Mnemonics 2 Flashcards

Question

13.What are the 5 ways of valuing equities

Answer 1

MEND * Market value * Measurable key factor approach * Economic value-added approach: 1. Operating profit less cost of capital over a year 2. Measures value added by the company over a specific year * NAV per share → Used for investment trusts and property companies * Discounted dividend model

Answer 2

TAMARAI * Timing of asset proceeds and liability outgoes may be uncertain. * Aimed at meeting monetary liabilities, but investors may need to match real liabilities. * Mismatch profits and losses are removed except for small second-order effects → limits investment in equities and property. * Assumes a flat yield curve and the same interest rate change across all terms. * Relies on small interest rate changes → may not protect against large changes. * Assets with suitable long DMT may not exist. * Ignores dealing costs and taxes

Answer 3

DETECT L * Difficulty in carrying out the switch at a good time * Expected extra return relative to extra risk taken * Tax implications (on capital gains) * Expenses of making the switch * Constraints on changes that can be made to the portfolio (regulatory restrictions) * Trouble of switching a large portfolio of assets (price shifting) * Level of free assets

Answer 4

SAVIOURS * Strategic decision making improved (integration of risk into processes) * Avoid surprises * Volatility of profits reduced (improved financial stability/quality of business) * Improved profits via capital efficiency (management and allocation of capital) * Opportunities exploited for profit * Understand interdependencies (concentration of risk, diversification benefits, natural synergies) and aggregate risk exposure * React quickly to emerging risks * Stakeholders in the business given confidence

Answer 5

Please Never Eat Fried Chicken Past Bedtime * Political - opposition to project, war, terrorism * Natural - earthquakes, hurricanes * Economic - interest rate or exchange rate movements * Financial - sponsor default, incorrect cashflow estimates * Crime - fraud, theft * Project - time delays, budget overruns, bad design, poor planning * Business - competition/lack of demand, operational problems, obsolescence

Answer 6

**TPL** Climate risks refers to risks arising from adverse changes in the physical environment and secondary impacts on the economy at a regional or global level **Physical** - first-order effects of environmental changes, eg greenhouse gas emissions, pollution and land use. Effects may be chronic or acute. **Transition** – economic, political and market changes as a result of efforts to mitigate climate change. **Liability** – from injured parties seeking compensation for the impacts of climate change. Impacts may be first-order physical impacts or second-order transition impacts.

Answer 7

CRIMES * Complicated products * Rubbish adviser * Integrity of adviser lacking * Model or parameters unsuitable * Errors in data relating to beneficiaries * State-encouraged but inappropriate actions e.g. Encouraging people to save for retirement when this might reduce the level of state benefits they are entitled to and reduce their overall standard of living in retirement

Answer 8

ESPECIAL * Existing exposure to a particular risk * Size of company * Period of time for which it has operated * Previous experience of board members * Existence of a parent company or other guarantors * Culture of company * Institutional structure * Attitude towards risk of owners and other capital providers * Level of available capital * Level of regulatory control to which it is exposed

Answer 9

PAR * Policyholder must have an interest in the risk (insurance vs wager) * claim **A**mount must bear some relationship to the financial loss incurred * Risk must be financial and reasonably quantifiable

Answer 10

MUD PIS * Moral hazard eliminated as far as possible * Ultimate limit on the liability undertaken * Data exists with which to price the risk * Pooling a large number of similar risks * Independent risk events * Small probability of occurrence

Answer 11

SRC * Scenario analysis * Stress testing * Stochastic modelling * Reverse stress testing * Combined stress and scenario testing

Answer 12

FRAUD CRIME * Financing * Rating agencies * Attractive investors * Understand better * Determine appropriate control systems * Changes over time * Regulator * Interactions * Monitor effectiveness of controls * Emerging risk identification

Answer 13

PI RATE * Partially transfer=> to another party * Ignore=> trivial or largely diversified * Reduce=> frequency or severity * Accept=> retain all * Transfer=> to another party * Evade=> avoid the risk altogether

Answer 14

FIRM * Feasibility + cost * Impact on Frequency+ severity and expected value * Resulting secondary risks * Mitigation required in response to secondary risks

Answer 15

DESCRATES * Diversification * Exploit risk as an opportunity * Solvency improvement * Cheaper cover than Re * Results smoothed or stabilized * Available when Re may not be * Tax advantages * Effective risk management tool * Security of payments improved

