CIA

Question 1

purposes of stress-testing

Answer 1

• risk: identify & control risk
• complement: provide a complement to other risk management tools and simulate shocks
• cap: support capital management
• liq: improve liquidity management

Question 2

describe the stress-testing purpose: ‘risk identification & control’

Answer 2

• risk identification: identify concentrations & interactions of risks
• risk control: adjust individual portfolios or overall business strategy

Question 3

describe the stress-testing purpose: ‘complementing other tools’

Answer 3

• test statistical models used to determine VaR
• simulate shocks to test model robustness to economic changes

Question 4

describe the stress-testing purpose: ‘supporting capital management’

Answer 4

identify severe events and/or compounding events that impact capital requirements

Question 5

describe the stress-testing purpose: ‘improving liquidity management’

Answer 5

assess liquidity profile and adequacy of buffers for institutional & market-wide stresses

Question 6

key elements of FCT

Answer 6

(BACRO):
- base scenario: must develop a base scenario and usually the insurer’s current business plan
- adverse scenario: must develop multiple adverse scenarios (i.e, covid, climate change, etc)
- corrective action: identification and analysis of corrective management actions to mitigate risks
- report: submit recommendations to management and the board of directors or chief agent
- opinion: appointed actuary signs an opinion regarding the financial condition of the insurer

Question 7

key metrics that must be understood when performing FCT

Answer 7

• regulatory capital minimum
• insurer’s internal target capital requirements determined by ORSA

Question 8

identify the ‘preliminary’ step and the ‘extra’ step in addition to ‘BACRO’ when performing FCT

Answer 8

• preliminary: review financial position at year-end for each year in historical period
• extra: identify possible regulatory action

Question 9

what is a review of operations and financial position

Answer 9

• review balance sheet, statement of income, and source of earnings for an appropriate number of years

Question 10

what is the forecase period for FCT

Answer 10

the forecast period should be long enough to capture
- risk emergence
- financial impacts
- ripple effects
- corrective action
-> generally 3-5 years although there is no minimum and should also be consistent with ORSA

Question 11

how do you determine the materiality standard for FCT

Answer 11

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

Question 12

define base scenario

Answer 12

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

Question 13

define adverse scenario

Answer 13

a scenario that is developed by stress-testing assumptions used in the business plan, look specifically for risk factors that threaten financial condition

Question 14

define solvency scenario

Answer 14

a plausible adverse scenario that has a non-trivial probability of occuring
- should fall above the 95th percentile on the loss distribution
- or possibly as high as the 99th percentile and beyond depending on circumstances

Question 15

define going-concern scenario

Answer 15

an adverse scenario that is more likely and/or less severe than a solvency scenario
- should fall above the 90th percentile on the loss distribution
- could include risks not considered in solvency scenarios

Question 16

define ripple effect

Answer 16

• an event that occurs when an adverse scenario triggers a change in 1 or more inter-dependent assumptions
• can include policyholder actions, management’s routine actions, regulatory actions

i.e, a ripple effect of an earthquake may be loss of reinsurance

Question 17

what is a corrective management action

Answer 17

an action management takes to mitigate adverse ripple effects

Question 18

what is an integrated scenario for FCT

Answer 18

a scenario created by combining two or more risk factors to produce a new plausible adverse scenario

i.e, combine a low-probability scenario with a higher-probability adverse scenario

Question 19

considerations in the development of a climate change integrated adverse scenario

Answer 19

(PTL):
- physical risk -> frequency and severity of wildfires, floods, wind events, rising sea levels
- transition risk -> due to economic shift to greener technologies
- liability risk -> exposure to climate-related litigation

Question 20

examples of IFRS 17 measurement features to consider for FCT scenarios

Answer 20

IFRS 17 liabilities:
- make no provision for default risk
- do not reflect the benefit of discounting arising from deferred tax assets
- include the CSM when evaluating solvency scenarios

check CIA.FCT-1 wiki for more possible answers

Question 21

key elements that an FCT model should reproduce

Answer 21

• balance sheet: assets, liabilities, retained earnings,…
• income statement: revenue & expenses
• regulatory measures of capital adequacy: MCT ratio, and possibly others like BCAR or MSA ratios
• sources of earnings: detail on sources of premium and investments

