Chapter 1 Flashcards
(18 cards)
Identify the clients that actuaries advise in both public and private sectors
and the stakeholders affected by that advice. (9 clients)
- benefit schemes
- Employers
- Insurance company
- Investment fund managers
- Members of investment schemes
- sponsors of capital projects
- banks
- Regulators
- Employees
When actuaries give advice, they should consider?
- information in the public domain, e.g. accounts, websites
- a pre-project meeting with the client ensuring that their position has been fully understood
- disclose the conflict of interest
- attitude of client, in particular risk appetite and culture
- the circumstances and objectives
- taking into account the implications for all stakeholders involved
- It is also important to consider the impact of those most vulnerable in each scenario.
How can you handle conflicts of interest? (3)
-not always possible to avoid and so should be disclosed and appropriate safeguards put in place
- conflict of interest are evident mostly when
-Chinese walls [independence of teams working for different clients within a firm]
-also ensure that electronic communications and data are kept secure and separate
Explain why and how certain factual information about the client should be sought to be able to give advice. 4:6
Why the information should be sought? (4 points)
o To determine the attitude of the client, in particular risk appetite and risk
culture.
o To identify any potential conflicts of interests.
o To determine the circumstances and objectives for seeking advice, i.e., to
identify the problems faced by the client.
o To determine the stakeholders which would be affected by the advice and the
implications of the advice for the identified stakeholders.
-
How the information should be sought/Information sources? (6 points)
o Client’s accounts
o Client’s website
o Any other published information
o A pre-project meeting with the client
o Less formal discussions with the client.
o If necessary and within legal limits, collaborate with other professionals, such
as accountants, lawyers, or risk managers.
What are vulnerable stakeholders and how can actuaries mitigate their vulnerability?
- stakeholders that are exposed to the risk of harm through the advice given or decisions made
- these stakeholders don’t have access to advice or means to mitigate such harm
- The optimal solution is one which balances the impact on vulnerable stakeholders while being cost effective
Describe the types of advice that actuaries might give to their clients.
Types of advice: (3 points)
o Factual advice
▪ Based on research and facts.
o Indicative advice
▪ Giving an opinion without fully investigating the issues, such as in
response to a direct question.
o Recommendations
▪ Performing research and modelling forecasts.
▪ Weighing of alternatives.
▪ Recommendations made consistent with requirements.
▪ Work is normally peer reviewed.
in giving advice actuaries should (5):
- actuaries should be sensitive to the needs of who their advice affects.
- Have a responsibility to the public interest ( thinking about the wider impact of their advice not just the parties it directly affects
- set out alternative solutions and implications of each solution on both the client and on other affected stakeholders
- outline the assumptions made and the reasons and implications for making them
- When an actuary is giving advice and also making decisions, they would need to seek peer review. This shows a good demonstration to regulators, auditors and customers that sound practices are being followed.
- Peer review requires a lot of actuaries and is very costly and so it is up for debate whether this should be a requirement
- the Actuaries’ Code in the UK and the Code of Professional Conduct in South Africa
Actuaries’ Code:
-integrity
-competence and care
-impartiality
-compliance
-speaking up
-communication
Some Actuarial guidance documents:
- Standard of Actuarial Practice (SAPs) and Advisory Practice Notes (APNs), which are issued by the Actuarial Society of South Africa (ASSA)
- Ethical and professional standards, which are set out in the Institute and Faculty of Actuaries Standard Technical Actuarial Standards (TASs), which are set and maintained by the Financial Reporting Council (FRC) [independent from the IFoA].
Identify the advice and who the advice is for that actuaries provides to benefit schemes:
o Provide advice to:
▪ Members and their dependents
▪ Trustees
▪ Shareholders of the sponsor
▪ Directors of the sponsor
▪ Employees of the sponsor (who are not scheme members)
▪ Auditors of the sponsor
▪ Investment fund managers
▪ Creditors of the sponsor
▪ Administrators of the scheme
▪ Regulatory bodies
o Provide advice on:
▪ Provision of protection of benefits that meet the needs of the members
and their dependents.
▪ Provision of retirement benefits that meet the needs pf the members.
▪ Managing the cost of providing the benefits.
▪ Meeting legislative requirements.
