Acronyms Flashcards
List the factors to consider in relation to the external environment
CREATE GRAND LISTS
Competetive structure Regulation and legislation Environmental issues and climate change Accounting standards Tax Economic outlook
(Corporate) Governance Risk management requirements Adequacy of capital and solvency New business environment Demographic trends
Lifestyle considerations International practice State benefits Technological changes Social and cultural trends
List 15 factors that influence the long term investment strategy of an institutional investor
SOUNDER TRACTORS
Size of the assets (absolute / relative) Objectives Uncertainty of the liabilities Nature of the liabilities Diversification Existing asset portfolio Return (expected long term)
Tax treatment of the assets / investor Restrictions - statutory / legal / voluntary Accrual of liabilities in the future Currency of the existing liabilities Term of the existing liabilities Other funds' strategies (competition) Risk appetite Solvency requirements and accounting requirements
Give 8 examples of how the regulatory framework might limit what a provider wants to do in terms of investment
TECH SCAM
Types of assets the provider can invest in
Extent to which mismatching is allowed
Currency matching requirement
Hold certain assets
Single counterparty maximum exposure
Custodianship of assets
Amount of any one assets used to demonstrate solvency may be restricted
Mismatching reserve
Outline the operational issues that need to be considered when designing and constructing a model
SCARCER DVR’S
Simple, but retains key features Clear results (Output reasonable) Adequately documented Range of implementation methods (to facilitate testing and parameterisation, and based on the focus of the results) Communicable workings and output Easy to understand Refineable and developable over time
Dynamic: Assumptions used to model assets and liabilities must be consistent
Valid for purpose
Rigorous
Sensible joint behavior of variables (eg higher expense inflation means higher claims inflation, etc).
What are the 5 most important things to consider when setting assumptions?
LUNCH
Legislative or regulatory constraints
Use (i.e. purpose) to which the assumptions will be put
Needs of the client
Consistency between the various assumptions
How financially significant the assumptions are
Why may past data not be relevant for the future?
BEST ARCHER
Balance of homogenous groups underlying the data may have changed
Economic situation may have changed
Social conditions may have changed
Trends over time, eg medical, demographic
Abnormal fluctuations
Random fluctuations
Changes in regulation
Heterogeneity within the group to which the assumptions will apply
Errors in data
Recording differences (e.g. in categorization of smoker)
Economic factors (assumptions) needed for a pension scheme model
- expenses - Ex
- pension increases - Pe
- discount rate (for valuing liabilities) - D
- investment returns - I
- earnings inflation- Tion from inflaTion
- price inflation -Tion
ExPeDITion
dividend yield is another economic assumption but not for pensions
List 6 factors other than age and gender that directly affect mortality and morbidity rates
GO CHANGE
Gender
Occupation
Climate and geographical location Housing Age Nutrition Genetics Occupation
List 18 factors to consider when designing or redesigning a contract
AMPLE DIRECT FACTORS
Administration systems Marketability Profitability Level and form of benefits Early leavers benefits
Discretionary benefits Interests and needs of customers Risk appetite of the parties involved Expenses vs charges Competition Terms and conditions of the contract
Financing (capital requirements) Accounting implications Consistency with other products Timing of contributions or premiums Options and guarantees Regulatory requirements Subsidies (cross-)
List the 7 key parties involved in contract design
ALPACAS
Actuaries Lawyers Providers of benefits Accountants Customers Administrators Shareholders / financial backers
List 7 perceived benefits of risk management to the provider
SAMOSAS
Stability and quality of business improved
Avoid surprises
Management and allocation of capital improved – improves growth and returns
(risk) Opportunities exploited– improves growth and returns
(natural) Synergies identified (and related opportunities arising from this)
(risk) Arbitrage opportunities identified (and related opportunities arising from this)
Stakeholders in the business given confidence that business is well managed
List six possible causes of inappropriate advice in relation to the provision of benefits
CRIMES
- Complicated products
- Rubbish (incompetent) adviser
- Integrity of adviser lacking
- Model or parameters unsuitable
- Errors in data relating to beneficiaries
- State-encouraged but inappropriate actions, e.g. encouraging people to save for retirement when this might reduce the level of State benefits they are entitled to, but this reduces their overall standard of living in retirement.
List six possible causes of inappropriate advice in relation to the provision of benefits
CRIMES
- Complicated products
- Rubbish (incompetent) adviser
- Integrity of adviser lacking
- Model or parameters unsuitable
- Errors in data relating to beneficiaries
- State-encouraged but inappropriate actions, e.g. encouraging people to save for retirement when this might reduce the level of State benefits they are entitled to, but this reduces their overall standard of living in retirement.
List 6 additional criteria that a risk should ideally meet to be insurable (to reduce volatility by the law of large numbers)
- The policyholder must have an interest in the risk being insured, to distinguish between insurance and a wager. (has to have an interest in the claim event not happening)
- The risk must be of a financial and reasonably quantifiable nature. (the claim amount has to be able to compensate for the loss)
- The amount payable in the event of a claim must bear some relationship to the financial loss incurred. (too high will encourage fraud and moral hazard, too low and purchase of insurance will not seem worthwile)
SIP MUD
- Small probability of occurrence
- Independent risk events
- Pooling a large number of similar risks
- Moral hazard eliminated as far as possible
- Ultimate limit on liability undertaken
- Data exists with which to price risk
List 6 possible responses from which a stakeholder can choose when faced with a risk
PIRATE
- Partially transfer (to another party)
- Ignore (reject then need for financial coverage as the risk is either trivial or largely diversified)
- Reduce (reduce frequency and/or severity)
- Accept (retain all)
- Transfer (to another party)
- Evade (avoid the risk altogether eg not selling a contract)
