A311 lists Flashcards

Question

List the aims of climate change related financial regulation

Answer 1

(DUCCCAI) * Disclose and report on climate-related risks and opportunities * Use scenario analysis to identify risks and estimate the impact of climate- related risks * Consider ESG in investment management decisions * Consider the impact of climate risks on the ability to meet obligations to PHs and other stakeholders * Consider climate risks in business decision making and strategic planning * Adopt consistent and reliable means of assessing, managing and pricing climate related risks * Incorporate financial risks arising from climate change in risk management processes

Answer 2

(ABC N FARM C) * Aims of regulation * Costs vs benefit * Need for regulation (maintain conf (SOCCC), info asym (CUNTD)) * Functions of regulator * Areas addressed by regulation * Possible regulatory regimes * Role of major financial institutions in supporting regulatory + business environment * Regulation/policies IRO climate change (emphasis on financial institutions)

Answer 3

1) Maintain market confidence - SOCCC 2) Information asymmetry - CUNTD Make sure you can describe each point in the abbreviations

Answer 4

Advantages: 1. System is implemented by those w/ greatest knowledge of the market & w/ greatest incentive to achieve optimal cost-benefit ratio 2. Respond rapidly to changes in market needs (flexible, not a process to change, not subject to becoming out-of-date) 3. Possibly easier to persuade firms + individuals to cooperate w/ a self-regulatory system than w/ a gvt bureaucracy Disadvantages: 1. ‘Closeness’ of regulator to industry it is regulating => danger that regulator accepts industry’s POV and is less in tune w/ views of 3rd parties (consumers of financial services) => weaker regime than tolerable by consumers + members of public. Even if regime if operating efficiently & effectively, can suffer from low public confidence in the system i.e. regulator needs to fair & objective AND perceived as so by investing public (reality vs perception) 2. Self-regulatory regimes may inhibit new entrants to a market – current rules impose barriers to entry e.g. by imposing high capital adequacy reqs that a new entrant starting from scratch would find extremely difficult to meet 3. Regulation may not be strict enough which could lead to lack of public confidence

Answer 5

Advantages: 1. Less open to abuse than the alternatives (stricter – great consequences) & may command greater public confidence (still possible concern that regulatory body takes more heed of the views of those it is regulating than those of the consumer) 2. Regulatory body may be run efficiently i.e. economies of scale thru’ grouping its activities by function rather than type of business e.g. separate depts for different monitoring functions – like capital adequacy (prudential), product sales (conduct), security trading, across all financial markets w/in the jurisdiction Disadvantages: 1. More costly than self-regulation 2. More inflexible than self-regulation (subject to becoming out of date, process to change) 3. Outsider interference – argued that market participants are in best position to develop regulatory system. Outsiders might impose rules that are costly and may not achieve desired aims (i.e. systems that don’t find optimal cost-benefit trade-off/ratio).

Answer 6

Advatnages: * Reduced cost of regulation (low cost) * Rules are set by those w/ greatest knowledge of the industry Disadvantages: * Greater incentive to breach the voluntary code, which has no legal backing and probably less severe penalties, if any, than w/ statutory regulation (less severe) * Vulnerable to lack of public confidence or a few rogue operators refusing to cooperate => breakdown of system.

Answer 7

(CHIRML) * Child support * Housing support (low income) * Income support – unemployment, illness , disability, injury * Retirement * Medical care * LT care

Answer 8

(ARID) * Accumulate assets for particular reasons (e.g. payoff mortgage) * Real income to maintain standards of living * Income at retirement * Protect against the impact of death – before retirement (e.g. lump sum benefits) or after (spouse’s pensions)

Answer 9

(PEP) * Pre-funding of risks (e.g. reserves) * Existence of insurable interest – to prevent moral hazard, fraud and crime * Pooling of risks (e.g. CCRCs and microinsurance)

