QFIP-137: Managing Your Advisor

Question 1

Describe how an investment actuary adds value

Answer 1

Investment actuary = liaison between product actuaries and portfolio managers

1. Helps product actuaries / senior management (objectives, product design)
2. Develops policies for liquidity, ALM, investments, and derivatives
3. Provides product information to investment advisor
4. Helps set crediting rates
5. Coordinates cash levels with Treasury department
6. Advises portfolio manager on accounting/product constraints on specific trades
7. Allocates new securities to asset segments
8. Leads A/L modeling (scenario analysis, duration, hedging)
9. Coordinates investment return effect on financial statements / policy values

Question 2

Describe the short-term investment process the investment actuary should be aware of

Answer 2

• The Treasury area maintains sweep accounts operating cash flow
  
  • Premiums/fees go in, benefits/expenses go out
• Substantial excess funds should transferred to investment accounts
• Invest cash from highly sensitive rate quotes ASAP
• Must determine how to allocate cash between surplus and product segments
  
  • Can be very complex

Question 3

Describe the long-term investment process, under the general guidance approach

Answer 3

General Guidance Approach

• Set a target mix for new purchases
• Update mix quarterly (or more frequently) based on the plan’s projected income
• Actively sold products: build a robust, diversified portfolio
• Products in runout: build an adequately liquid, high cash flow portfolio

Question 4

Describe the long-term investment process, under specific guidelines

Answer 4

Specific Guidelines

• Determine product funding needs more frequently
• Target funding level = last month’s liability valuation plus net product cash flow
  
  • May include required surplus, too
• Capital planning is necessary

Question 5

List considerations when deciding between the general guidance approach and
specific guidelines

Answer 5

1. Level of cash flow
2. Asset risks inherent in the investment strategies
3. Investment advisor’s expertise in the products your company sells
4. Management’s comfort level with the investment advisor
5. Detail available from general ledger (including electronic availability)

Question 6

Compare the realities of trading stocks vs. bonds

Answer 6

• Round lot = standard trade size
  
  • Stocks: 100 shares
  • Bonds: $1 million
• Stock trading is more streamlined, efficient
• Bond market is dominated by institutional investors (due to large lot sizes)
• Bonds are generally less liquid
• Bond trading requires much more negotiation
  
  • “Can be like a poker game”

Question 7

Describe 4 constraints on asset sales

Answer 7

1. Accounting
   
   • Stat accounting spreads gains and losses over life of original assets (IMR and AVR)
   • Realized gains are taxable
2. Embedded value / economic value added
   
   • Impact is usually minimal
3. Asset/Liability Management
   
   • Bond prices usually increase before upgrades
   • Riding the yield curve — unrealized gains emerge as bond approaches maturity
4. Credited rates and policyholder equity
   
   • Selling a high-yielding bond can hurt crediting rates
   • Constraints on credit quality, maturity structure, or concentration

Question 8

List 6 items to include in an insurer’s investment policy

Answer 8

1. Investment Objectives
2. Investment Constraints
3. Scope
4. Authority from the Board of Directors
5. Investment Committee
6. Appendices

Question 9

List 6 items to include in an insurer’s ALM policy

Answer 9

1. Objectives
2. Ground rules
3. Guidelines and tolerances
4. Process
5. Reporting
6. Governance

Question 10

List 6 items to include in an insurer’s derivatives policy

Answer 10

1. Accountability
2. Permitted uses
3. Types of derivatives permitted
4. Counterparties
5. Derivative portfolio exposure limits
6. Internal controls

Question 11

List 5 items to include in an insurer’s liquidity policy

Answer 11

1. Objectives
2. Management oversight
3. Liquidity measures and reports
4. Constraints
5. Written plan