Test 3: 35-43

Question 1

Reasons for calculating provisions : 
Need for Individual – for each contract/product
BAD MEDICS
Need for global provision
CARD

Answer 1

Benefit improvements/contribution reductions for a benefit scheme
Accounts and reports (to show liabilities in them) published accounts, internal management
Discontinuance and surrender benefit
Merger and Acquisition value
Excess of assets over liabilities possible discretionary benefits
Disclosure information provided to beneficiaries
Investment strategy
Contributions and premium level setting
Statutory requirement- demonstrating supervisory solvency

Cover financial and non-financial risks - provisions in excess already held
Additional protection against insolvency
Reflect degree of A-L-mismatch
Demonstrate unambiguous solvency

Question 2

Ways to counter anti-selection:

MES

Answer 2

Modify assumptions used
Eligibility criteria
Set terms that favour one option over another

Question 3

Reasons for continuous analysis of surplus:

DIVERGENCED

Answer 3

Divergence of the actual experience vs the expected results financial effect
Information given to management and for accounts
Variance in the total financial effect is described by the variance of the individual levers does individual levers add up to total.
Experience monitoring to feed back into the ACC
Reconcile valuations for successive years to check consistency of the assumptions
Group into recurring/once-off sources of surplus enabling appropriate decisions to be made on the distribution of surplus
Executive remuneration scheme data - golden handcuff schemes: bonus of 10m if you stay 5 years. etc
New business strain affects
Check on valuation assumptions and calculations
Extra check on valuation data and process
Determine the assumptions that are the most financially significant

Question 4

Disclosure is important in a benefit scheme because (SIMMERS):

Answer 4

Sponsor aware of financial significance of benefits
Informed decisions can be made
Miss-selling is avoided
Manages expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor/trustees more accountable

Question 5

Individual disclosures are often made on (PRICE):

Answer 5

Payment commencement
Request
Intervals
Combination
Entry

Question 6

Information to be disclosed includes (DISCLOSURE SRC):

Answer 6

Director’s pension costs
Investment strategy and performance
Surplus/deficit (last year, accumulated to date)
Calculation method and assumptions
Liabilities (accrued over year, accrued to date)
Options and guarantees
Sponsor’s contributions and members’ contributions
Uncertainties (risks)
Rights on wind-up
Expenses

Strategic report - Key performance indicators shown
Risk report - attitude, management approach, risk based capital requirement calculation
Corporate governance - the management structure of board set out

Question 7

Levers/sources on surplus/profit

CRIEC CLIM VVACC

Answer 7

Claim likelihood and amount 
Renewal rates
Investment strategy 
Effective management strategies (Tax and accounting and fraud)
Control expenses  

Commission
Lapse rates
Inflation (Claim size and expenses)
Mix of business

Volume of business 
Valuation basis and method
Assumptions from formula of product , Demographic and 5CIET
Carried forward surplus/defici
Change in tax, policies

Question 8

Carrying out surplus analysis

PCEEA

Answer 8

Project income statement and balance sheet of product into future, starting with initial pricing model and ensuring assumptions are consistent and realistic
Compare three models:
Expected experience and expected volume of business
Expected experience and actual volume of business
Actual experience and actual volume of business

Question 9

Types of risk: COMBEL

Answer 9

Credit risk: FR
Operational risk: NFR  
Market risk: FR
Business risk: FR - CAROLINE MC 
External risk NFR
Liquidity risk: FR

Question 10

The principles of good lending relate to the: (CASPAR)

“Cannons of good lending”

Answer 10

Character and ability of borrower(known, competent, trustworthy, references?)
Amount (reasonable for purpose?)
Security (nature of transaction, covenant, market circumstances, security available)
Purpose or borrowing (risks associated with where the monies will be used)
Ability to repay (certain source of repayment? Any margins of safety?)
Risk vs. reward (is reward appropriate to risk level, has due diligence been done)

Question 11

Causes of inappropriate advice (CRIMES)