Answer 10

The process will look as follows: * Identify and group the stakeholders according to needs * Classify the needs * Current or future needs (make sure you know defs) * Logical or emotional needs (make sure you know defs) * Prioritise the needs * Consider logical needs first and in order of importance * Fit products to the needs ---------------------------------------------------------------------------------------------------- Current needs: triggered by an event that has an immediate effect on customer’s circumstances Future needs: relates to a customer’s future aspirations Logical approach – systematically determining needs and fitting relevant products Emotional approach – what the individual feels they need

Answer 11

(LIE) * Longevity risk * Investment risk * Expenses being more than expected

Answer 12

* Logical approach – systematically determining needs and fitting relevant products * Emotional approach – what the individual feels they need

Answer 13

(COLIE) * Credit risk * Operational risk * Longevity risk * Investment risk * Expenses being more than expected

Answer 14

(ESPIRE) * Education about providing for future (initiatives & disclosure requirements (imposed by regulation) by providers – employers & insurance companies) * Sponsor provision of benefits e.g. provide appropriate financial instruments * Provide benefits to some/all of popn * Incentivise provision by other providers/consumers thru’ taxes * Regulate benefit providers & bodies with custody of funds (security) * Encourage or compel benefit provision via regulation (Requiring benefit providers (in this case employers) to have benefit provision in place for employees)

Answer 15

(LIAR) * Larger schemes with economies of scale in admin costs and investment * Incentive to save no longer needed, so the state reduces costs * Adequate pension provision ensured * Reduced state burden

Answer 16

(ESPIRE without I & R) * Education about providing for future (initiatives & disclosure requirements (imposed by regulation) by providers – employers & insurance companies) * Sponsor provision of benefits e.g. provide appropriate financial instruments * Provide benefits to some/all of popn * Encourage or compel benefit provision via regulation

Answer 17

* Compelled/encouraged by the state * To attract and retain good staff * Desire to look after employees + dependants * Pooling of expenses and expertise

Answer 18

(BIME) * Wider range of Benefits – larger schemes * Identity within the industry * Mobility between participating employers enhanced * Economies of scale in admin costs and investments (cost saving)

Answer 19

(FIDOS GUNC)++++ * Demonstrate financial strength (to SHs, creditors, CRAs, PHs, regulators) * Investment freedom (mismatch more to pursue higher returns) * Development expenses (PD, advertising, marketing costs) * Opportunities e.g. mergers & acquisitions * Smoothing dividends/bonuses * Guarantees (more onerous provisioning requirements) * Unexpected events * New business strain * Capital requirements * General market uncertainty * Recession * Weakening domestic currency * Rising interest rates

Answer 20

(FIAR) * Flexibility (within legislation) of income to draw [also of investments] * Inheritance of fund balance on early death (as opposed to annuity) * Annuity rates may currently be poor but improve in future (at which time the member may choose/be forced to purchase annuity) * Return earned on invested fund may exceed annuity rates (after tax + charges)

Answer 21

(A FARM MAP I PASS) * Set assumptions for premium rating * Set assumptions for provisioning and monitoring emergence of claims against expectations * Assess profitability + key components of profitability (break down any profits/losses into components to understand causes = analysis of surplus) (experience stats/profitability) * Assess reinsurance requirements, monitor adequacy (adequacy of risk management strategies) * Investment strategy * Determine capital requirements (statutory solvency + to pursue risk management strategy) * Financial planning + strategy * Provide management w/ information * Help with marketing new contracts

Answer 22

(VICHT) * Volatile income if member only takes income earned on fund (to preserve capital value) * Inheritance on death (remaining fund) may be insufficient to provide adequate benefits for a dependant (was it worth it?) * Charges for admin may be high (why it’s not recommended for small funds) * High and unsustainable income withdrawals could potentially reduce capital to 0 before death => state dependency (why annuity is forced sometimes) * Tax on residual fund at death (again, was it worth it for bequest?)