Question 22

what is the recommended loss distribution for a going-concern scenario

Answer 22

90th percentile -> 95th percentile

Question 23

what is the recommended loss distribution for a solvency scenario

Answer 23

95th percentile -> 99th percentile

Question 24

how does an actuary validate an FCT model on an accounting basis

Answer 24

verify: statement of income = cash flows + change in balance sheet items

Question 25

how does an actuary validate an FCT model in a static environment

Answer 25

base scenario should show continuity of results from year-to-year cash, liabilities, surplus,…

Question 26

how does an actuary validate a new FCT model or model update

Answer 26

- new model: run with data at (t-1) & compare to actual data at (t) should be close - model update: do a retrospective test compare prior base scenario projection to current data

Question 27

how does an actuary validate an FCT model in a changing environment

Answer 27

- ask: does model properly quantify changes in results under different assumptions - compare: 2 adverse scenarios magnitude & direction on change should be consistent with assumptions

Question 28

when is a stochastic FCT model appropriate

Answer 28

- when risk distributions are easily inferred - capital market risks ## Footnote stochastic models generate multiple randmoized scenarios and models random movements in key risk drivers like: - interst rates - equity market returns - claim frequencies and severities - inflation - policyholder behaviors stochastic models are used for solvency 2, LICAT and IFRS 17, help insurers determine captial adequacy, reinsurance needs and strategic risk management

Question 29

when is a deterministic FCT model appropriate

Answer 29

- when risk distributions are not easily inferred - actuary then select scenarios based on historical experience, credibility of data ## Footnote deterministic models analyzes only a few well-defined scenarios and project future financial conditions based on fixed, specific assumptions like interest rates, claim experience and market performance deterministic models are used for stress-testing and solvency analysis as required by regulators (i.e, OSFI)

Question 30

what is a combination stochastic/deterministic model

Answer 30

when results of a stochastic model are used to derive a deterministic scenario that reproduces the stochastic results OR A combination stochastic/deterministic model is used when stochastic modeling (which incorporates randomness and multiple scenarios) is run first, and the results are then used to create a deterministic scenario that closely replicates the key outputs of the stochastic model.

Question 31

how are ripple effects in a FCT analysis modeled

Answer 31

- automatically: by computer model - manually: by actuary based on knowledge of situation

Question 32

what are some considerations in FCT model segmentation

Answer 32

- management: segment around management structure - product: smallest subdivision - may combine similar products - investment: asset categories

Question 33

identify an important IFRS 17 concept to consider when creating an FCT scenario

Answer 33

CSM for GMA and VFA approaches ## Footnote "GMA = general measurement approach VFA = variable fee approach (specifically desgined for direct participating contracts and it directly links insurers' profits to the performance of the underlying assets)"

Question 34

does PAA approach have a CSM component? Explain

Answer 34

no, but PAA requires a loss component for onerous contracts and LC cannot be offset by future profits so 'level of aggregation' is an important consideration

Question 35

identify aspects of IFRS 17 that should be considered when creating FCT scenarios

Answer 35

- the impact of adverse scenarios on onerous groups is not absorbed by the CSM - it will be reflected in earnings immediately - modelling will need to capture the behavior of groups of contracts rather than individual contracts - groups of reinsurance contracts are modeled separately from the underlying primary insurance contracts issued - the business volume forecast requires sufficient granularity to model the timing of recognition of new cohorts

Question 36

purpose of an FCT report

Answer 36

communication to BoD: - identify risks to an insurer's financial condition - identify ways to mitigate and reduce risk

Question 37

audiences for FCT report

Answer 37

- BoD: prefers an interpretive summary vs. a detailed statistical report - management: receives a more detailed report - regulator: focuses on solvency issues

Question 38

possible types of opinion that AA can include in the FCT report

Answer 38

- satisfactory - satisfactory subject to appropriate corrective action - not satisfactory

