Acronyms Flashcards
Key Topics Under the General Commercial and Economic Environment (ACC)
ESPERIA, a magical environment far away
- External environment
- Stakeholders
- Providers of benefits
- Economic Influences
- Regulation
- Insurance products
- Asset Classes
6 principles of the Actuaries’ code
CCCIIS
- competence and care
- compliance
- communication
- integrity
- impartiality
- speaking up (whistleblowing)
List the factors to consider in relation to the external environment
CREATE GRAND LISTS
Competitive 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
What actions can the regulator take to reduce asymmetries of information?
SPIDER CC
Selling practices regulated (addresses negotiation weakness of and individual)
Price controls imposed (addresses negotiation weakness of and individual)
Insider trading prevented
Disclosure of full information in an understandable form
Educating consumers
Restricting knowledge to publicly available
Consumer cooling off period (the right to cancel a policy without a penalty)
Chinese walls established (virtual barriers to block the exchange of information between departments of a company - reduces conflicts of interests
Also,
Fairness
List the main functions of the regulator
SERVICE
Setting sanctions
Enforcing regulations
Reviewing and influencing government policy
Vetting and registering firms and individuals authorised to conduct certain types of busines
Investigating breaches
Checking (supervising) management and conduct of providers
Educating consumers and the public
List 8 methods used to value individual investments
SHAM FADS
Smoothed market value
Historic book value
Adjusted book value
Market value
Fair value (Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.)
Arbitrage value (REPLICATING the investment with a combination of other investments and applying the condition that in an efficient market the values must be equal.)
Discounted cashflow
Stochastic modelling
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
List 10 factors affecting the long-term investment strategy of an individual.
Matching the nature, term, currency and uncertainty of the liabilities.
A need for income to live on vs growth for the future
Risk aversion and a dislike of volatility
Diversification, to reduce specific risk
Maximizing expected return on investments, net of expenses and tax
The individual’s tax status and the tax treatment of the asset
Low free assets, which constrain the ability to mismatch and take risks
Not enough assets for direct investment in certain asset classes
High relative expenses when investing small amounts.
Lack of information / expertise relative to institutional investors.
(SOUNDER TRACTORS again, without E (now expenses), A, O2, S2)
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 FILES
Simple, but retains key features
Clear results
Adequately documented
Range of implementation methods
Communicable workings and output
Easy to understand
Refineable and developable
Frequency of cashflows (balance accuracy vs practicality)
Independent verification of outputs
Length of run not too long
Expense not too high
Sensible joint behavior of variables
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)
List 6 factors other than age and gender that directly affect mortality and morbidity rates
CHONGE
Climate and geographical location
Housing
Occupation
Nutrition
Genetics
Education
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 8 items that the expense charges of an insurance company would be expected to cover
COST RAID
Commission
Overheads
Sales / advertising
Terminal, e.g. paying benefits
Renewal administration ,e.g. collecting premiums
Asset management
Initial administration
Design of the contract
List 7 perceived benefits of risk management to the provider
SAMOSAS
Stability and quality of business improved
Avoid surprised
Management and allocation of capital improved
Opportunities exploited for profit
Synergies identified (and related opportunities taken)
Arbitrage opportunities identified
Stakeholders in the business given confidence
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 of 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 and reduce their overall standard of living in retirement.
List features of a company that might influence its risk appetite
SPECIAL PEL
Size of the company
Period of time for which it has operated
Existing exposure to a particular risk
Culture of the company
Institutional structure (mutual, proprietary)
Attitude to risk of owners and other providers of capital
Level of available capital
Previous experience of board members
Existence of a parent company / other guarantors
Level of regulatory control to which it exposed
List 6 additional criteria that a risk should ideally meet to be insurable
MUD PIS
Moral hazard eliminated as far as possible
Ultimate limit on liability undertaken
Data exists with which to price risk
Pooling a large number of similar risks
Independent risk events
Small probability of occurrence
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 (frequency and/or severity)
Accept (retain all)
Transfer (to another party)
Evade (avoid the risk altogether)
How could each risk mitigation option be evaluated?
FIRM
Feasibility and cost
Impact on frequency / severity / expected value
Resulting secondary risks
Mitigation required in response to secondary risks
List the 9 main reasons for using ART
DESCARTES
Diversification
Exploits risk as an opportunity
Solvency improvement / source of capital
Cheaper than reinsurance
Available when reinsurance may not be
Results smoothed / stabilized
Tax advantages (possibly)
Effective risk management tool
Security of payments improved
Why do insurers underwrite business?
SAFARI
Suitable special terms - identification of the most suitable approach and level for special terms to be offered to substandard risks.
Avoid anti-selection
Financial underwriting to reduce the risk of over-insurance on large policies
Actual claims experience being 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 substandard risks, for which special terms will need to be quoted - while aiming to accept as many risks as possible on standard premium rates.
List 10 reasons why a provider calculates provisions
BAD MEDICS
Benefit improvements for a benefit scheme
Accounts and reports - published and internal
Discontinuance / surrender benefits
Mergers and acquisitions
Excess of assets over liabilities and so whether any discretionary benefits can be awarded
Disclosure of information for beneficiaries
Investment strategy
Contribution / premium setting
Statutory solvency reports
List 6 additional reports that might accompany the accounts
CIRCUS
Chairperson’s / CEO’s statement
Investment report
Remuneration report
Corporate governance report
Uncertainty (risk) report
Strategic report
List the reasons why disclosure of information to scheme beneficiaries and also to the provider or sponsor is important.
SIMMERS
Sponsor is aware of financial significance of benefits
Informed decisions can be made
Mis-selling (or misleading beneficiaries) is avoided
Manages the expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor / trustees are made more accountable
WHEN might disclosure of information to beneficiaries be required?
PRICE
Payments commencement
Request
Intervals
Combination
Entry
List examples of information that may be disclosed to members of a benefit scheme
SCRIBE
Strategy for investment
Contribution obligations
Risks involved
Insolvency entitlement
Benefit entitlements
Expense charges
List 9 items that owners of benefit providers may be required to disclose in accounts
DIM CLAIMS
Director’s benefit cost over the year
Investment return achieved on the assets over the year
Membership movements
Change in the surplus / deficit over the year
Liabilities accruing over the year (value of)
Assumptions used
Increase in the past service liabilities over the year
Method used
Surplus / deficit
List 10 reasons why providers of financial services need capital
REG CUSHION
Regulatory requirement to demonstrate solvency
Expenses of launching a new product / starting a new operation
Guarantees can be offered (higher solvency capital requirement)
Cashflow timing management (mismatch benefits vs premiums / contributions)
Unexpected events cushion, e.g. adverse experience, fines
Smooth profit
Helps demonstrate financial strength / attract new business / obtain a good credit rating
Investment freedom to mismatch in pursuit of higher returns
Opportunities, e.g. mergers and acquisitions, new ventures
New business strain financing
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
