C - CIA DCAT Flashcards
CIA DCAT
Define RIPPLE EFFECT
6 inclusions in RIPPLE EFFECTS
an event that occurs when an adverse scenario triggers a change in one or more interdependent risk factors
It includes :
1) chg in assumptions of base scenario that are no longer appropriate for adverse scenario being tested
2) Insurer’s expected RESPONSE to adversity
3) policyholder’s RESPONSE
4) rating agency’s RESPONSE
5) change in planned capital injections
6) regulatory RESPONSE
CIA DCAT
Contrast
Materiality Standard of
DCAT vs VALUATION of policy liabilities.
3 considerations of AA when selecting a materiality standard
Materiality for DCAT should be less vigorous than the one used for valuation of policy liabilities
1) SIZE
2) FINANCIAL POSITION (more rigorous if base scenario closer to STCR)
3) NATURE of REGULATORY TEST
CIA DCAT
4 items to recognize in future financial position under BASE SCENARIO when it differs from the projected financial results in the business plan
1) change in distribution assumptions
2) management decisions not discussed in business plan
3) change in capital level not reflected in business plan
4) impact actual recent experience on future experience
CIA DCAT
3 examples of RIPPLE EFFECTS due to INFLATION RISK
1) rapid and sustained increase in interest rates
2) increase in operating expenses
3) increase in reinsurance rates and swing-rated contracts
CIA DCAT
4 AA considerations when developing an adverse scenario for reinsurer insolvency in DCAT
1) whether reinsurer is AFFILIATED or not (easier to assess likelihood of insolvency if affiliated)
2) rating of reinsurer (weaker rating most likely to fail)
3) whether reinsurer is REGISTERED or not (non-registered reinsurer funds are more difficult to secure)
4) concentration of reinsurance
CIA DCAT
8 possible ADVERSE SCENARIOS arising from INVESTMENT RISK
1) significant change in yield curve
2) significant change in foreign exchange rates
3) increase in default rate on debt securities
4) decrease in returns and value of equities
5) decrease in returns and value of real estate
6) decrease in returns and value of subsidiary
7) decrease in returns and other major asset categories
8) the AA may consider integrated scenarios (combination of these events)
CIA DCAT
Define
OFF-BALANCE SHEET RISK
Risk arising from new or evolving industry practices not yet recognized in balance sheet, but may be in subsequent years
actuary must be aware of emerging risks
CIA DCAT
6 possible ADVERSE SCENARIOS from OFF-BALANCE SHEET RISK
1) structured settlement (when a pc insurer buys an annuity and is exposed to the credit risk associated with the insolvency of the annuity company)
2) contingent liabilities or losses
3) letter of credit and pledged assets
4) capital maintenance agreements
5) Derivative instruments
6) pension underfunding
CIA DCAT
4 risks associated with DERIVATIVES
1) MARKET RISK
a) liquidity risk
risk of not being able to cancel a contract at a favorable price
b) basis risk
risk that the price of the derivative does not act as expected, undoing the intended hedging benefits
2) DEFAULT RISK
risk that a loss will be incurred due to default in making the full payment
3) MANAGEMENT RISK
potential for unexpected losses on derivatives due to inadequate management supervision
4) LEGAL RISK
risk that the derivative agreement is not binding as intended
CIA DCAT
2 possible effect due to OFF-BALANCE SHEET RISK
forced sales
significant CFs, affecting liquidity position
CIA DCAT
4 possible ADVERSE EFFECT due to RELATED-COMPANY RISKS in a DCAT
reduction in reliance on the parent cie for financial support
increase in provision of financial support to the parent
high level of dependency on group operational resources
a rating agency downgrade reflecting difficult financial conditions
CIA DCAT
3 possible RIPPLE EFFECTS due to RELATED-COMPANY RISKS
1) management focus on group rather than company priorities
2) a need to provide for service disruptions
3) regulator action to protect local policyholders
CIA DCAT
6 possible CORRECTIVE MANAGEMENT ACTIONS due to RELATEd-COMPANY RISK
1) finding alternative sources of funds for operations
2) adjusting premium volumes and mix of business
3) reviewing reinsurance coverage
4) reviewing target mix by LoB
5) reviewing types of products offered
6) selling assets
