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CA1 Final Revision > Tutorial Extras > Flashcards

Tutorial Extras Flashcards

1
Q

Name 10 stakeholders

A 
s/h
p/h
lawyers
accountants
reinsurers
members/dependants
creditors
sales intermediaries
investment managers
government/regulator
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2
Q

3 types of actuarial advice?

A

IFR
Indicative (opinion without full investigation)
Factual (based on research of facts like legistlation)
Recommendation (researched, forecasted, alternatives considered)

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3
Q

What are the 4 types of customer needs?

A 
CLEF
Fergie is logical and not emotional and signs players for the future
Current
Logical
Emotional
Future
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4
Q

Who may provide benefits

A 
I'll get a state pension, company pension, my own portfolio, and am life insured, I also put money in the banks
State
Employer
Individual
Financial companies
Other companies
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5
Q

Which policies pay out on death, which also pays out on survival

A

Term, WoL, Endowment Assurance (PE is just survival)

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6
Q

4 aims of regulation

A 
CRIPO
Confidence to financial system
Reduce financial crime
Inefficiency correction
Protection of customers of financial products
Order in market
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7
Q

What are the 5 types of regulatory regime?

A 
SS VUM
Self reg
Statutory
Voluntary coc
Unregulated
Mixed
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8
Q

Formula for running yield (income yield) for each of bond, property, equity

A

coupon rate/current price
rental rate/current price
dividends/current price

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9
Q

Explain an Ivestment trust in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)

A

S,CE,Inv, discount to NAV, company law

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10
Q

Explain an unit trust in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)

A

U,oe,man, equal to NAV, trust law, bid/offer spread

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11
Q

Explain an OEIC in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)

A

S, oe, man, company law, lower charges, 1 buy/sell price

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12
Q

What is the formula for the real WACC?

A

debt/(debt+eq)Gross cost of debt(1-t) + equity/(debt+equity)*cost of equity
Fractions reflected optimal capital structure
GCoD=return on IL bonds+Corp Bond RP
CoE=return on IL bonds+ERP
t=assumed corporation tax rate

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13
Q

Formula for Required return on asset

A

RFRY+EI+RP

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14
Q

Expected return on an asset

A

Initial income yield + expected capital gain

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15
Q

The definition of fair value

A

The amount that an asset could be exchanged or liability settled, between 2 willing parties in an arms length transaction

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16
Q

Formula for the discounted dividend model and simplified

A

Value=Sum to infinity D(t)*v(t)
Value = D/i-g where D is the dividend in 1 years time
i is required rate of return
g is the annual growth of dividend

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17
Q

What are the assumptions underlying the discounted dividend model?

A

D, an annual dividend first paid at time 1
i, constant effective annual required rate of return
g, constant effective annual rate of divdiend growth
i>g
i, g both real or both nominal
taxes and expenses ignored
Dividends are reinvested at rate i
Share held in perpetuity

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18
Q

What’s the required return formula for Gov/Corp/Eq/Prop (slight changes). What risk premium do the bonds have that the other 2 don’t

A 
r+EI+
IRP
IRP+CBRP
ERP
PRP
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19
Q

What is the expected return for Gov/Corp/Eq/Prop

A

GRY,GRY,d+g,ry+rg

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20
Q

What is the reverse yield gap?

A

GRY(govt)-d
Gap between yield on government debt and equities
IRP-ERP+g
Where g = EI + “real” g (as you expect growth in your capital just from inflation)

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21
Q

What is the real yield gap?

A

d-risk free real return

=ERP-real g

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22
Q

What is the property/corp bond yield gap?

A

ry-GRY(corp)

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23
Q

4 Factors effecting demand for assets

A 
PIA-RRRRRRRRRR
Preferences
Income
Alternatives
Risk/Return
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24
Q

Why prefer a lower yield?