Answer 23

(CRoPS) * Competitors’ practice * Regulatory limits on payouts (can’t allocate too much bonus) * PRE (past bonuses, market practice, policy documentation) * Wish to smooth benefits from year to year (holding back excess profit in good years to finance the bad, keep bonuses steady)

Answer 24

(RAT) * Regulation (restrict/prescribe) * Size of free assets (& ability to mismatch) * Need for tax efficiency

Answer 25

(RUDE) * Reinsurance * Underwritting * Diversification * Experience monitoring

Answer 26

Wole of life insurance funeral cover investment bond key person insurance Income drawdown

Answer 27

* Without-profit (non-participating contracts) o Premium and benefit is fixed – but the premium may be reviewable o Only main benefits of a contract may be fixed o Primary need: Protection o Premiums may be higher than on with-profits / unit linked because  Guarantees (SA) increase capital requirements  All the investment risk lies with the insurer * With-profit (participating contracts) o PH shares in the surplus of a company, as well as the risks (shared risk) o Extent of entitlement for PH is up to the discretion of the company o These discretionary benefit entitlements will by influenced by (CRoPS):  Competitors’ practice  Regulatory limits on payouts (can’t allocate too much bonus)  PRE (past bonuses, market practice, policy documentation)  Wish to smooth benefits from year to year o Primary need: Savings o Typically involves some guaranteed and discretionary benefit (e.g. min SA with vesting bonuses) Unit linked: o Unit-linked contracts are unitised contracts whose value of units is directly attributable to the underlying value of the invested asset o Usually more complex to administer than the other options and therefore expected to carry higher expense charges o PH premiums => pooled investment funds (often a choice given to PH). o Primary needs:  Protection element (min guaranteed amount)  Significant savings/investment element (value of units) o Additional benefit: May receive sum multiple of units held at death (e.g. 120% of unit value) o Usually a more FLEXIBLE option than participating and non- participating contracts because you can switch between protection and savings o Premiums are also flexible which may better meet the needs of consumers (if fund does well then premiums might decrease) o For this contract type compared to the other two:  Obtain higher expected level of benefit for a given premium  Pay a lower expected level of premium for a given level of benefit o Why is unit-linked more risky than with-profits?  All investment risk is with the PH (investment performance => value of UF => value of benefit)  With-profits less investment risk to PH because (GPS): * Guaranteed element (esp. w.r.t vested bonuses) * PRE may limit scope for/speed of bonus reductions (at company’s discretion, not ‘automatic’) * SHs may share in investment losses (as well as profits) of the company (incentive to make profits/remain profitable?) * Index-linked o Enables the consumer to obtain a benefit that is guaranteed to move in line with the performance of an index specified in the contract. Normally an investment/economic index. Premiums may move in line with the same index or be fixed in monetary terms

Answer 28

Liability classes (for harm done unto others) * Employers’ liability * Product liability * Professional indemnity * Public liability (relate to incident at your premises/property) * Motor third party (damage to public property in an accident) [consider fleet 3rd party motor liability for companies]

Answer 29

Property damage classes (insure your items) (6) * Land vehicles (e.g. cars) [consider fleet motor property insurance for companies] * Marine * Aircraft * Residential buildings * Commercial buildings * Moveable contents

Answer 30

* Pecuniary loss (including mortgage indemnity guarantee) – protects against financial loss arising from a variety of reasons, one of which may be default (bad debts, 3rd party failure) * Fidelity guarantee (indemnified employer from acts of fraud, theft or dishonesty by employees) * Business interruption/consequential loss

Answer 31

(PHU) * Personal accident e.g., loss of an eye * Health (medical expenses e.g. major medical expenses, hospital cash plan, gap cover) – Ch 7 * Unemployment

Answer 32

Short and long tailed claims (make sure you know defs etc)

Answer 33

(LLLRC/ Long Life Really Lacks Complexity) * Claim sizes (may take longer to settle/ assess if insurer is liable/ determine claim amount – large potential damage) * Need to assess damages & potential for recovery (any improvement to loss) * Anything dealing with human life (personal accidents) * Latency periods * Product complexity (i.t.o assessment of damage)

Answer 34

* Time between event occurring and the condition emerging (industrial diseases like asbestosis). Another example: home robbery in Dec, only realise in Jan. Latency period * Time taken for the PH to advise the insurer – possibly because the amount is small or because they do not realise there is cause for claiming