Question 39

when can AA report that financial condition of an insurer is satisfactory

Answer 39

- under the base scenario insurer meets its internal target capital ratio as determined by ORSA - under the going-concern scenarios -> insuer meets the regulatory minimum capital ratios - under solvency scenarios -> must have assets > liabilities

Question 40

how many adverse scenarios should an FCT report include

Answer 40

- at least 3, 1 going-concern scenario and 2 solvency scenarios - they should also be chosen from multiple risk cateogries

Question 41

P&C risk categories

Answer 41

(F-PIP-REAGOR-C^2): - frequency&severity - policy liabilities - inflation - premiums - reinsurance - expense risk - asset risk - government risk - off-balance-sheet risk - related company risk - climate risk - cyber risk

Question 42

common ripple effects ## Footnote think about the ripple effects from COVID

Answer 42

- higher LR - loss of reinsurance - post-event inflation - forced sale or liquidation - mix shift - policyholder actions - regulatory action ## Footnote loss ratio goes up because of higher severity and elevated inflations, also it caused some business shut down which leads to loss of reinsurance for commercial, there are shifts in mix of business of the drivers, and policyholders drive more wild due to fewer cars on the road, and regulator intervene for covid relief measures

Question 43

common corrective management actions

Answer 43

- tighten U/W guidelines - raise rates - review reinsurance - sell assets - review mix of business

Question 44

2 more corrective management actions only applicable in certain situations

Answer 44

- suspend dividend payments - reduce capital transfers to parent or home office

Question 45

a ripple effect and management action for the 'cyber risk' adverse scenario

Answer 45

- data breach - invest in cybersecurity and IT infrastructure

Question 46

possible ripple effects and corrective management actions for: catastrophe

Answer 46

ripple effects: - post-event inflation - loss of reinsurance corrective management: - raise rates - review reinsurance

Question 47

possible ripple effects and corrective management actions for: a change in asset risk

Answer 47

ripple effects: - forced sale or liquidation - signifcant +/- change in cash flows corrective management: - sell assets - change investment strategy ## Footnote a change in asset risk can be: - significant changes in yield curve - decrease in return on equity investments

Question 48

methods for selecting adverse scenarios

Answer 48

- percentiles if a loss distribution is available - reverse stress-testing

Question 49

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

Answer 49

- start by considering a specific adverse scenario where the insurer's surplus becomes negative (surplus = assets - liabilities) - work backwards to find the risk factors required to produce that scenario - determine if it's plausible for risk factors ofthe insurer's current financial position to deteriorate to that degree -> if yes, then this adverse scenario may be a solvency scenario

Question 50

should the actuary integrate the FCT report with the ORSA report or keep them separate

Answer 50

use judgement, may produce 2 independent reports or 1 integrated report

Question 51

considerations in supporting integration of FCT and ORSA

Answer 51

- FCT uses ICT ratios developed by ORSA and these target ratios may develop over the timeframe of a projection - ORSA is useful in assessing adverse scenarios - may be more efficient to integrate the reports, both require data collection and similar types of analysis, both may be released at the same time - a single integrated report may be better for the end user

Question 52

challenges regarding integration of FCT and ORSA

Answer 52

- oversight: AA is responsible for FCT whereas the board and senior management is responsible for ORSA - different methodology: FCT follows a prescribed regulatory basis while ORSA reflects own models and assumptions - staff responsible: different for FCT vs. ORSA and coordination may be costly

Question 53

type of duration

Answer 53

Macaulay duration, modified duration, effective duration

Question 54

what is the formula relating Macaulay and modified duration

Answer 54

modified duration = Macaulay duration / (1 + discount rate)

Question 55

what is the difference between modified duration and effective duration

Answer 55

- effective duration accounts for situations where a change in interest rates changes the cash flows - modified duration doesn’t account for this

Question 56

describe the concept behind 'modified duration'

Answer 56

modified duration is the approximate % change in PV(cash flows) from a 100bps change in interest rate assuming no change in cash flows

Question 57

describe the concept behind 'effective duration'

Answer 57

effective duration recognizes that a change in interest rate may also cause a change in cash flows