Identify the advice and who the advice is for that actuaries provides to insurance companies:
o Provide advice to:
▪ Prospective policyholders
▪ Policyholders
▪ Board of directors
▪ Shareholders
▪ Creditors
▪ Auditors
o Provide advice on:
▪ Meeting legislative requirements
▪ Investment and management of assets
▪ Managing liabilities
▪ Determining provisions
▪ Premium rating/Pricing of contracts
▪ Meeting policyholders’ reasonable expectations (PRE)
▪ Good corporate governance
▪ Reinsurance requirements
Identify the advice that actuaries provides to employers:
Provide advice on:
▪ Protection against financial loss arising from sickness and death of
employees.
▪ Protection of assets.
▪ Provision of work-related benefits that will attract and retain good
quality staff.
▪ Meeting legislative requirements.
▪ Managing the costs of running the business.
▪ Quantification/Calculation of surplus capital
▪ Investment of surplus capital
Identify the advice and who the advice is for that actuaries provides to Public sector clients:
o Provide advice to:
▪ Central and local government departments
▪ Regulatory bodies
▪ Central banks
o Provide advice on:
▪ Setting legislation that impacts on the provision of financial products.
▪ Monitoring the adherence to the legislation.
▪ Funding benefit provision by the state.
▪ Monitoring the funding of benefit provision by the state.
Identify the advice that actuaries provides to investment managers:
o Provide advice on setting the investment strategy.
Describe how stakeholders other than the clients might be affected by any
actuarial advice given. (6 points)
Actuarial advice can affect employees, particularly in the context of employee
benefits and pension plans.
o If the advice leads to changes in the design or funding of these plans, it may
impact the benefits or retirement security of the employees.
o For instance, if the actuary recommends reducing the employer’s contributions
to the pension plan, it could result in reduced retirement benefits for
employees. - -
Actuarial advice can influence shareholders and investors, especially in the case of
insurance companies.
o If the advice suggests adjusting insurance premiums, policy terms, or reserves,
it may impact the financial performance of the company.
o Shareholders and investors may experience changes in profitability, dividend
payments, or the overall value of their investments.
Actuarial advice is subject to regulatory oversight, particularly in industries such as
insurance and pensions.
o The recommendations provided by actuaries must adhere to legal and
regulatory requirements.
o Regulators rely on actuarial advice to ensure solvency, fair pricing, and
compliance with regulations.
o Any advice that fails to meet regulatory standards can result in penalties or
legal consequences for both the actuary and the organization. - - -
Actuarial advice can have implications for government entities responsible for social
security programs, public pensions, or healthcare systems.
o Actuarial assessments are crucial in determining funding levels, sustainability,
and policy changes for these programs.
o Recommendations from actuaries may impact the level of benefits provided,
contribution rates, eligibility criteria, and the overall financial health of these
systems.
Actuarial advice can influence creditors and lenders, particularly when it relates to the
evaluation of risk.
o For example, if an actuary assesses the risk exposure of an organization, such
as an insurance company, and identifies potential financial challenges, it may
affect the organization’s creditworthiness and the terms offered by lenders.
Society at Large: Actuarial advice, especially when related to insurance and risk
management, can have broader societal implications.
o Actuaries play a crucial role in ensuring the financial stability of insurance
markets and the availability of coverage for various risks.
o Their advice can affect the affordability and accessibility of insurance
products for individuals, businesses, and communities, impacting the overall
well-being and resilience of society.
Explain why subjective attitudes of clients and other stakeholders – especially towards risk – are relevant to giving advice. (6 points)
- Customized recommendations:
o Understanding the subjective attitudes of clients and stakeholders towards risk
allows advisors to tailor their advice to align with their risk preferences.
o Different individuals or organizations may have varying risk tolerance levels,
risk aversion, or risk appetite.
o By incorporating these subjective attitudes, advisors can provide
recommendations that are more suitable and acceptable to the clients’ risk preferences. - - - - - Decision-making process alignment:
o Clients’ subjective attitudes towards risk can significantly influence their
decision-making process. Some clients may be more conservative and prefer
conservative risk management strategies, while others may be more comfortable with taking higher risks for potentially higher rewards.
o By considering these attitudes, advisors can align their advice with clients’ risk preferences. - Emotional factors:
o Risk perception is not solely based on objective assessments but is influenced by emotional factors.
o Clients and stakeholders may have emotional responses to certain risks, such as fear, anxiety, or overconfidence. Understanding these emotional factors helps advisors address clients’ concerns, manage their expectations, and guide
them towards rational decision-making.