Answer 35

* Initial administrative processing * Establishing whether insurer is liable * Waiting for a condition to stabilise (e.g. will the injured party recover, or is the disability permanent?) * Establishing amount to be paid * Possible disputes and court settlements

Answer 36

* Usually larger sums at risk * Risks are more heterogenous -> greater uncertainty

Answer 37

(FRAVSAV) * Frequency of claim (expected) * Reinsurance available * Amount of claim (expected)/sum insured (known) * Volatility of claims (heterogeneity) * Short-tailed/long-tailed (LLRLC) * Accumulation of exposure risk (geographical or portfolio) or catastrophes * Volume of contracts sold and hence data availability + predictability of future assumptions (likelihood that known experience will be borne out is directly impacted by the amount of known experience) + currency, changes in risk over time, room for anti-selection & moral hazard, inflation, legislation, claims handling costs, policy wording

Answer 38

* Reduces amount of each claim * Reduces number of claims (elimination) * Eliminates small claims => expense savings (on fixed costs) – admin costs disproportionately high * Arguably encourages PHs to be more careful so helps prevent claims

Answer 39

Employer liability: Indemnifies the insured agaisnt the legal liability to compensate an employee or there estate for accidental bodily injury, disease or death, due to the negligence of the insured, during the course of employment Product liability Indemnfies the insured against the legal liability to provide compensation to a third party due to injury, damages or accidental death caused by the product of the insrued, due to their negligence (e.g. faulty packaging, incomplete instructions, faulty product, etc) Public liability Indemnifies the insured against the legal liability to compensate a third party due to injury, or damages to property, or accidental death of third party due to their negligence Professional liability Indemnifies the insured against the legal liability to compensate a party to whom services have been rendered which has lead to large financial losses (e.g. inappropriate advice) due to their negligence Motor third party Indemnifies insured against the legal liability to compensate a third party due to injury, and/or damages to property, and/or accidental death of third party due to the insured party's negligence

Answer 40

Indemnifies the PH against losses of, or damages to, their own material property

Answer 41

Indemnifies insured against the financial losses arising from insured events (e.g. pecuniary losses, fidelity guarantees, business interruption, cyber crime, etc)

Answer 42

Pecuniary loss: Protects the insured against bad debts or other failure of a 3rd party. Includes mortgage indemnity guarantee insurance – protects mortgage lender against risk that the borrower (who pays the insurance premium) defaults on the loan and a loss is made by the lender due to the sale of the property not covering the outstanding liability Fidelity guarantee insurance: Protects insured against financial losses caused by dishonest actions by its employees (fraud or embezzlement, theft, dishonesty). Business interruption cover/ consequential loss cover: Indemnifies insured against losses made as a result of not being able to conduct business for various reasons specified in the policy. NB to remember this is still financial loss Cyber insurance (an extension of BI, up-and-coming, fast-evolving): Protects against cyber risks. Can cover pecuniary (default by 3rd party/bad debts), fidelity guarantee (employee fraud, theft, dishonesty) and BI cover (servers down) losses for a business

Answer 43

Personal accident insurance: Fixed benefits in the event that an insured party (may incl. PH’s family as well as the PH) suffers the loss of one or more limbs or other specified injury from an accident. Not indemnity – can’t quantify the value of the loss. Health insurance: Provides money for medical treatment. Indemnity but only part of cost may be covered or may provide fixed amounts regardless of cost => fixed benefit insurance (major medical expenses). Unemployment insurance: Provides a lump sum/income stream, usually of no more than a year’s duration, in the event of the PH being made redundant (fired). Provides additional funds to maintain PH’s lifestyle and service any debts for a short period while new employment is sought (would cease once new employment found)

Answer 44

(CATTT LSD) * Competitors: match or exceed (e.g. in return or funding level) – relative underperformance relative to competitors is a huge day- to-day risk = relative performance risk * Control the amount and timing of future obligations (reduce liabilities) * Achieve a target level of return/funding * Track an index * Meet liabilities as they fall due * Satisfy statutory solvency requirements * Discontinuance sufficiency (sufficient assets to meet liabilities rn)

