Ch 0: Introduction

Question 1

Key Topics Under the General Commercial and Economic Environment

(idea generator)

Answer 1

• Legislation
• Tax
• Regulation
• Guidance notes
• Stakeholders, Cust needs (and changes over time)
• Types of products (who uses, risks?)
• Competition (products, pricing, benchmarks, marketing strategies)
• Assets & Markets (characteristics, correlation, availability)
• Reins availability
• Effect economy has (any trends?)
• Jargon/terminology

Question 2

What does the “specifying the problem” stage of the ACC involve?

Answer 2

• Setting out clearly the problem from the viewpoint of each stakeholder.
• Identifying and analyzing the risks for each stakeholder.
• Considering the strategic courses of action available to handle the particular risks in question (manage, mitigate or transfer)
• Especially analyse where transfer risk from one set of stakeholders to another.

This stage requires thorough analysis and understanding of the nature, scope, and potential impact of the problem, to facilitate effective decision-making in subsequent stages of the ACC.

Question 3

What does the “Developing the solution” stage of the ACC involve?

Answer 3

MODEL CONSTRUCTION
* An examination of the major actuarial models currently in use and how they may be adjusted for the particular problem to be solved
* Selection of the most appropriate model to use for the problem, or construction of a new model
* Consideration and selection of the assumptions to be used in the model.

MODEL RESULTS
* Interpretation of the results of the modelling process
* Consideration of the implications of the model results on the overall problem.
* Consideration of the implications of the results for all stakeholders

SOLUTION
* determining a proposed solution to the problem
* consider alternative solutions and their effects on the problem
* formalising a proposal
* communicating the proposed solution and the alternatives to decision makers

Question 4

What does the “monitoring the experience” stage of the ACC involve?

Answer 4

• Analyzing periodically the actual experience against expected
• Identifying causes of departure from expected experience and determining whether each source is one-off or likely to recur
• Feeding back into the specifying the problem and developing the solution stages of the ACC
• Making sure the model is dynamic and reflects current experience

Monitoring should be carried out regularly. For a new contract, where there is lots of uncertainty, monitoring should take place more frequently initially.

Question 5

What makes the ACC “actuarial”?

(Part of core reading)

Answer 5

The ACC incorporates the following basic elements, which are common to all actuarial and risk management work:

• The estimation of the financial impact of uncertain future events
• a long-term rather than a short term time horizon, but decisions to be made in the short term in the light of likely future outcomes
• consideration of stakeholders (requirements and risk profile), allowing for the general business environment with the impact of legislation, regulation, tax and competition
• The use of models to represent future financial outcomes
• The use of assumptions based on appropriate historical experience
• Interpretation of the results of modelling to enable practical strategies to be developed
• Monitoring and periodically analyzing the emerging experience in order to update models and strategies
• The application of professional judgement

Question 6

List 10 applications of the ACC in actuarial work

(Part of core reading)

Answer 6

• Asset-liability management (e.g. setting investment strategy and risk management options)
• Monitoring the effects of investment mismatching
• Considering insurance and reinsurance options
• Determining the profitability of the contract
• Determining the (current and future) solvency levels
• Considering the need for and calculation of provisions
• Assessing capital requirements
• Determining premiums / contributions
• Assumption setting for contract / scheme design
• Model validation

Question 7

Outline why the ACC is suitable for use in risk management

Answer 7

Risk management also involves the following cyclical process:

• analyzing situations, products and projects to determine the risks to which they are exposed
• quantifying the financial consequences of the risk events occurring
• considering and quantifying appropriate methods for managing, mitigating and transferring the risks
• monitoring the situation and the risk management procedures implemented as time develops
• modifying or changing the risk management approaches adopted over time, in light of emerging experience

Question 8

Investment risk

Answer 8

The uncertainty associated with the outcome of making an investment

(They might, for example, use variance of return as a measure of investment risk.)

Question 9

Credit risk

Answer 9

The risk that a person or an organisation will fail to make a payment that they have promised

(An example of credit risk for corporate bonds would be the failure to make interest payments on set dates or failure to repay the face value of the bond on the redemption date.)