Answer 16

SAFARI * Suitable special policy terms=> identification of the most suitable approach and level of special terms for substandard risks * Avoid anti-selection * Financial underwriting=> reduce risk of over insurance on large policies * Actual claims experience being in line with that expected in pricing basis * Risk classification=> all risks are rated fairly * Identify substandard risks- special terms need to be quoted=> accept as many risks as possible on standard premium rates

Answer 17

BAD MEDICS * Benefit improvements for a benefit scheme * Accounts and reports- published and internal * Discontinuance/ surrender benefits * Merger and acquisition * Excess of A over L => whether any discretionary benefit can be awarded * Disclosure information for beneficiaries * Investment strategy * Contribution/ premium setting * Statutory solvency reports

Answer 18

PRICE * Payment commencement * Request * Intervals * Combination * Entry

Answer 19

SCRIBE * Strategy for investment * Contribution obligations * Risks involved * Insolvency element * Benefit entitlements * Expense charges

Answer 20

CARD * Consistency in the accounting treatment from year to year * Avoiding distortions resulting from contribution fluctuations * Recognising the realistic costs of accruing benefits * Disclosure of appropriate information

Answer 21

DIM CLAIMS * Directors benefit costs over the year * Investment returns on assets achieved over the year * Membership movements * Change in the surplus/deficit over time * Liabilities accruing over the year * Assumptions used * Increase in the past service liabilities over the year * Methods used * Surplus/deficit

Answer 22

LUC * Liquidity facilities (short-term financing for companies) * Senior unsecured financing (financing at group level) * Contingent cap (agreement to provide capital following defined event)

Answer 23

PEN * Parent company * Exisitng shareholders - Rights issue * New shares

Answer 24

REGulatory CUSHION * Regulatory requirement to demonstrate solvency * Expenses of launching a new product/ starting a new operation * Guarantees can be offered (higher solvency capital required) * Cashflow timing management * Unexpected event cushions e.g fines * Smooth profits * Helps demonstrate financial strength/ obtain new business/ good credit rating * Investment freedom to mismatch in pursuit of higher return * Opportunities, e.g. mergers and aquisitions, new ventures * New business strain financing

Answer 25

BIRDS FEDS * Banking products * Internal sources of capital * Reinsurance * Derivatives * Securitisation * Financial reinsurance * Equity * Derivatives * Subordinated debt

Answer 26

MAD VS * Restructuring by **M**erging funds * Changing **A**ssets: 1. Inadmissible to admissible 2. Matching more closely to reduce mismatching reserve 3. To influence the valuation interest rate used for liabilities * Not paying **D**ividends * Weakening the **V**aluation basis * Deferring the distribution of **S**urplus (e.g. Bonuses)

Answer 27

CCB and CyCB * Capital conservation buffer * A countercyclical capital buffer Regulator may require banks to hold capital greater than required by Basel regulations

Answer 28

DIVERGENCE * Divergence of actual vs expected * Information to management and for accounts * Variance as a whole= sum of variance individual levers * Experience monitoring=> Feedback into ACC * Reconcile values for successive years * Group into one-off/recurring sources of surplus * Executive renumeration scheme (Data for) * New business strain (show effects of) * Check on valuation assumptions and calcs * Extra check on valuation data and process

Answer 29

CRICT RD * Corporate banks – traditional commercial banking activities + merchant and payroll services; conduct market research and give stock recommendations * Retail banks – offer deposit, investment, and loan products to customers; include long- and short-term savings, secured and unsecured loans * Investment banks – involved in debt raising and equity financing for corporations and governments * Community banks – membership-based, decentralised, self-help financial institutions (e.g., stokvels, mutual banks) * Traditional deposit-taking banks – commercial or retail banks * Reserve (central) banks – achieve and maintain price stability for balanced and sustainable economic growth * Development banks – provide credit through higher-risk loans to public and private sector initiatives

Answer 30

PIS * Post loss funding * Integrated risk covers * Insurance derivates * Swaps * Securitisation

Answer 31

TeaM CAMPS * Tracking an index as closely as possible * Meeting the liabilities as they fall due * Controlling the amount and timing of future obligations * Achieving a pre-specified target level of investment return or funding level * Matching or exceeding competitors – e.g. the median return or funding level * Proving that there are sufficient assets available should the provision of future benefits be discontinued * Satisfying statutory and/or realistic solvency requirements