Answer 45

* ST investments (more NB to hold real assets for LT investing) * Diversification (to real assets) * Value perceived to be good (e.g. cash deposits currently at high STIR) * Risk averse individual (e.g. cash deposit is highly secure and liquid)

Answer 46

(SOUNDEER FTRAACCToRS) * Size of assets (Some asset classes restricts diversification if asset size is small, e.g. property) * Objectives of institution (see CATTT LSD) * Uncertainty of liabilities (amount/timing. Increased uncertainty  increased liquidity buffers) * Nature of liabilities (nominal/real/vary in another way e.g. index- linked) * Diversification needs * Expenses * ESG (environmental, social, governance) considerations – consider the company’s LT sustainability goals * Return on alternative asset classes (expected LT return) * Free assets available - which allows for increased mismatching risk * Term of liabilities * Risk appetite of institution * Future accrual of liabilities - how they increase over time and when they are likely to fall due * Accounting rules * Currency of liabilities * Competitor strategies (other fund strategies) * Tax (different investments & personal tax position of investor. Investors want highest return net tax) * Regulatory Requirements * Restrict assets allowed to invest in * Restrict the assets allowed to be used to demonstrate solvency * Restrict the maximum exposure to a single asset class or counterparty * Restrict / limit custodianship of assets * Requires assets and liabilities to match by currency * Require companies to hold a mismatching reserve * Requirement to hold a certain portion of assets in a particular asset class, e.g. gvt bonds * Solvency requirements

Answer 47

* Nature, term, currency and uncertainty of their liabilities and assets Cash flow requirements * Variability of market values * Return from different asset classes (net of expenses & tax) * Level of free assets * Risk aversion and dislike of volatility * Diversification * Cost of investment especially when investing small amounts

Answer 48

* Guaranteed in money terms * Guaranteed in terms of an index * Discretionary * Investment-linked

Answer 49

* Pure matching * Approximate matching * Immunisation * Liability hedging

Answer 50

* Guaranteed in money terms o Pure matching – want to match liabilities ito size and timing. When doing this, consider the liability outgo and the prob of benefits happening o Approximate matching – Probably more likely as a pure match is very difficult. Match liability with good quality fixed interest bond, which considers the size and timing of liability cashflows * Guaranteed in terms of an index o High quality index-linked bonds * Discretionary o These benefits are up to the discretion of the provider, so they may aim to maximise returns in this aspect as to maximise the benefit offered to policyholders. They can do this by investing in assets with the highest expected return (e.g. property and equity) o The risk taken should still be within their risk appetite of the provider and the risk expectations of the client * Investment-linked o Avoid investment mismatching by investing the same underlying asset as used to determine the benefits (liabilities)

Answer 51

* Restrictions on the type of assets allowed to invest in * Restrictions on the amount of a particular asset than can be taken into account for the purpose of demonstrating solvency * The requirement to match assets and liabilities by currency * Restrictions on the maximum exposure to a party * Restrictions / requirements on the custodianship of assets * The requirement to hold a certain portion of assets in a particular class * A limit on the extent to which mismatching is allowed

Answer 52

* Approximate liability hedging o Matching assets and liabilities as closely as possible in terms of currency and real and nominal terms * Full liability hedging o Most appropriate for unit-linked liabilities o Establish a portfolio of assets, determine the unit price by reference to the value of the asset portfolio, use this price to value the units and hence the liabilities

Answer 53

* It is the investment of assets in such a way that the present value of the assets less the present value of the liabilities is immune to general small changes in interest rates

Answer 54

Ch16 p100 of own notes

Answer 55

* Consider the expected return compared to the additional risks that will be taken * Consider the constraints on changing the portfolio (regulatory, legislative, risk appetite) * Consider the expenses in making the switch * Consider any problems that may arise due to the switching of a large amount of assets (marketability, liquidity) * Consider the tax liability that may arise when capital gains are realised in current assets * Consider the difficulty of carrying out the switch at a good time