Question 58

things to consider in calculating duration for liabilities

Answer 58

- consistency of assumptions: assumptions for duration calculation should be consistent with the discounting calculation from the valuation - duration calculation by LOB: use same payout patterns as for discounting then total duration is a weighted average with weights by APV by LOB - duration calculation on a combined LOB basis: use effective duration - when interest rate is small: modified duration and effective duration are approximately the same

Question 59

is it permissible for the actuary to rely on an investment specialist for the calculation of asset duration? Explain

Answer 59

- yes, the actuary would be the enquiring professional, and the investment specialist would be the responding professional - the actuary must review the investment specialist's work for methodology and reasonableness

Question 60

the key principles of risk transfer assessment

Answer 60

- use quantitative and/or qualitative approaches depending on information available - use professional judgment - consider overall agreement all verbal & non-verbal agreements - check risk transfer at inception of contract and re-check whenever changes affect future cash flows

Question 61

in a risk transfer contract, what is included in the 'overall agreement'

Answer 61

contract, amendments, verbal agreements, other written docs

Question 62

when should existence of risk transfer be rechecked

Answer 62

- at inception - when contract change significantly alters expected future cash flows

Question 63

changes to reinsurance contract that would trigger recheck of risk transfer

Answer 63

revision to premiums or coverage levels other than linear increase/decrease of quota share

Question 64

changes to reinsurance contract that would not trigger recheck of risk transfer

Answer 64

events that are part of the normal course of the contract ## Footnote i.e, build-up of a claim fluctuation reserve

Question 65

what should actuary do prior to recheck risk transfer

Answer 65

check whether previous reinsurance assessment is still applicable

Question 66

qualitative assessment of risk transfer

Answer 66

- is it obvious that the cedant's financial interests are protected - don't focus on probabilites: coverage for a low frequency/high severity passes if contract is arms-lenth and/or no risk-limiting features (specifically for earthquake insurance)

Question 67

does 'reasonably self-evident' apply to this cat treaty (earthquake insurance)

Answer 67

- difficult to assess since we know nothing about the treaty - it's a low-frequency/high severity situation so it could pass the 'reasonably self-evident' test if the premium and coverage are appropriate

Question 68

2 broad categories of risk-limiting contract features

Answer 68

- terms set in advance - experience-based renewals (EBR)

Question 69

types of terms-set-in-advance risk limiting features

Answer 69

- adjustability of reinsurance premiums of commissions - pre-set limits on timing of loss payments from reinsurer to insurer - removes timing risk - counterparties ceding back to original cedant

Question 70

examples of experience-based renewals risk limiting features

Answer 70

- future terms based on past experience & reinsurer guaranteed to recover losses - forced renewals if the contract is in deficit

Question 71

define side agreement

Answer 71

agreement between cedant, reinsurer not directly incorporated into contract - may obscure intent of contract

Question 72

define mirroring + comment

Answer 72

- definition: cedant & reinsurer carry similar liability estimate for the ceded claims - comment: it is appropriate for cedant & reinsurer actuaries to confer on large losses

Question 73

considerations in estimating a credit provision for a counterparty

Answer 73

- best rating of reinsurer - expertise of reinsurer in relevant lOBs - diversification of reinsurer - disputes: history of claims disputes

Question 74

define materiality

Answer 74

an omission/under-statement/over-statement is material if the actuary expects it to materially affect the user's decision-making or reasonable expectations

Question 75

what materiality is not

Answer 75

- materiality is not a range of reasonable values around actuarial estimate - materiality is not inherent uncertainty in an actuarial estimate

Question 76

identify the main consideration in setting a materiality level

Answer 76

specify: - use of work, intended users - there is no obligation to communicate with other than intended audience

Question 77

identify circumstances where the materiality level should change

Answer 77

- when an external benchmark is approached (i.e, regulatory action level) - otherwise, it should be consistent over time and between valuations

Question 78

identify charactersitics of an insurance company that may affect materiality

Answer 78

(F-STARS): - financial strength - size of entity - type of business - access to capital - net retention - stage of organization's life cycle