Answer 32

A SAD CUTER INVESTOR * Accounting regulations * Size of assets ( absolute/relative) * Accrual of future liabilities * Diversification * Currency of the liabilities * Uncertainty of the liabilities * Tax treatment of the assets/investor * Environmental/social/governance issues * Risk appetite * Institution’s objective * Nature of the liabilities * Voluntary and legal restrictions * Existing asset portfolio * Solvency requirements * Term of the liabilities * Other funds’ strategies (competition) * Return

Answer 33

TECH SCAM * Types of assets a provider can invest in * Extent to which mismatching is allowed * Currency matching requirement * Hold certain assets * Single counterparty risk management→ restriction on maximum exposure * Custodianship of assets (custodian holds investments and accounts for financial transactions) * Amount of any one asset held to demonstrate solvency may be restricted * Mismatching reserve requirements

Answer 34

MERMAIDENN * Matching the nature, term, currency and uncertainty of the liabilities * Expenses are relatively high when investing small amounts * Risk aversion and a dislike of volatility * Maximising expected return on investments, net of expenses and tax * low free Assets, which constraint’s ability to mismatch and take risk * Individual’s tax status and the tax treatment of the asset * Diversification, to reduce specific risk * Expertise/ Information lacking relative to institutional investors * Need for income to live on vs growth for future * Not enough assets for direct investment in certain assets classes

Answer 35

ICHES * Issues with respect to data security and piracy * Controls to ensure that the required data standards are applied * How the adequacy of the controls will be monitored on an ongoing basis with respect to data usability, accessibility, integrity and security * How an organisation will capture, analyse and proces data * Ensuring that the relavant legal and regulatory requirements in relation to data management are met by the organisation * Specific roles and responsibilites of individuals in the organisation wrt data

Answer 36

N3 CLIP * Not credible * Not sufficiently relevant to the intended purpose * Not available in an appropriate form for the intended purpose * Chosen data groups are not optimal * Lack of confidence in the data leads to a lack of confidence in the results * Inaccurate or incomplete data * Past data do not reflect what will happen in the future

Answer 37

TRAINERS * Tables * Reinsurers * Abroad (data from overseas contracts) * Industry data * National statistics * Experience investigations on the existing contract * Regulatory reports and company accounts * Similar contracts

Answer 38

LUNCH * Legislative or regulatory constraints * Use (purpose) to which assumptions will be put * Needs of the client * Consistency between the various assumptions * How financially significant the assumptions are

Answer 39

**STATiC** * **Spurious selection**=> Ascribing mortality differences to groups formed by factors that are not the true causes of the observed mortality differences. * e.g. Mortality improvements due to increasing strictness of underwriting * Geographical mortality differences actually due to a different balance of high and low risk occupations * **Time selection** => Within a population, mortality and morbidity rates usually vary over a calendar year, essentially due to medical advances. This effect is observed at all ages and the usual effect is for mortality rates to become lighter. * e.g. Individuals living 30 years exprience heavier motality than lives of the same age today * **Adverse selection**=> Any selection that leads to an adverse effect on another party (e.g. on an insurance company). Involves an element of self-selection which acts against a controlled selection process which is being imposed on the lives. * e.g. Poeple who decide to purchase an immediate annuity with pension funds usually experience lighter mortality than those who decide not to do so * **Temporary initial selection**=> Usual that the mortality rates depend on the duration since some event, up to some duration s. After duration s they are independent of duration. This phenomenon is known as initial selection. S= select period. * e.g. Lives that have recently been underwriten have lower mortality rates than those of same age that took policies several years ago * Life insurance policies=> mortality rates of policies recently underwritten is lower than those of the same age who have been underwritten a while back * **Class selection** => Each group categorised by the nature of a particular characteristic of the population * Gender * Occupation * Age

Answer 40

CIRCUS * Chairperson/CEOs statement * Investment report * Remuneration report * Corporate governance report * Uncertainty/risk report * Strategic report

Answer 41

SIMMERS * Sponsor is aware of financial significance of benefits * Informed decisions can be made * Mis-selling (misleading beneficiaries) is avoided * Manages the expectation of members * Encourages take up * Regulatory requirement * Security of scheme improved as sponsor/ trustees are made more accountable

Answer 42

The decision will depend on: (FENCED) * Fit for purpose * Expertise available in-house * Need for flexibility * Cost of each option * Expected number of times the model is to be used * Desired level of accuracy

Answer 43

SCARCER FILES * Simple but retains key features * Clear outputs * Adequately documented * Range of implementation * Communicate workings and results * Easy to understand * Refinable and developable * Frequency of cashflows (balance accuracy and practicality) * Independent verification of outputs * Length to run not too long * Expense not too high * Sensible joint behaviour of variables