Answer 56

* When the investment market is very efficient – unlikely to be any price inefficiencies in the market * The portfolio consists of unmarketable assets – so there may be high dealing expenses eliminating additional investment returns * The investment managers has little information or lack of expertise in the particular investment market, so may simply wish to track an index or benchmark, to reduce the prob of underperformance * The investor’s stated investment objectives is to pursue a particular form of passive strategy, e.g. track an index

Answer 57

(SASO) * Strategic risk – the risk that the strategic benchmark does not match the liabilities * Active risk – the risk taken by individual investment managers relative to a given benchmark * Structural risk – where the aggregate of the individual investment manager’s benchmarks do not equal the total benchmark of the fund * Overall risk – this is the sum of the strategic, active and structural risk

Answer 58

* Liability structure may have changed (LINT) o Legislative changes (e.g. change in how liabilities must be valued o Benefit improvements o New business lines o takeover * Free assets may have changed significantly – may have more assets available or less which will influence investment strategy o Legislation may restrict: o Assets allowed to be invested in o Require assets and liabilities match in currencies o Restrict exposure to a single counter party or asset class o Custodianship requirements / restrictions * Manager’s performance may be significantly out of line with other funds

Answer 59

(DITS) * Duration risk * Interest rate, counterparty, equity market risk * Tactical asset allocation risk (ST) * Strategic asset allocation risk (LT)

Answer 60

* Risk budgeting is the process of determining how much risk should be taken on and when will be the most efficient time to take on the risk to maximise returns * Risk budgeting consists of two steps: o Establishing how total risk should be split up between strategic (know def) and active (know def) risk o Allocating the total fund active risk budget across the asset portfolios (e.g. equity, bonds, etc) * The distribution will depend on the risk appetite of the entity

Answer 61

* It typically involves two stages: o Firstly, establishing an appropriate asset mix for the fund - strategic benchmark o Secondly, strategy is implemented by the investment managers, and the appropriate levels of risks that should be taken relative to the strategic benchmark. Within the guidelines, the investment managers have freedom over stock selection, and use their skills and research to maximise returns on the funds allocated to them. This is known as active risk

Answer 62

* Commercially produced models can be purchased * Modifying existing models * New models

Answer 63

(FACIT) * Desired flexibility of model * Level of accuracy required * Cost of each option * In-house expertise available * Number of times the model is to be used (many times might justify own development)

Answer 64

(PPRIDE CONFoRM) * Pricing /setting premium rates [described further] * Provisions calculations (for existing Ls) [described further] * Risk management: capital requirements (Ch 37), return on capital, funding levels * Estimating investment returns * Estimating future discontinuance rates * Estimating future expense levels * Determining future capital requirements (SCR, risk-based, economic capital) * Valuing O&Gs [described further] * Estimating future NBVs * Setting future financing strategies – benefit schemes [described further- Ch 24] * Assessing reinsurance requirements * Estimating future mortality improvements (specific to LIs) – use for other rates of decrement for other insurers (but mortality is prevalent issue)

Answer 65

* The model being used should be well documented * It should be easy to communicate the results of the model * The model should exhibit sensible joint behavior between model variables * The outputs of the model should be capable of independent verification and should be easily communicable * The model must not be overly complicated or time consuming * The model should be capable of development and refinement * The model should be adaptable

Answer 66

* The computing power available * Time constraints * The heterogeneity of the class * The sensitivity of the results to different choices of model points * The purpose of the exercise

Answer 67

* Advantages * Easier to understand and explain to a non-technical audience * Cheaper than stochastic models * It is clearer which economic scenario is tested * Sometimes people assume the output of more complex stochastic models must be correct * Disadvantages * Thought should be given as to what economic scenarios should be tested / modelled o Subjective o Room for missing important scenarios (detrimental scenarios not identified)

Answer 68

* Advantages * Tests a wider range of outcomes * Good at assessing the financial impact of options and guarantees * More appropriate in complex scenarios * Disadvantages * Complexity + longer run time * Depends on parameters used as in any standard investment model * Spurious accuracy (misleading precision) * Difficult to interpret + communicate results (explainability) * Questionable accuracy of the distribution functions that are replacing the deterministic values (depends on data quality, skill of modeller in parametrising) * Increased model risk due to parameterization – assumptions on what distribution parameters should follow is subjective

