Test 2: Ch 23-28 and 32-34 Flashcards Preview

Actuarial Risk Management: CA1 > Test 2: Ch 23-28 and 32-34 > Flashcards

Flashcards in Test 2: Ch 23-28 and 32-34 Deck (41):
1

Ways to value assets:
(SHAM FADS)

Smoothed market value
Historic (book) value
Adjusted book value
Market value
Fair value
Arbitrage
Discounted cashflow model
Stochastic model

2

Main factors influencing investment strategy :
(SOUNDER TRACTORS)

Solvency requirements and statutory valuation requirements
Objectives of the institution
Uncertainty of liabilities
Nature of L
Diversification
Existing asset portfolio
Risk appetite of the institution


Term of the liabilities
Return expected over long term from various asset classes
Accrual of future liabilities
Currency of current liabilities
Tax and cashflow requirements
Other funds strategies
Restrictions on how the fund may (statutory, legal and voluntary)
Size of the assets in relation to liabilities and in absolute terms

3

Three main definitions of risk in institutional investment strategies: PVPR

Probability of default (unlikely)

Variability of return (also unsatisfactory because liabilities change too)

Probability of failing to achieve the investor’s objective (most practical)

Relative performance risk

4

Factors to consider prior to a tactical asset allocation switch:
CEPEL

Constraints on the changes that can be made to the portfolio

Expected extra return relative to any additional risk

Problems involved switching a large portfolio

Expenses

Level of assets available

5

Main factors influencing individual investment strategy:
(PRINCES)

Practical considerations
DEK (no direct investment, high expenses, no knowledge)
Returns on different assets FUT
(tax considerations, ‘feel-good’ and undervalued assets, speed of changing assets)
Investment freedom and
constraints LURE (excess assets, uncertainty, insurance risk appetite (WAD) and liquidity)
Nature of assets and liabilities
Cashflow requirements
Expenses/expertise
Spread(variability) of market values

Considerations
DORA

6

Types of benefit payment and asset strategy:
(GIDI)

Guaranteed in nominal terms:
- pure/approx. matching assets
- seek immunisation

Index linked
-index linked bonds
-equities

Discretionary
-real assets - highest expected return possible
-requirement to match PRE- policyholder reasonable expectations

Investment linked
-assets to replicate/match index
-(assets used to determine the benefits , derivative strategy or CIS)

7

Regulatory framework limitations in developing an investment strategy: (TECH SCAM)

Type of asset can invest in
Extent of mismatching allowed
Currency
Hold certain proportion in a certain class of assets
Single counterparty maximum exposure
Custodianship of assets
Amount of any one asset used to demonstrate solvency
Mismatch reserve

8

Limitations of Redington's immunisation theory:
(FAT DRY PI)

Fixed nominal values assumed (but can use ILG)
Assets of long enough duration may not exist
Timing of asset proceeds/liabilities unknown
Dealing costs ignored
Re-balancing needed after interest rate change
Yield curve assumed to be flat
Profit from mismatching eliminated
Interest rate changes assumed to be small

9

Expenses for securing new business:
(PUMaCR)

Processing/ product design
Underwriting
Marketing
Commission
Research

10

Factors affecting cost of benefit:
(TIERCCCOP)/
(ICC COPTER)

Tax
Investment income
Experience rating – adjust future premiums - how was the actual claim experience? better or worse than
Reinsurance cost
Commission – possibly expense?
Cost of capital – still to be covered
Contingency margin
Options + Guarantees
Provisioning bases – cost of establishing solvency capital, becomes positive a termination-- cost of capital
expected? (connect to data chapter)

11

Factors affecting the marketability of products:
(ICE)

Internal issues: Product quality, reputation etc
Competitors’ actions
External environments (economic situation, trends, policy changes)

12

Factors affecting benefit paid in discontinuance:
(FRACPENCS)

Frequency of change of discontinuance terms - PRE, Cost
Regulation and market practice
Asset share of a policy (retrospective res)
Competitiveness
Practical considerations – cost, calculation ease.
Expectations - PRE, short and long duration
New business disclosure
Cost of implementing the discontinuance terms
Suitable terms - Lump sum, paid up value

13

Insolvency and closure of a life insurer why this rarely happens:
(RIPTC)

Regulation
Intervention - Reinsurance, Investment strat, New Bus
Projecting solvency
Takeover of business
Compensation schemes

14

Factors affecting the level of benefit paid out in the case of insolvency:
(ARE)

Asset level - surplus or deficit
Rights of beneficiaries – terms of scheme or overriding legislation
Expectations – benefits if did not cease, future, accrued, discretionary.

15

Factors considered when modeling future solvency RECSO

Redemption of debt - Amount and timing
Estimated future loss/profit net of tax
Current value of surplus assets
Staff - Relationships & employee benefits
Outstanding financial obligations

16

When taking over discontinuance business or for a merger/acquisition, consider:
RIEL SyCRETS

Relocation of staff
integration of system platforms
Effect on unit costs
Location of Business

Synergy of the products
Cost vs Reward of the takeover/merge
Regulatory differences if in different sectors
Employee benefit scheme new members
The effect on the company's long term goals
Shareholders on both sides

17

Options for benefit provision of discontinued benefit scheme CLiBPr / CT4

Continue scheme with no benefits accrual
Liabilities transferred to new scheme of the same sponsor
Beneficiary receives funds as lump sum
New Provider of benefits are given the built up assets
/
Continuation of the scheme without any accrual of future benefits.
Transfer liabilities to another scheme with the same sponsor
Transfer the funds to an insurance company to invest and provide some form(lower or guaranteed) of benefits to members
Transfer benefits as a lumps sum to the member
The scheme can close to new members