Answer 44

AMPLE DIRECT FACTORS * Administration systems * Marketability * Profitability * Level and form of benefits * Early leaver benefits * Discretionary benefits * Interests and needs of customers * Risk appetite of the parties involved * Expenses vs charges * Competition * Terms and conditions of contract * Financing (Capital requirements) * Accounting implications * Consistency with other products * Timing of contributions or premiums * Options and guarantees * Regulatory requirements * Subsidies(cross)

Answer 45

ALPACAS * Actuaries * Lawyers * Providers of benefits * Accountants * Customers * Administrators * Shareholder/financial backers

Answer 46

`COST RAID` * Commission * Overheads * Sales/advertising * Terminal e.g. paying benefits * Renewal administration e.g. collecting premiums+ contributions * Asset management * Initial administration e.g. setting up policyholder records * Design of contract

Answer 47

**aEIoU** * Inadequate underwriting standards leading to mispricing of risks (Underwriting) * More claims than expected (insurance) * Investment in a business project that fails to be successful (investment) * Greater exposure than planned to a particular risk e.g. High volumes sold (exposure)

Answer 48

**TPL** Climate risks refers to risks arising from adverse changes in the physical environment and secondary impacts on the economy at a regional or global level **Physical** - first-order effects of environmental changes, eg greenhouse gas emissions, pollution and land use. Effects may be chronic or acute. **Transition** – economic, political and market changes as a result of efforts to mitigate climate change. **Liability** – from injured parties seeking compensation for the impacts of climate change. Impacts may be first-order physical impacts or second-order transition impacts.

Answer 49

CC - RA **Direct costs** * Cost to the regulator for administering the regulation * Cost to the regulated firms for complying with it **Indirect costs:** * Alteration of consumer behaviour=> given a false sense of security or reduced sense of responsibility for their own actions * An undermining of the sense of professional responsibilities amongst intermediary and advisors * A reduction in the market’s own consumer protection mechanism * Reduced product innovation * Reduced competition

Answer 50

CIIRCLED * Cooling-off period for consumers * Imposing price controls * Insider-trading regulations enforcement * Regulating selling practices * Chinese-walls * Legislation on treating customers fairly and ensuring no unfair contract terms * Educating consumers * Disclosure of information in simple language

Answer 51

SOAP DIP-F * Security safeguards * Openess * Accountability * Process specification * Data subject participation * Information quality * Processing limitation * Further processing limitation

Answer 52

APRC4 * Abnormal fluctuations * Potential errors in the data * Random fluctuations * Changes in the way in which the data was recorded * Changes in the mix of homogeneous groups within the past data * Changes in the mix of homogenous groups to which the assumptions will apply * Changes in experience with time

Answer 53

* ALPHA * A complex design * Lack of historical data * Policyholder options * High overhead expenses * High guarantess * An untested market

Answer 54

CHONE G * Climate change and geographical location * Housing * Occupation * Nutrition * Education * Genetics

Answer 55

* Pay-as-you-go=> benefits are met out of current revenue and there is no funding * Smoothed pay-as-you-go=>same as pay as you go but with a small fund to smooth effects of timing difference between contributions and benefits, short term business cycles and long-term population changes * Terminal funding=> s lump sum set aside to cover all expected benefit costs when the first tranche of benefits becomes payable * Just-in-time funding=> funds are set aside only in response to an external event such as sale of employer * Regular contributions=> funds are gradually built up between promise and first benefit payment * Lump sum in advance=> lump sum is set aside to cover the expected benefit costs when the benefit is promised

Answer 56

COVER TIP * Contribution to profits * Commission * Cost of capital * Contingency margins * Options and guarantees * Value of benefits * Value of expenses * Experience rating * Reinsurance * Tax * Investment income * Provisioning bases

Answer 57

COUPEPICAA * Claim frequency, benefit amount, volatility and settlement delays * Operational risks, e.g. fraud, systems failure, regulatory changes * Underwriting risk, i.e. failure to properly disclose pre-existing conditions * Poor persistency, i.e. high lapses and low renewals * Expenses being higher than expected * Poor plan mix due to upgrades, downgrades and anti-selection * Investment risks, e.g. poor or volatile returns, falls in asset values, default risk * Credit risk, i.e. failure of a counterparty such as a provider, reinsurer or a broker * Accumulations of risk, catastrophes, and large number of large claims * Availability of claims data

Mnemonics 2 Flashcards

(81 cards)