Answer 69

1. Specify purpose and the features of the model (purpose and key features of model) 2. Collect, group and modify data (obtain and adjust data – homogenous groups & adjusting for likely future experience) 3. Choose form of model, identifying its parameters or variables 4. Ascribe values to the parameters using past experience + appropriate estimation techniques (set the parameters/assumptions, incl. any dynamic links) 5. Construct model based on expected cashflows 6. Test model to identify any build errors and correct if necessary 7. Check that the goodness of fit is acceptable (and attempt to fit a different model if the first choice does not fit well) [check the accuracy and fit of the model and amend if necessary] – goodness of fit tests help to reduce model error (by adjusting parameters. Data error would be fixed at this point) 8. Run the model using estimates of the values of variables (inputs) in the future (as many times as required) 9. Run several times to assess sensitivity of results to different parameter values (sensitivity testing) (as many times as required) a. Also run under different scenarios to test robustness of results to many parameters changing at the same time (scenario testing) 10. Output and summarise the results

Answer 70

* Claim basis of policy (e.g. for TA business – single life, joint life, last survivor) – contingent event * Age of life/lives covered (in the case where there are beneficiaries or a joint life product) * Smoker status * Health status * Gender(s) * Sum assured * Term of policy * Duration in force

Answer 71

1. Specify purpose and the features of the model (purpose and key features of model) 2. Collect, group and modify data (obtain and adjust data – homogenous groups & adjusting for likely future experience) 3. Choose form of model, identifying its parameters or variables 4. Choose a suitable density function for each of the parameters or variables to be modelled stochastically 6. Specify correlations between variables (might be functions) 5. Construct model based on expected cashflows 6. Test model to identify any build errors and correct if necessary 7. Check that the goodness of fit is acceptable (and attempt to fit a different model if the first choice does not fit well) [check the accuracy and fit of the model and amend if necessary] – goodness of fit tests help to reduce model error (by adjusting parameters. Data error would be fixed at this point) 9. Run the model many times, each time using a random sample from the chosen density function(s) – simulates an observation from each distribution 10. Produce a summary of the results that shows the distribution of the modelled results after many simulations have been run e.g. at various confidence levels (distribution of outcomes)

Answer 72

It refers to the VOLUME of data which can actually be used for a specific purpose

Answer 73

(FAPPDOSI) * Further processing limitations - further processing must be compatible with the initial collection purpose * Accountability - party processing data is responsible for complying with POPIA * Processing limitations - fair, lawful, relevant manner w/ consent from subjects * Purpose specification - destroy when no longer relevant/ authorised to be held * Data subject participation - subject may request confirmation of personal data held and request correction/deletion of inaccurate, misleading or outdated info held (IMO) * Openness - maintain documents on all processing operations and maintain transparency on data use * Security and safeguard - integrity and confidentiality of personal data secured. All processing by authorised operator. Notification on security compromises. * Information quality - data completeness, accuracy and updates (CAU) to be ensured

Answer 74

* A document that sets out guidelines on ensuring the proper management of a company’s data * Some of the guidelines will relate to: o The specific roles and responsibilities of individuals who work with company data o How a company will capture, analyse and process data o Issues with respect to data security and process data o Controls to ensure required standard applies Risks: * Legal and regulatory non-compliance * Fines * Inability to rely on data for decision making * Reputational damage

Answer 75

* Can be inaccurate and incomplete * Data may not be credible due to insufficient volume, particularly when estimating extreme outcomes * May not be relevant for the intended purpose * Chosen data groups may not be optimal * The data may not be available in the appropriate form for its intended use

Answer 76

* This is a form of algorithmic trading that involves buying and selling financial securities electronically to capitalise on price discrepancies for the same asset in different markets * Benefits * Quicker, more efficient * More consistent * Fairer * Greater volume of data stored and faster processing than ever => algorithmic tools aid in decision-making processes to best utilise the data (most efficient and accurate) (data storage advances) * Advances in computing power & programming capability => new tools for decisions, execution and risk management (programming advances) * Lower dealing costs * Execute complex trading strategies, humans can’t keep track of * Risks * There could be an error in the algorithm * The algorithm may not properly operate in adverse conditions * In turbulent conditions trades may be suspended before and algorithmic trade can be completed * Can lead to large movements in the market if a lot of positions are exercised at the same time