Question 79

identify a metric to test materiality for regulatory or solvency purposes

Answer 79

- statutory surplus - solvency benchmark ratio

Question 80

identify a metric to test materiality for appraisals

Answer 80

- net worth - net income - EPS(earnings per share)

Question 81

identify a metric to test materiality for general purpose financial statements

Answer 81

- statutory surplus - net income

Question 82

identify which application has a less rigorous materiality level, DCAT or Valuation

Answer 82

DCAT is less rigorous so materiality standard is higher DCAT: - used for surplus in scenario-testing Valuation: - this impacts net income, which is more important - need to detect smaller deviations here

Question 83

considerations for extent of disclosure materiality

Answer 83

- sophistication of user - important of concept to user - complexity of concept

Question 84

possible actions of report-writer based on materiality

Answer 84

- include them? - refine them? (if it's sufficiently accurate) - disclose them?

Question 85

briefly describe when an actuarial approximation is appropriate

Answer 85

an approximation is appropirate if it does any of these without affecting the result: - reduces cost - reduces time - improves control ## Footnote approximation should strike a balance between benefit and effort

Question 86

an example of an approximation that is appropriate

Answer 86

for a multi-billion dollar line of business: spend 99 cents to reduce error in your reserve estimate by 3.14%

Question 87

an example of an approximation that is not appropriate

Answer 87

for a significant line of business run-off: give up your first-born to reduce the error in your reserve estimate by 2.718%

Question 88

examples of quality assurance processes

Answer 88

- check valuations - validate models - redo the work - peer review

Question 89

considerations in determining what quality assurance processes to perform

Answer 89

- purpose, complexity, significance of work - vulnerability to error - expectations of user - legislative requirements for peer review

Question 90

identify items an actuary should consider before using another person's work

Answer 90

- qualifications of the other person - regualr communication & info-sharing with the other person - awareness by the other person of how the work is being used

Question 91

identify the purpose of CIA/CICA joint policy statement

Answer 91

JPS discusses: (RID) - reliance of auditor & actuary on each other's work - interaction between auditor & actuary - disclosure of responsibilities of auditor & actuary

Question 92

define 'enquiring professional'

Answer 92

a professional who relies on the work of another in the course of their own work

Question 93

define 'responding professional'

Answer 93

a professional whose work is being used by another

Question 94

identify management's responsibility under JPS regarding financial statements

Answer 94

overall responsibility for F/S may include amounts determined by the actuary

Question 95

actuary's responsibility under JPS regarding financial statements

Answer 95

- actuary is responsible for 'RelSuff' of data - actuary is not responsible for data integrity or controls

Question 96

auditor's responsibility under JPS regarding financial statements

Answer 96

- auditor is responsible for integrity of financial statements (financial position, operations, cash flows) - auditor is not responsible for the actuarial valuation

Question 97

communication requirements for enquiring professional with responding professional

Answer 97

- notify responder that work is being used - notify responder regarding needs (materiality, subsequent events, timing) - request confirmation of responder's appointment, professional standing, observance to standards

Question 98

communication requirements for responding professional with enquiring professional

Answer 98

- confirm that work will be done - confirm appointment, professional standing, observance of standards - notify of any issues in meeting enquiring professional's needs

Question 99

4 types of actuarial reports according to CSOP 1700

Answer 99

1. external report: - formal & detailed - range of appropriate reports is narrow 2. internal report: - may be formal & detailed or informal & abbreviated depending on use & user - range of appropriate reports is wide 3. oral report: - useful to internal user - disadvantage vs. internal report is no written record 4. summary report: - a simplified way to communicate actuary's analysis - may be part of an external of internal report

Question 100

items included in an external report according to CSOP 1700

Answer 100

- name of client - description of work, use, user - statement that it may not be appropriate for other uses - statement about whether accepted actuarial practice was used - assumptions and justifications - methods - reservations or qualifications

Question 101

scope of CSOP 2600 regarding derivation & recommendation of dates

Answer 101

within scope: deviation of rates not within scope: recommendation of rates

Question 102

how should an actuary incorporate inflation assumptions in a reserve analysis

Answer 102

- consult with underwriters, business analysts, fraud detection experts, claim adjusters to understand whether inflation has transpired in claim payments, and is accounted for in case reserves - consult with CPI - perform sensitivity analysis with varying inflation assumptions to assess the sensitivity of reserve estimates