Answer 11

Complicated products
Rubbish/incompetent advisors
Integrity of advisor lacking
Model/parameter error
Errors in data
State encouraged, but inappropriate, actions

Question 12

Investment risks (DRUMOLITE):

Answer 12

Default
Reinvestment
Uncertainty over timing/amount of return
Mismatching of A/L
Opportunity cost of capital
Lack of appreciation from beneficiaries
Inflation (income and capital proceeds)
Taxation
Expenses

Question 13

Insurable risk criteria (FIA MUDPIS):

Answer 13

Financial/quantifiable
Interest in the risk being insured (from policyholder perspective)
Amount payable relates to size of loss
Moral hazard eliminated (as far as possible)
Ultimate limit on liability payable
Data available for accurate pricing
Pooling large number of homogeneous risks
Independent risk events
Small probability of occurrence

Question 14

Risk management helps to (AEIOU PRC D)

ASGrow SPIDO D

Answer 14

Avoid surprises
Effective use of capital to improve growth/returns / Exploit risk opportunities
Improve stability and quality of their business
Opportunities from natural synergies identified
Uncertainty of stakeholders reduced (increase confidence)
Product pricing improved
Reduce variability in employee costs and job security
Cost effective risk transfer
Determine risks earlier and more cheaply

Avoid surprises
Stability and quality of business improved
Growth and returns improved by exploiting risk opportunities
Growth and returns improved by better management and allocation of capital
Stakeholders in business given confidence that business is well managed
Price products to reflect level of risk
Improve job security and reduce variability in employee cost
Detect risk earlier meaning they are cheaper and easier to deal with
Opportunities identified from natural synergies
Determine cost effective means of risk transfer

Question 15

Risk registers are a way to categorise risks faced by a business or individual. Need to quantify: ICorP

Answer 15

Impact
Correlation
Probability

Question 16

Assessing capital requirement is difficult because (CRISPS):

Answer 16

Correlation matrix required - reduce stochastic variables. More than 2 stochastic variables are impractical
Risk probability parameters
Interactions between risks -the effect of multiple risk events is greater or less than the sum of individual risks.
Subjectivity of constructing adverse scenarios- such as setting risks such as operational risk
Past data for rare events - be cautious.
Stochastic model duration of the risk is determined (Should ruin prob be expressed over one year or over whole run off of the business

Question 17

Factors to consider when valuing options DECS CICA

Answer 17

Demographics
Expensive options not always exercised
Cultural bias
State of the economy

Consumer sophistication and needs
Immediate benefit vs. Higher deferred benefit
Cost increases in the valuation
Anti-selection

Question 18

Mitigating against inappropriate advice:

CARSHoW GRound

Answer 18

Cooling off periods
Advisors: Trusted source, qualifications, fee basis
Research on products done individually
Shop around for quotes
Honesty about needs, health and financial state
Write to regulator or ombudsman if inappropriate advice was given
Government advice questioning
Read fine print

Question 19

Factors determining the application of surplus for a benefit scheme:
LIST DiSS CEFE

Answer 19

Legislation
Industrial relations
Scheme rules
Tax benefit

Discretionary decision making
Risk exposure carried by the various parties
Source of surplus
Speed of corrective action

Consistency with other funds / employers
Expectations of members
Funding level of the fund
Ease of calculation

Question 20

Differences that exist in disclosure relates to

AFASI

Answer 20

Actuarial methodology chosen
Flexibility in the setting of assumptions
Amount of information to be disclosed
Smoothing of year on year fluctuations
Importance of the balance sheet and income statements in demonstrating a true financial picture

Question 21

Factors influencing the choice of valuation method and assumptions when determining the value of insurers liabilities
PuLSGRiDBNS

Answer 21

Purpose of the valuation DID PISC
Legislation/regulation or accounting principles
Size of solvency capital - larger solvency capital the less significant the margins in the individual provisions
Guarantees or options being valued - tend to use more cautious basis
Risk characteristics of business being considered
Data used - quality and quantity
Going concern vs breakup basis
Needs of the client - Individual, Shareholder, Investment
Sensitivity testing