Answer 77

(PREMIAAMi) (Make sure you can explain each of these in detail) * Premium rating * Risk managements * Expense analysis * Marketing * Investments * Accounting * Administration * Management information

Answer 78

(ROOMPI) * Reinsurer data – good quality but can be very expensive * Own data – Data will be relevant but may not have enough credible data * Other data – magazine ,newspaper * Market data – data will be standardized but may be outdated * Population data – data may be credible since it looks at a large group, but can be outdated * Industry wide data collection scheme – Have credible data but may not be representative of the entire industry

Answer 79

* Benefits * A company can compare its own experience to that of the industry as a whole * Heterogeneity in data * Companies operate in different geographical and socio- economic sections of the market * Policies sold by different companies are not identical * Sales methods are not identical * Companies will have different practices, e.g. underwriting and claims settlement standards * The nature of the data stored by different companies will not be the same * The coding used for the risk factors may be different from company to company * This means we must be very careful when interpreting industry wide data because it may not be relevant to the company using it * Other problems * Data may be less detailed than the data available internally * Out of date * Data quality will depend on the data systems used by companies who contribute to the data collection scheme * Not all companies contribute, so it may not be representative of the market as a whole

Answer 80

* That the liability or asset exists on the given date * That the liability is held or the asset is owned at the given data * That the data is complete * That the appropriate value of the asset or liability has been recorded

Answer 81

* Opening + movements = closing * Policy data vs accounting data * Investment data vs accounting data * Spot checks * Reconciliation of policy numbers * Reconciliation of premiums and benefits * Movement data against accounts (management accounts?) * Validity of data * Consistency of contribution and benefit levels with accounts * Records picked at random for spot checks

Answer 82

(CARCAHF) * Credibility * Accurate / reliable * Relevant * Costs * Available * Homogeneous * Future – historical data may be the main source of data. May not be representative of the future

Answer 83

(CACTI) * Reduced risk of data being corrupted * Easier access to info (no collating required) * Better control over who enters/amends info * Time need not be spent reconciling data from different systems * Reduced chance of inconsistent treatment of info, between products or over time

Answer 84

* The use to which the assumptions will be put to * The financial impact the assumptions may have * Achieving consistency between various assumptions * Consider any legislative or regulatory constraints * Consider the needs of the clients

Answer 85

* Abnormal fluctuations * Random fluctuations * Changes in experience over time * Changes in the way data was recorded * Potential errors in the data * Changes in the mix of homogeneous groups within past data – past groupings aren’t relevant to groupings now * Changes in the mix of homogeneous groups to which the assumptions apply * Product/service enhancements * Legislative or regulatory changes relating to data

Answer 86

* The purpose for which the assumptions will be used for * The impact the assumptions may have on the overall result * Whether every single cashflow is important or just the total value at the end when all cashflows have been added up * The financial significance of any errors * Implicit assumptions * Whether the valuation is for cash transactions

Answer 87

* Need for margins – influenced by level of confidence in assumptions and possible adverse future experience * Risk discount rate – adjust up or down based on confidence in assumptions. RDR can be calculated stochastically * Profit criterion – this needs to be considered and incorporated during the pricing stage. Methods used for quantifying profitability of a product may include: NPV, IRR, discounted payback period

Answer 88

* Lack of historical data * High guarantees * Policyholder options * Overhead costs * Complexity of design * Untested market

Answer 89

A profit criterion is often a single figure that tries to summarise the relative efficiency of a contract/product – helps to rank results to determine where is most efficient/profitable to allocate capital Methods (project appraisal techniques - 3): 1. NPV (net present value) 2. IRR (internal rate of return) 3. DPP (discounted payback period)

A311 lists Flashcards

Memorising lists