Question 103

why may the development method not work for long-tailed with sudden changes in inflation

Answer 103

the effect of inflation on recent development periods may emerge more quickly for short-tailed lines but more slowly for long-tailed lines

Question 104

what is the ongoing role of actuaries concerning COVID19

Answer 104

- follow guidance from regulatory bodies like OSFI - monitor legal actions related to COVID19 that might impact valuations

Question 105

what specific requirement does OSFI have for insurance companies related to COVID19

Answer 105

report statistics and impacts in Appointed Actuary's Report

Question 106

how are actuaries approaching the evaluation of trends and metrics affected by COVID19

Answer 106

take a longer-term view to cover pre- and post-pandemic impacts

Question 107

what specific factors are easier to isolate concerning COVID19's impact on policy liabilities

Answer 107

- premium reductions - refunds - cost of material and labour

Question 108

how will IFRS17 affect the valuation of actuarial liabilities

Answer 108

discounting: - use a yield curve instead of a single discount rate - no more PfAD for interest/discount rate ==> risk adjustment for financial risk is implicitly included in yield curve risk adjustment: - adjust PV(future cash flows) for uncertainty in amount&timing related to non-financial risk aggregation: - create portfolios of similar risks that are managed together: onerous risks, non-onerous risks, remaining risks measurement: - may use PAA for measuring remaining liabilities - PAA is a simplified version of BBA(building block approach) and can only be used under certain conditions reporting: - carrying amounts for 4 groups must be shown separately in financial statements: -> insurance contracts that are assets/liabilities -> reinsurance contracts that are assets/liabilities

Question 109

define yield curve

Answer 109

a yield curve is a function relating yield of fixed-interest securities to the length of time to maturity

Question 110

handling the time value of money in claim runoff

Answer 110

- discounting: discount the paid&unpaid amounts at time t back to t-1 - subtraction: subtract investment income earned during CY t on assets that support the liabilities easier than discounting

Question 111

define calculation date

Answer 111

effective date of calculation

Question 112

define report date

Answer 112

date on which the actuary completes the report on his/her work

Question 113

define report

Answer 113

actuary's oral or written communication to users about his/her work

Question 114

define subsequent event

Answer 114

an event of which an actuary first becomes aware after the calculation date but before the corresponding report date

Question 115

define adjusting event + example

Answer 115

- event after calculation date that provides evidence of condistions existing at calculation date: results in adjustments - i.e, reinsurer insolvency after calculation date that was due to gradual deterioration occuring before calculation date

Question 116

define non-adjusting event + example

Answer 116

- event after calculation date indicative of conditions arising after calculation date: no adjustments - i.e, reinsurer insolvency due to catastrophe

Question 117

subsequent event case: catastrophic (1998 ice storm)

Answer 117

Facts(timeline): - event: 1/5/1998 - actuary became aware 1/5/1998, the same day as the event - subsequent event? Yes, actuary became aware after the calculation date 12/31/1997 and before the report date(several weeks after the event) Branch: middle Action: - error? no, next - when? after the calculation date, next - different? yes, after the calculation date, next - purpose? report on entity as it was -> inform only ## Footnote comments: - the ice storm doesn’t make the entity different retroactively - the purpose of the actuary's work was to report on the entity as it was - but note that the premium liabilities could have been understated

Question 118

what is the prime consideration to apply the subsequent event tree

Answer 118

is the event material? - if not material then usually no action is required - but sometimes it's still beneficial to disclose the event

Question 119

subsequent event case: late reported claims

Answer 119

Facts: - event: 11/20 (case reserve increasing by the ceding insurer) - actuary became aware 1/12 - subsequent event? Yes, actuary became aware after the calculation date (12/31) and before the report date (several weeks after 1/12/1998) Branch: middle Action: - error? no, next - when? before the calculation date -> reflect ## Footnote comments: - this situation often arises for reinsurers - it is not the same as a data error or missing claims