Question 22

Factors determining the application of surplus for a life insurer:
PP WOES

Answer 22

Provision of capital and margins
Pace of surplus and distribution difference
Working capital retained
Objectives of the business
Expectations of the policyholder and competition
Smoothness of results / smoothness in the distribution

Question 23

Factors causing overall uncertainty of benefit schemes

Da CoMPaS

Answer 23

Data errors - beneficiaries or parameters
Contributions or premium calculation error
Model error
Parameter error
Security of the sponsor

Question 24

Factors affecting the contribution level for a benefit scheme (I PIE)

Answer 24

Inflation
Promised benefit
Investment return
Eligibility to accrue/receive benefits

Question 25

Risk of benefits for a DB scheme | ISUME LiBeNT

Answer 25

Inadequate funds due to: - Sponsor insolvency - Under funding - Mismatching of A and L - Economic mismanagement Liquidity of the scheme to meet benefits Benefit changes Needs of member not met - design or inflation Take over by company who's unwilling to meet beneficiary promises

Question 26

Risk identification: | DR RUB

Answer 26

``` Desktop analysis Risk analysis at high level Risk register/matrix Upside Brainstorm with experts (MILEP) ```

Question 27

Brainstorming with experts should yield: | MILEP

Answer 27

``` Mitigation options Interdependent risks Long term strategic thinking Evaluate risks: frequency, consequences Project risk identification – likely, up/downside ```

Question 28

Risk Measure should identify: ProSCoCo Risk Measures: LEAV

Answer 28

Probability Severity Correlation Controllability Liability risk - actual vs expected analysis Expected shortfall- Expected loss given benchmark Asset risk- measurement of active risk such as forward/backward tracking error VaR- Maximum potential loss given a confidence and a time horison

Question 29

Risk control methods: | FAT SIR LEP

Answer 29

``` Further research Avoid Transfer (likely, existing resources, cost/willingness of 3rd party) Share Insure Reduce ``` Choice depends on: Likelihood/severity of risk event Existing resources in place to meet the cost of the risk event should it occur Price/willingness of a 3rd party to take on the risk instead

Question 30

Risk financing should: | DRC MiD

Answer 30

Diversify Reduce likelihood Control price paid (e.g. insurance) Mitigate consequences of risk events that do occur Determine the amount of capital to hold to cover the retained risk

Question 31

Accounting ratios that indicate insurer's financial position and profitability: SARPY and ICOCO

Answer 31

``` Solvency ratio Asset/liability ratio Return of capital employed Price/earnings ratio Yields of dividends ``` Incurred expenses Claims ratio Operating ratio - (Claims + expenses)/premium income Commission income Outward reinsurance premium to premium income

Question 32

Factors affecting the certainty of contributions made to the benefit scheme (LUI IFANTA)

Answer 32

Liquidity constraints Unaffordable premiums Inflationary increase of contributions ``` Incorrect contributions made Fraud Advice not correct Non-compliance to regulation - fine or loss of tax reduction Tax terms change Administration costs ```

Question 33

The method of scenario analysis | GroP CaST/ GroDe CaRuT

Answer 33

Group risks - input from several senior managers Develop Plausible adverse scenarios for each group - ideas!! Calculate consequences - ideas!! Several different scenarios run Total cost is financial cost of all risks in relevant scenario Group risks Develop Plausible adverse scenarios for each group Calculate consequences Run several different scenarios Total cost is the financial cost of all risks in relevant scenarios

Question 34

The method of stress testing: | SIM

Answer 34

Subject portfolio to extreme market movements to determine sensitivity to certain risks: - Identify weak areas and effects of localised stress situations- what correlations exist withing the risk - Measure impact of market turmoil on all parameters

