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)
How could each risk mitigation option be evaluated?
FIRM
- Feasibility and cost of implementing the option
- Impact on frequency / severity / expected value
- Resulting secondary risks
- Mitigation required in response to secondary risk
Why do insurers underwrite business?
SAFARI
- (Identify) substandard risks, for which special terms will need to be quoted - while aiming to accept as many risks as possible on standard premium rates.
- Avoid anti-selection - Not fraudulent or illegal - involves not disclosing useful information that can help with pricing because the insurer did not ask for it
- Financial underwriting to reduce the risk of over-insurance on large policies
- (Ensures) Actual claims experience is in line with that expected in the pricing basis
- Risk classification to ensure that all risks are rated fairly (premium commensurate with the risk)
- Identify for substandard risks, the most suitable approach and level of special terms to be offered
List 9 reasons why a provider calculates provisions
BAD MEDICS
- (value) Benefit improvements for a benefit scheme
- (determine the liabilities to be shown in the) Accounts and reports - published and internal
- (calculate) Discontinuance / surrender benefits
- (value the provider for) Mergers and acquisitions
- (determine) Excess of assets over liabilities and so whether any discretionary benefits can be awarded
- Disclosure of information for beneficiaries
- Influence Investment strategy
- (set) Contributions / premiums
- Statutory solvency report (determine liabilities to be shown)
List the reasons why disclosure of information to scheme beneficiaries and also to the provider or sponsor or regulator is important
SIMMERS
- Sponsor must be made aware of the financial significance of the benefits obligations
- Informed decisions can be made by the beneficiaries
- Mis-selling ( product or service is deliberately misrepresented or a customer is misled about its suitability.) is avoided
- Manages the expectations of members
- Encourages take up
- Regulatory requirement of non-state benefit provision
- Security of scheme improved as sponsor / trustees are made more accountable
List examples of information that may be disclosed to members of a benefit scheme
SCRIBE (preSCRIBEd information)
- Strategy for investment
- Contribution obligations
- Risks involved
- Insolvency entitlement
- Benefit entitlements
- Expense charges
Across different countries, a number of different accounting standards exist for benefit schemes. These have a number of common aims, what are they?
CARD
- Consistency in the accounting treatment from year to year (although not necessarily from company to company)
- Avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
- Recognizing the realistic costs of accruing benefits
- Disclosure of appropriate information
List the reasons why providers analyze surplus
DIVERGENCE
- Divergence of actual vs expected (show financial effect / significance of)
- Information to management and for accounts
- Variance as a whole is equal to the sum of the variances from the individual levers.
- Experience monitoring to feedback into ACC
- Reconcile values for successive years
- Group into one-off / recurring sources of capital
- Executive remuneration schemes (data for)
- New business strain (show effects of)
- Check on valuation assumptions and calculations
- Extra check on valuation data and process
(Additionally, these reasons can be grouped into 3:
- assisting management in decision making
- providing information for other purposes
- data / calculation / assumption checking)
Describe the 4 types of management control systems used to reduce risk.
- Data recording - the company should hold good quality data on all risks insured and on the risk factors identified during underwriting, to ensure that adequate provisions are established and to reduce operational risks.
- Accounting and auditing - effective procedures enable adequate provisions to be established, regular premiums to be collected and finance providers to be reassured.
- Monitoring liabilities - this protects against aggregation of risks to an unacceptable level. Also, by monitoring new business volumes, it helps ensure the provider is not exceeding the resources available; new business mix to monitor the risk to profitability due to cross-subsidies.
- Taking special care over options and guarantees - in particular, monitoring will determine whether the options and guarantees are likely to bite.