Question 120

subsequent event case: Alberta Minor Injury Cap

Answer 120

Facts: - event: 2/8/2008, $4,000 Alberta Minor Injury Cap struck down - actuary became aware 2/8/2008, the same day - subsequent event? Depends on the insurer's report date Branch: - if the report date is after 2/8/2008, then it's subsequent event, go middle - if the report date is before 2/8/2008, then go right Action(if subsequent): - error? no, next - when? after the calculation date, next - different? yes -> reflect Action(if not subsequent): - if material, withdrawl/amend - if not material, inform only ## Footnote comments: - this case is complicated because some insurers would have completed their reports before 2/8/2008, but some would not

Question 121

subsequent event case: reinsurer failure

Answer 121

Facts: - event: 1/15 - actuary became aware 1/15, the same day - subsequent event? Yes, actuary became aware after calculation date 12/31 and before report date (several weeks after 1/15) Branch: middle Action: - error? no, next - when? after calculation date, next - different? yes, before calculation date (failure provided evidence of prior deteriorating conditions) -> reflect ## Footnote comments: - action depends on cause of failure: here reinsurer failure had been building prior to calculation date, failure after calculation date simply provided further evidence of condistions existing prior to calculation date - if failure was due to a catastrophe, path through decision tree would be EWDP, and final action will be inform only

Question 122

subsequent event case: stock market drop

Answer 122

Facts: - event: 1st week of Jan, big drop in stock market - actuary became aware 1st week of Jan - subsequent event? Yes, actuary became aware after the calculation date 12/31 and before report date (several weeks after 1st week of Jan) Branch: middle Action: - error? no, next - when? after calculation date, next - different? yes after the calculation date, next - purpose? report on entity as it was -> inform only ## Footnote comments: - main issue is whether the market drop provided evidence of conditions in existence prior to calculation date or not - it was decided that it didn't different from the 'reinsurer failure' example

Question 123

subsequent event case: missing claims

Answer 123

Facts: - event: before 6/30 claims database was missing claims - actuary became aware 8/5 - subsequent event? Yes, actuary became aware after calculation date 6/30 and before the report date (after 8/5) Branch: middle Action: - error? Yes -> reflect ## Footnote comments: - if actuary had become aware after the report date, this wouldn’t be a subsequent event, we would then be on the right branch of the decision tree and ask these questions instead: -> would the event be reflected if it had been a subsequent event? yes, next -> does the event invalidate the report? yes, withdraw or amend report

Question 124

subsequent event case: change in industry benchmark

Answer 124

Facts: - event: 7/15, new industry menchmark released - actuary became aware 7/15 - subsequent event? Yes, actuary became aware after quarterly calculation date 6/30 and before report date (several weeks after 7/15) Branch: middle Action: - error? No, next - when? after the calculation date, next - different? event doesn't make any entity different - LDFs don't change much from quarter to quater -> final action: nothing ## Footnote Comments: - this situation could arise from a new company without its own credible data and must rely on industry benchmarks

Question 125

subsequent event case: pandemic

Answer 125

Facts: - event: 3/31 pandemice was declared - actuary became aware 3/11 - subsequent event? Yes, actuary became aware after the calculation date 12/31 and before the report date Branch: middle Action: - error? No, next - when? After the calculation date, next - different? yes, after the calculation date, next - purpose? report entity as it was -> inform only ## Footnote Comments: - provide potential impacts of the impact of the pandemic either qualitatively or quantitatively, when situation for classification is unclear, discuss with auditor

Question 126

identify circumstances under which a subsequent event must be accounted for

Answer 126

- if the event is material - if the event reflects an error - if the event makes the entity different relative to the timing/purpose of the actuary's report

Question 127

define model

Answer 127

a practical representation of relationships among entities using FEMS(financial, economical, mathematical, statistical) concepts

Question 128

elements of a model

Answer 128

(SIR): - model specification - model implementation - model run

Question 129

define model specification

Answer 129

a description of the parts of a model and their interactions includes data, assumptions, methods, entities, events