A 
TIME
Tax
Investments deal less frequently, so less cost
Matching
Expected returns higher, longer DMT
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25
The formula for net liabilities
NL=benefit payments+expense outgo-premiums/contributions | ie. Liability=£800 in benefits paid+£300 expenses - £100 premiums in
26
3 actuarial techniques in investment strategy
``` Pure match (A/L cashflows identical) Liability hedging (PV(A) performs same way as PV(L) in all circumstances) Immunisation - PV(A) performs in same way to PV(L) under a small change in interest rates ```
27
Conditions for immunisation
PVA=PVL DMTA=DMTL CONVA=CONVL
28
Problems with immunisation
``` Fixed liabilities Small profits Flat yield curve Constant rebalancing Taxes/dealing costs ignored Suitable assets may not exist If timings of cashflows are unknown we can't do it ```
29
3 less important actuarial techniques in investment strategy?
MAR MVPT inc liabs ALM Risk budgeting (active/strat/stuct)
30
3 non-actuarial investment strategy techniques
PIMS Peer group benchmark Index track MVPT without liabilities
31
Why might past data be useless?
``` BEACHES Balance of homogeneous groups changed Experience changes Abnormal fluctuations Changes in how data was recorded Heterogeneity in group we're applying assumptions to Errors in the data Statistically random fluctuations ```
32
What is the cost of benefits? | What is the price of benefits?
The amount that could theoreticall be charged for them | The amount that can actually be charged to provide the benefits given market conditions
33
6 methods of financing a benefit scheme?
``` PAST JUGULAR PAYG Smoother PAYG Terminal Just in time ReGULAR Lums sum in advance ```
34
How do you appraise a financing method?
``` DR FLOSS Durability Realism Flexibility Liquidty Opportunity cost Stability Security ```
35
Reasons to calculate liabilities
``` IP MAD DOGS Investment strategy Premium setting MandA's Accounts (published and internal) Discretionary beenfits Discontinuance benefits Option terms Gtee costs Statury valn ```
36
What are the sources of surplus?
``` CAMBODIA Changes in assumptions/legislation A reclaculation Modified conribution rate Bulk transfer of liabilities Options taken up Discretionary benefits Interest on surplus Actual not equal to expected Errors ```
37
4 types of financial risk, 2 non-financial
``` credit market liquid business ops external ```
38
What 4 types of ops risk are there?
Inadequate or failed ppl/processes/systems Dominant individuals Reliance on 3rd parties Imapct of external events
39
Giver 4 examples of external events
change in tax/regs competition natural disasters war
40
Give 4 types of business risk
U/w Ins Finance Exposure
41
What 3 things must you have to be insurable
P/h has interest in the risk Financial and quantifiable nature Amount paid by insurer relates to the financial loss incurred
42
What 6 other things would you like in an insurable risk
``` MUDPIS Moral hazard avoided Ultimate limit to liability Data to price the risk Pooling of similar risks Independant risk events Small probability of occuring ```
43
What are the risk managemnt tools?
``` MURDA Management and control systems Underwriting and claims control Reinsurance Diversification ART ```
44
What management control systems are there?
``` Special DAMS Data checks Accounting/audit Monitor liabilities Special care on Options/Gtees ```
45
3 types of underwriting
MILF Medical Lifestyle Financial
46
4 possible stages of underwriting?
Proposal form Dr report Medical exam Specilist tests
47
4 types of claims control
``` CLEO Claim form Loss adjust Estimates Ongoing checks ```
48
3 headings of reinsurance, split first into 2, second into 4 and the last explain
``` Proportional, NP, Financial Proportional: Quota share Surplus NP Risk XL Agg XL CAT XL Stop loss Financial - reinsurance to improve solvency position, regulatory arbing ```
49
Reasons to reinsure
``` SAD LIFE Smoothing Avoid large losses Diversify Limit exposure to single risks/accumulations Increase NB capictiy Financial assistance (NB, solv) Expertise e.g. data/pricing ```
50
Types of ART
``` DIPSIS Disc cover Integrated risk cover Post loss funding Securitisation Insurance deriv Swaps ```
51
What can you do when MV not available, give an example, explain
Shareholder value e.g. EVA Used for exec compensation schemes Get underlying value rather than accounting Get 1 years results - costs of servicing capital Key factors e.g. Their company is like ours and is worth £2m Where company not making profit Where NAV not appropriate Determine relevant, measurable key factor of another company Look at the key factors versus valuation of that company
52
4 tests of values of Asset Class A vs Asset Class B
1) Yield... Gaps Norms - As long as not fundamental shift Ratios - use care if other analysis accepted 2) Technical Analysis - index levels, price charts
53
Assumptions of Required Return = Expected Return
Investors want real rate of retun Time horizon Tax same Reinvestment rate equal to expected total return of asset
54
Which mnemonic to use when deciding which type of asset to buy?
SOUNDER TRACTORS
55
What is true if expected return not equal to required return | If Eret>RRet
Asset not valued fairly Market is inefficient Buy asset, as it's 'cheap'
56
What is a risk premium?
The return required by investors over the return on a risk free asset, to invest in it Compensates investors for the extra risk e.g. default risk
57
How do you make an asset valuation more stable than Market Value
Smoothed MV Disc cashflow using relatively constant long term interest rate Notional portfolio
58
What is a notional portfolio
To make asset valuation more stable Eliminates risk valuation process at conflict with investment policy Reduces amount of calculation required Characteristics are broadly that of the liabilities
59
What 2 reasons may there be volatility in the asset portfolio valuation?
Shot term volatility of prices in market value valuation | Major change in portfolio make up e.g. equities to bonds
60
What is the main disadvantage of MV of assets valuation, why shouldn't it be like that?What problems can it cause?
Volatility of asset value Shouldn't be volatile as long term assets and fund Results difficult to communicate Results difficult to interpret May not be possible for a consistent liability valuation if unstable
61
Why shouldn't volatility of asset values be a problem in MV valuation of assets?
Consistency should override stability

CA1 Final Revision (7 decks)

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