18

Merits of valuing assets with the market price
ARCOE FFARBB

Objective
Reliable
Easy
Well understood and accepted
Comparable with other valuation methods to determine anomalies

Fluctuates over time
Future value not reflected
Availability lacks
Not realistic value for sale
Bid/Offer conflict
Basis inconsistency between A and L

19

Issues with valuing equities with the discounted dividend model TURA/ TULA

Tax ignored
Unknown dividend and required return rate
Lack of Rigour in results
Annual dividend assumed

20

Methods to compare returns on different asset classes/ categories of tests to determine if an asset class is overvalued:
GRaNTR

yield Gap
yield Ratios
yield Norms
Technical analysis
Reverse yield gap

21

Property risk premium compensates for: U VOLD

Unit size/ Uniqueness
Refurbishment
Void risks
Obsolescence
Liquidity
Dealing and management costs

22

Valuation of A and L with MARKET VALUE, Merits CAMV:

Consistency with L difficult
Assets usually valued with MV
Market based discount rate hard to find
Volatile

23

Valuation of A and L DISCOUNTED CASHFLOW merits SASH/CASH:

Stable and consistent valuation of L
Assumptions about valuations consider both A and L
Subjective
Hard to explain

24

Merits of Active investment JEL JED

Judge future performance of assets
Expected returns are higher
Limited Restrictions on investment
Judgment error risk exists
Efficient market - inability to outperform
Dealing costs

25

Merits of Passive investment EIS LT

Expenses are less
Index tracking is possible
Smaller expected return
Little investment freedom
Tracking errors

26

The technique of risk budgeting APEAR

EDIT-----------------

Active and strategic risk allocation
Portfolio risk allocation
Efficiency of active management measured
Appetite of risk at given level determined
Risk correlation considered

27

Non-Actuarial Techniques of investment strategies MAS

Mean-variance optimisation
Asset allocations based on market capitalisation
Similar strategies as other institutions

28

The three components of risk when quantifying ASS:
Three key investment risks

Active - fund manager not meeting benchmark
Strategic - benchmark does not match liabilites
Structural - aggregate benchmark of managers does not meet total benchmark

29

Aspects of an Asset Liability model OPHACC:

Objectives of investment formulated
Performance target set
Horizon of performance set
Assumptions of model set
Confidence levels of performance determined
Continuously run and assess the model

30

Factors causing differences - price and cost of products: DCLP

Distribution system – exploit economies of scale or sell above market price
Competition – underwriting cycle
Loss leader: Cheap products attract customers to profitable products
Premium frequency

31

Factors when assessing premium rates MOP:

Marketability
Other features: lapse rates, policy terms, cross- subsidies
Profitability

32

Forms of funded products JuSTLuReT

Just in time funding
Smoothed PAYG
Terminal funding
Lump sum advance
Regular contributions
Tax

33

Factors to consider when choosing a financing method FLiRTS SORRi

Flexibility of the contributions
Liquidity needs of sponsor
Realism of method
Tax incentives
Stability of contributions needed
Security of the benefits
Opportunity cost of funding method - none for PAYG
Regulation
Risk allocation - sponsor vs. beneficiary

34

Constraints individual investors have that institutions do not have:
(4 Lack of Cash SADD)

Lack of access to research facilities
Lack of up to date investment information
Lack of expertise to invest directly
Lack of time available

Not always have cash available for
- Short notice investment opportunities
- Achieve economies of scale
- Direct investment and remain well diversified
- Directly invest in large unit sizes

35

Advantages of PAYG method WTF ExO

No need to wait for contribution accumulation to provide benefits
Lower transaction costs
Funds not tied up
Easier to Organise the payments of benefits
Experience cannot cause difference between contributions and benefit

36

Advantages of risk budgeting
BaIn

Bases asset allocations not only on expected return but also on its risk contribution
Increases the attention paid to low correlation investments which reduces total risk of the portfolio

37

Benefits of funding in advance
GASER T

Gives security to members
Avoids sudden and unexpected cash calls that could cause liquidity problems
Smooths costs
Expected by members to fund in advance
Required possibly by legislation
Tax advantages possible

38

Treating the surplus or deficit of a discontinued benefit scheme: (DPEL SERB)

Deficit:
Priority given to certain members
Expenses of the calculation
Legislation
Surplus:
Employer's right to receive surplus
Rights of members
Benefits improvement

39

The steps of an expense analysis CFTIL

Class - Fixed/variable or Direct/Indirect
Function - Initial, Renewal, Termination
Type - Salaries, Rent, Computing etc.
Identification of costs - Time sheets, floor space, etc.
Loading method - Once off, recurring premium proportion

40

When matching assets and liabilities keep the following in mind

CNT CRRD

Currency
Nature
Term
Certainty
Return
Regulation or Legislation
Diversification of assets

41

Steps required to perform a stochastic ALM modelling exercise:
OSNeP SAPI

1. The objectives of the strategy need to be defined clearly
2. The company will be required to produce simulations of assets and liabilities over the full run off period of the liabilities
3. The model may include or exclude future new business, depending on the objectives
4. If NB is included, projected sales can be obtained from business plans and input from marketing and sales departments
5. Depending on the size of the book and computing power, it may be necessary to select model points
6. Appropriate input assumptions are required such as distribution parameters of assets, correlation between assets and liabilities
7. Projections should be based on best estimate assumptions
8. An initial strategy is tested by projecting the Assets and Liabilities under several thousand simulations to derive a probability distribution and to determine the suitability of the strategy