o It allows advisors to provide advice that considers both rational analysis and emotional aspects. - Risk communication:
o Effective communication of risk is crucial for clients and stakeholders to understand the implications and consequences of different options.
o By considering subjective attitudes towards risk, advisors can frame and
communicate risk in a way that resonates with clients’ perspectives and helps
them comprehend the potential risks involved.
o This improves the clarity and effectiveness of the advice provided. - Decision acceptance and ownership:
o Clients and stakeholders are more likely to accept and take ownership of
decisions that align with their subjective attitudes towards risk.
o When advisors take these attitudes into account and incorporate them into the
advice, clients are more likely to trust and feel comfortable with the
recommendations.
o This enhances the likelihood of decision acceptance, implementation, and
long-term success. - Relationship building:
o Considering subjective attitudes towards risk fosters stronger relationships
between advisors and clients.
o When advisors demonstrate an understanding of clients’ risk preferences and
effectively address their concerns, it builds trust and rapport.
o This, in turn, enhances the overall client-advisor relationship, leading to better
collaboration and more successful outcomes.
Distinguish between the responsibility for giving advice and the responsibility
for taking decisions. 4:4
- Responsibility for giving advice: (4 points)
o Expertise and analysis:
▪ The responsibility for giving advice lies with the individuals or
professionals who possess the expertise, knowledge, and skills to
assess a situation, conduct analysis, and provide recommendations
based on their expertise.
▪ These individuals may include consultants, subject matter experts, or
advisors with specialized knowledge in a particular field.
o Objective assessment:
▪ Those responsible for giving advice are expected to conduct an
objective assessment of the available information, analyse relevant
factors, consider potential outcomes, and present their findings in a
clear and unbiased manner.
▪ They should rely on their expertise, experience, and professional
judgment to provide accurate and reliable advice.
o Provision of options:
▪ Advisors have a responsibility to offer a range of options or
alternatives to the decision-makers.
▪ They should present the potential advantages, disadvantages, risks, and
trade-offs associated with each option, enabling decision-makers to
make informed choices based on the advice provided.
o Ethical considerations:
▪ Advisors have an ethical responsibility to act in the best interest of the
individuals or organizations seeking their advice.
▪ They should adhere to professional standards, maintain confidentiality,
avoid conflicts of interest, and provide advice that is honest, objective,
and aligned with the needs and objectives of their clients. - Responsibility for taking decisions: (4 points)
o Decision-maker’s autonomy:
▪ The responsibility for taking decisions lies with the individuals or
entities who have the authority and accountability to make choices and
determine a course of action.
▪ This typically includes organizational leaders, managers, or individuals
with decision-making authority within their respective domains.
o Consideration of advice:
▪ Decision-makers are responsible for carefully considering the advice
and recommendations provided to them.
▪ They should evaluate the expertise and credibility of the advisors,
critically assess the information and analysis presented, and weigh the
options and potential consequences before making a decision.
o Contextual factors:
▪ Decision-makers are responsible for considering various contextual
factors, such as organizational goals, resources, risk appetite, legal and
regulatory requirements, and stakeholder interests.
▪ They need to factor in these considerations when making decisions, as
they impact the feasibility, implementation, and overall success of the
chosen course of action.
o Accountability for outcomes:
▪ Decision-makers bear the ultimate accountability for the outcomes of
their decisions.
▪ They are responsible for the consequences and impacts of the chosen
course of action. They may face scrutiny from stakeholders, regulatory
bodies, or their organizations based on the outcomes resulting from
their decisions.
Discuss the professional and technical standards that might apply to actuarial
advice. 6:4
- The requirements to operate as a professional actuary are than an actuary must: (6
points)
o Recognise the views of others.
o Detach from own circumstances.
o Act with integrity.
o Be a good communicator.
o Have competence and skills to give sound actuarial advice.
o Develop a direct, personal, and trusting relationship with the client. - The Financial Reporting Council’s (FRC) Actuarial Quality Framework aims to promote and enhance the quality of actuarial work in the context of financial reporting
through maintaining the quality of: (4 points)
o Methods
▪ reliability and usefulness of actuarial methods
o Communication
▪ communication of actuarial information and advice
o Actuaries
▪ technical skills of actuaries and ethics and professionalism of actuaries,
as well as meeting continuing professional development.
o Environment
▪ working environment of actuaries and other factors outside their
control