Question 35

Why ERM is effective: | VIS PROE SO

Answer 35

``` Variety of risk handled Interdependence of risk used Senior management take responsibility of risk management Pooling of risks done Risk is diversified Offsetting between risks Effective allocation of capital Stable results are produced Opportunities in the risks can be seen and exploited F ```

Question 36

Interpreting accounts Nicr Fap/ | ClEO IRP

Answer 36

Nature of the business: * investment mix * claim settlement pattern * reinsurance Financial condition: *asset to liability ratio to assess financials strength * profitability and performance - Claims ratio (gross and net) (c/p) - Expense and commission ratio (e+com/np) - Operating ratio (nc+e/np) - Investment performance ratio (inv income/ A) - return on capital ratio (post tax profit/ free reserves) - profit margin (gprof/np)

Question 37

Similar aims for different accounting standards CARS

Answer 37

Consistency in account treatments from year to year Appropriate information disclosed Recognize realistic cost of benefit accrual Smooth benefit provision done

Question 38

Market risk - why holding a matched position is difficult: | CDC

Answer 38

Changing value of L - Options or Discretionary benefits' Duration of A does not match L Cost of keeping matched position

Question 39

Business Risk for insurers BREW CO

Answer 39

``` Business mix and volumes Reinsurance Expenses Withdrawals Claims Options and guarantees ```

Question 40

Risks in Life and General insurance RISK LIFE DROWN CATS MUn

Answer 40

Reinsurance/ Reputational Investment/ Reinvestment risk Systematic risk Kompetition risk Liquidity risks Inflation Fraud Expenses ``` Data Rates (Mortality, withdrawal, morbidity) Options Withdrawals New business(vol and mix) risk ``` Credit risk/ failure of third parties Aggregation of risk Tax Selection (Anti Selection, Moral Hazard) Marketing/ Market risk Underwriting risk

Question 41

Methods for calculating reserves: | SPEC

Answer 41

Statistical analysis: Large population exposed to risk and consequence of risk has a known distribution Proportionate: prop of outstanding premiums allocated to the expected future claims is the provision held Equalisation reserve: stable/smooth annual results, catastrophe, deferring of tax and profit Case by case: Rare events

Question 42

Different methods of allowing for prudence: | MaCoR

Answer 42

Margin built into each assumption Contingency loading: increase liability by some value Risk premium built into the discount rate

Question 43

Enterprise risk management - definition

Answer 43

Risk management becomes a major activity at enterprise level Combine several unit level risk models to assess risk at entity level Company can then allow for pooling of risk, diversification, and economies of scale -PED Take advantage of risk based opportunities Similar risk assessments methods used - risk can be combined in a risk model Effective capital allocation

Question 44

Risks in a DC scheme | OLIE

Answer 44

Operational risk- fraud Longevity risk- Life annuity purchase price higher Investment risk- bad investment performance Expense risk - higher than expected

Question 45

Additional considerations for a insurance company in a group scheme agreement: PRe ABC

Answer 45

- Profit sharing arrangements that might be put in place - Relationship between the company and the group scheme - Additional benefits to provide - Bargaining power - Company reputation

Question 46

Causes of a change in claims experience: | CaRBEN VRUIF DRINKS

Answer 46

Claims frequency: Catastrophe Random variation Business mix changes Education of clients on eligibility of claims New Risk factors not allowed for Volumes of Business Risk factors missed by underwriting Underwriting standards decreased - Claims and proposal stage Internal claims processing improved Fraud Claim Size: Demand for services increased Regulation increased, increasing cost of benefit Inflation New services available - cheaper or expensive K - ??? State subsidizing Decreased

Question 47

Sources of operational risk DIRH COFF

Answer 47

``` Dominance Reliance on third parties Internal process failures Human error Cyber crime Outsourcing Fraud Failure of plans to recover from external risks ```

Question 48

Factors affecting the risk appetite REC SCAN

Answer 48

``` Regulatory control Existing risks faced Culture of company Size of company Capital level Attitude of stakeholders Nature of business ```