Question 10

Mortality Risk

Answer 10

Mortality refers to the likelihood of death. Mortality risk may be defined as there being more or less deaths than expected or priced for.

(In life insurance, for whole of life products there is a risk of higher mortality than expected (more deaths) and for annuity products there is a mortality risk of fewer deaths than expected (longer lifespans).)

(sub category of Insurance risk)

Question 11

Market risk

Answer 11

Risks related to changes in investment market values

(market as a whole, e.g. due to a recession, so largely unavoidable)

(sub category of investment risk)

Question 12

Inflation risk

Answer 12

Risk of real liabilities being larger than anticipated due to inflation.

(e.g. of salaries, consumer prices, medical costs, court awards)

Question 13

Underwriting risk

Answer 13

Risk of failures in underwriting leading the insurer to take on risks at an inadequate price.

Question 14

Insurance risk

Answer 14

Risk of more claims being made than expected

(e.g. due to higher than expected mortality or morbidity rates)

Question 15

Exposure risk

Answer 15

Risk of more claims arising than expected from a particular event due to the insurer having greater exposure to a particular peril than had been appreciated.

Might be due to inadequate diversification within the portfolio of business written.

Question 16

Finance risk

Answer 16

Risk of not being able to obtain finance when required or not being able to obtain it at the anticipated cost.

Question 17

Operational Risk

Answer 17

Risk of loss due to fraud or mismanagement within the organisation itself

Question 18

External Risk

Answer 18

Risk arising from external events, e.g. changes in legislation.

Question 19

Possible solutions to mitigate risks

Answer 19

• avoiding
• accepting and minimizing
• sharing
• transferring risk together with ongoing monitoring.

Question 20

Outline examples of the key risks that an insurance company may highlight in its report and accounts.

(Example in notes - Ch1 p12)

Answer 20

Key risk examples include:

• Market risk – adverse changes in the prices of assets, liquidity risk, currency risk
• Credit risk – defaults of assets, reinsurers, customers, suppliers
• Insurance risk – longevity, mortality, morbidity, persistency, expense, reinsurance
• Operational risk – fraud, IT, human resources, outsourcing, branding, reporting
• External risk – catastrophes, war, regulation, tax.

(These risk categories will be covered in more detail later in the cours

Question 21

Explain the reasons for investing overseas.

(Example in notes - Ch1 p25)

Answer 21

• Match overseas liabilities – choosing assets of the same currency as that in which the liabilities are denominated hedges currency risk.
• Diversification – investing overseas gives access to different economies, stock markets, industries and individual companies.
  Investing in a number of different countries or economies with a low degree of correlation helps to reduce portfolio risk.
• Increase expected returns – returns on overseas investments can be higher than domestic returns because they are fair compensation for the higher risk involved.
• Alternatively, inefficiencies in the global market may allow fund managers to find individual countries whose markets, or currencies are undervalued.

Question 22

Applying the ACC to a specific question

(idea generator)

Answer 22

Think of the important features of the contract in the question

Specifying the problem
- set an objective
- identify the risks and potential mitigation options in the question
- consider all the potential stakeholders and the risks they face in the question

Developing the solution
- often involves using a model - suggest a type of model and how to acquire it (build/adjust/use as is)
- identify assumptions for the model - give specific examples
- suggest ways of dealing with any uncertainty in the assumptions
- talk about sensitivity testing - i.e. rerunning the model on different assumptions
- considering alternative solutions
- communicating the proposed solution and alternatives to stakeholders for decision-making

Monitoring the experience
- compare actual vs expected experience using dynamic model
- analyse the differences in actual versus expected and suggest how you might deal with them
- discuss how frequently the monitoring should occur
- emphasize iterative nature of the ACC

Professionalism
- talk about the characteristics of the professional in the question
- mention Technical Actuarial Standards

The general economic and commercial environment
- what external issues should be considered?
- what would you like to know about the competition?
- what is the state of the economy and what issues can it cause?