastic FCT model appropriate (2)

Answer 10

Risks where statistical loss distribution may be inferred
Risks related to capital markets

Question 11

When can the actuary report that the insurer is in satisfactory condition (3 conditions)

Answer 11

(1) under the base scenario: insurer meets it internal target capital ratios as determined by ORSA
(2) under the going-concern scenarios: insurer meets the regulatory minimum capital ratios
(3) under solvency scenarios: must have assets > liabilities

Question 12

Possible types of opinion the AA could include in the FCT report

Answer 12

• Satisfactory
• Satisfactory subject to appropriate corrective action (AA must be comfortable)
• Not satisfactory

Question 13

How many adverse scenarios should an FCT report include

Answer 13

at least 3, including 1 going-concern scenario and 2 solvency scenarios
(multiple risk categories)

Question 14

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Frequency and severity risk

Answer 14

Causes:
- catastrophe
- large claim

Ripple effects:
- loss of reinsurance for remainder of term
- increase in reinsurance rates or non-availability of reinsurance at the next renewal

Corrective management actions:
- reviewing reinsurance coverage, type, or contract terms at renewal
- implementing rate increases

Question 15

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Liabilities for incurred claims

Answer 15

Causes:
- selection of inadequate loss development factors
- class actions and other mass torts effective retroactively

Ripple effects:
- reduced CSM or increased LC
- rating agency downgrade

Corrective management actions:
- reviewing reserving and claim settlement practices
- implementing rate increases

Question 16

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Inflation risk

Answer 16

Causes:
- severe recession in the economy
- significant, rapid, and sustained increase in the general rate of inflation

Ripple effects:
- a rapid and sustained increase in market interest rate (to bring down inflation)
- increase in operating expenses

Corrective management actions:
- implementing rate increases
- reviewing types of product offered

Question 17

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Business volume significantly lower than the base scenario

Answer 17

Causes:
- entry of a new and strong competitor in the market
- inability to implement planned premium rate increases

Ripple effects:
- higher expenses (marketing)
- forced sale or liquidation of assets

Corrective management actions:
- implementing rate increases
- reducing personal and slowing down hiring

Question 18

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Business volume significantly higher than the base scenario

Answer 18

Causes:
- Withdrawal or failure of major competitors from a market
- Withdrawal or failure of major competitors from a market

Ripple effects:
- higher expenses (hiring of employees…)
- less favorable loss experience on new business due to inadequate pricing

Corrective management actions:
- implementing rate increases
- underwriting actions

Question 19

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Reinsurance risk

Answer 19

Causes:
- reinsurer insolvency
- increase in reinsurance rates

Ripple effects:
- increase in reinsurance rates arising from the need to obtain replacement reinsurance
- reduced availability of reinsurance

Corrective management actions:
- changing the reinsurance structure
- changing reinsurers

Question 20

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Market and Credit risk

Answer 20

Causes:
- A significant change in the yield curve
- A significant change in foreign exchange rates

Ripple effects:
- forced sale or liquidation of assets
- significant positive or negative cash flows impacting the insurer’s liquidity position

Corrective management actions:
- selling or reinvesting assets
- changing investment strategy

Question 21

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Government and political issues risk

Answer 21

Causes:
- rate freeze
- a change to regulations regarding use of rating variables that may impact the adequacy of rates

Ripple effects:
- higher FCFs than expected
- reduced availability of insurance to the public

Corrective management actions:
- reducing volume of business written or withdrawing from the jurisdiction or line of business
- reviewing the target mix by line of business or jurisdiction

Question 22

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Off-balance-sheet items risk

Answer 22

Causes:
- structured settlement
- contingent liabilities or losses

Ripple effects:
- forced sale or liquidation of assets
- signification positive or negative cash flows, affecting the insurer’s liquidity position

Corrective management actions:
- selling or reinvesting assets
- changing the reinsurance strategy

Question 23

Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Related companies risk

Answer 23

Causes:
- a reduction in reliance on the parent company for financial support
- an increase in the provision of financial support to the parent

Ripple effects:
- regulatory action to protect local policyholders
- management focus on group rather than company priorities, potentially delaying remedial action

Corrective management actions:
- finding alternative sources of funds for operational support
- selling or reinvesting assets

Question 24

Identify adverse scenarios: Expense Risk (5)

Answer 24

• inflation
• technology obsolescence
• court-awarded damages (ripple effects: reputational damages, litigation impacts)
• company structure
• merger and acquisitions (ripple effects: change in product pricing, low sales, higher cancellations or non renewals)

Question 25

Identify and describe climate related risks (2), 2 ripple effects and 2 management actions

Answer 25

• Physical risk, which arises from an increase in frequency and severity of climate events, that
  could disrupt critical operations, threaten the value of investments, and/or increase
  insurance risks.
• Transition risk, which is driven by a shift towards a lower carbon footprint economy, could
  stem from current or future government policies, changes in investor or consumer
  sentiment, technological advancements, or climate-related litigation.

Ripple effects:
- increased frequency of catastrophe events
- increased severity of catastrophe events
- increase in reputational risk
- change to insured products (electric vehicles)

Management actions:
- implementing rate increases
- reviewing type of product offered

Question 26

Identify 2 ripple effects and 2 management actions of Technology and cyber risks

Answer 26

Ripple effects:
- disclosure of data breach and possible reputational damage
- decline in new business

Management actions:
- purchase of cyber insurance
- invest in cybersecurity and IT infrastructures

Question 27

2 ways of selecting adverse scenarios

Answer 27

• percentiles (if a loss distribution is available)
• reverse stress-testing

Question 28

Describe the method of reverse stress-testing in an FCT analysis

Answer 28

start by considering a specific adverse scenario where the insurer’s surplus becomes negative (assets < liabilities)

work backwards to find the risk factors required to produce that scenario

determine if the scenario is plausible (risk factors can deteriorate to that degree considering insurer’s current financial position)

if yes than adverse scenario may be a solvency scenario

Question 29

Describe social inflation

Answer 29

social inflation is the increase in costs due to the changes in public behavior, being more likely to submit claim or more likely to sue, resulting in high costs to the company, and can result in inadequate premiums and loss reserves