Question 130

define model implementation

Answer 130

the systems that perform the calculations(computer programs, spreadsheets,…)

Question 131

define model run

Answer 131

the inputs/outputs of the implementation

Question 132

define model risk

Answer 132

the risk that the user will draw inappropriate conclusions due to shortcomings of the model or its use

Question 133

main difference between calculation and model

Answer 133

a model requires more documentation(how it was chosen, how it's used)

Question 134

why there's always risk in using a model

Answer 134

because a model is a simplification of reality

Question 135

how can model risk be measured

Answer 135

- severity of model failure - likelihood of model failure

Question 136

considerations in assessing the severity of model failure

Answer 136

- financial significance (higher severity if estimating a major balance sheet item) - importance of model (severity is lower if multiple models are being used) - frequency of use of model (severity is higher if model is used frequently)

Question 137

considerations in assessing the likelihood of model failure

Answer 137

- complexity (higher complexity means higher likelihood of misuse of the model) - expertise(non-expert users may not understand model limitations) - docs (bad docs means high likelihood of model failure) - testing (inadequate testing means high likelihood of model failure)

Question 138

does the actuary have more control over the severity or likelihood of model failure

Answer 138

more control over likelihood: - choose a more reliable model within the actuary's control - test the model more thoroughly within the actuary's control

Question 139

steps an actuary should take before using a new model ## Footnote common sense + what to do about elements of model

Answer 139

review specification, validate implementation, deal with limitations, keep documentation

Question 140

describe what an actuary does when reviewing model's specifications

Answer 140

verify DAMs: - your data fits the models requirements - methods are sound - assumptions are appropriate

Question 141

describe what an actuary does when validating a model's implementation

Answer 141

- compare with other tested models - maintain a set of test cases - backtesting (testing with historical data where you already know the answer) - run an entire live file through successive versions of the model for models with a higher risk-rating - peer review of testing procedure

Question 142

describe what an actuary does when dealing with a model's limitations

Answer 142

understand the range of uses for which the model was designed and tested

Question 143

describe what an actuary should include when documenting a model

Answer 143

- how the model was chosen - how it was tested - what are its limitations

Question 144

what is an important tool for validating models

Answer 144

a model's risk rating

Question 145

how should an actuary evalulate an existing model that's being used in a new way

Answer 145

- check the initial model as properly validated - review limitations in the new application that may not have been relevant in the intial application

Question 146

how should an actuary evaluate a model approved for use by others

Answer 146

actuary should review & approve the initial validation report

Question 147

how should an actuary evalulate a model outside actuary's expertise

Answer 147

make a reasonable attempt at understanding the model's - specifications - validation (extent to which experts were involved) - risk-rating - complexity - control framework

Question 148

give an example of a model outside actuary's expertise

Answer 148

a credit-scoring model

Question 149

what is the purpose of sensitivity testing regarding models

Answer 149

- to validate a model - to understand the relationship bewteen inputs/outputs - to develop a sense of comfort with the model

Question 150

how can model assumptions be tested in the context of sensitivity-testing

Answer 150

- test assumptions outside the expected range - test assumptions singly and then in combination - test assumptions with a nonlinear relationship between inputs/outputs

Question 151

what types of validation should be done when using a model

Answer 151

DAR: validation of data, assumptions, results - data should be 'RelSuff' - validate non-global assumptions that vary by model run - results should be 'reasonable' relative to input

Question 152

what does it mean for data to be reliable

Answer 152

- data reconciles to audited sources - data is reasonable with respect to prior period data

Question 153

what does it mean for data to be sufficient

Answer 153

- data fits model specification - data is available in a consistent format

Question 154

what checks can be done to validate the results of a model

Answer 154

- inputs/outputs should be consistent (input data should match similar fields in output file) - results should be reasonable in both magnitude & direction (small change in inputs causes a small change in outputs)

Question 155

compare uni-dimensional model risk-rating with two-dimensional rating

Answer 155

uni-dimensional approach: - rating from 1-20 - based on financial significance, complexity, expertise of users, docs two-dimensional approach: - assessed separately for severity & likelihood of failure - final rating is a balance of these