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ARM 2023 > Acronyms > Flashcards

Acronyms Flashcards

1
Q

Key Topics Under the General Commercial and Economic Environment

A

ESPERIA, a magical environment far away

External environment
Stakeholders
Providers of benefits
Economic Influences
Regulation
Insurance products
Asset Classes

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2
Q

6 principles of the Actuaries’ code

A

CCCIIS

compliance`
communication
competence and care
integrity
impartiality
speaking up (whistleblowing)

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3
Q

List the factors to consider in relation to the external environment

A

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
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4
Q

List the main functions of the regulator

A

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
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5
Q

What actions can the regulator take to reduce asymmetries of information?

A

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
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6
Q

Summarize the three main principles of insurance and pensions that impact the design of financial products and the benefits that can be provided from such products

A 
Insurable interest - in most countries, an insurance contract is only valid if the person taking out the contract has a financial interest in the insured event, to prevent moral hazard, fraud and other crime
Pre-funding - individuals or corporate bodies put money aside in advance of the occurance a risk event, which is uncertain in terms of whether it will happen, its timing and amount. The amount of money put aside depends on the probability of the risk event occuring, the amount the risk event will cost, and the return that can be earned on the pre-funded money before the risk event occurs
Pooling of risk - protects a group of individuals who pool their finances, against uncertainty in financial costs, which then leads to more cost-efficient provision than if each individual made their own financial provision
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7
Q

List 15 factors that influence the long term investment strategy of an institutional investor

A

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
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8
Q

Give 8 examples of how the regulatory framework might limit what a provider wants to do in terms of investment

A

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

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9
Q

Immunisation

A

The investment of the assets in such a way that the (present value of the assets) MINUS the (present value of the liabilities) is immune/unresponsive to a general small change in the rate of interest

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10
Q

Define MWRR

A

A
The MWRR is the discount rate at which present value of inflows = present value of outflows in the portfolio

(sensitive to to contributions and withdrawals)

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11
Q

Define TWRR

A

The TWRR is the compounded growth rate of a unit investment over the period being measured. It is the product of growth factors between consecutive cashflows,

(not sensitive to contributions and withdrawals)

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12
Q

Outline the operational issues that need to be considered when designing and constructing a model

A

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).
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13
Q

List the main sources of data

A

TRAINERS

~~~
Tables
Reinsurers
Abroad (data from overseas contracts)
Industry data
National statistics
Experience investigations on the existing contract
Regulatory reports and company accounts
Similar contracts

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14
Q

What are the 5 most important things to consider when setting assumptions?

A

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

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15
Q

Why may past data not be relevant for the future?

A

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)

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16
Q

List 6 factors other than age and gender that directly affect mortality and morbidity rates

A

CHONGE (or GO CHANGE)

  1. Climate and geographical location
  2. Housing
  3. Occupation
  4. Nutrition
  5. Genetics
  6. Education
17
Q

List 18 factors to consider when designing or redesigning a contract

A

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-)
18
Q

List 8 items that the expense charges of an insurance company would be expected to cover

A

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

19
Q

List the 7 key parties involved in contract design

A

ALPACAS

Actuaries
Lawyers
Providers of benefits
Accountants
Customers
Administrators
Shareholders / financial backers
20
Q

What is the difference between the cost and the price of a set of benefits?

A

The cost of benefits is the amount that should theoretically be charged for them.

The price of benefits is the amount that can actually be charged under a particular set of market conditions. It may be more or less than the cost

21
Q

Risk Premium vs Office Premium

A

Risk Premium = Premium needed to cover benefits

Office Premium = Cost = Premium needed to cover benefits and expenses

22
Q

List 7 perceived benefits of risk management to the provider

A

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

23
Q

List six benefits of risk management at the enterprise level.

A
  1. Diversification, including being able to identify undiversified areas of risk
  2. Pooling of risks
  3. Economies of scale in terms of the risk management process
  4. Capital efficiency as capital can be targeted
  5. Providing insight into risk in different parts of business, including identification of unacceptable concentrations.
  6. Understanding the risks better and so adding value by exploiting risk as an opportunity
24
Q

What are the 4 key areas of benefit risk when the benefits are known in advance?

A
  1. Inadequate funds to provide the benefits
    • Insufficient funds set aside
    • insolvency of sponsor or provider of benefits
    • mismatching assets and liabilities
  2. Illiquid assets
  3. Benefit changes (within terms of the contract)
  4. Not meeting beneficiaries’ needs
25
Q

What are the four key areas of benefit risk when the benefits are not known in advance?

A
  1. Lower than expected benefits due to lower than expected investment returns or higher than expected expense returns.
  2. Lower than expected benefits due to worse than expected purchase terms for any investment vehicles (like annuities)
  3. Not meeting beneficiaries’ needs
  4. Higher than expected claim payments on non-life insurance policies (e.g. due to high property or court-award inflation) = risk to provider
26
Q

In a defined benefit scheme, what are the 6 key contribution risks?

A
  1. Unknown future level of contributions. Contributions depend on the promised benefits, the eligibility of members to accrue / receive benefits, inflation, and investment returns net of tax and expenses.
  2. Unknown timing of future contributions if not funded in advance.
  3. The requirement to put in extra funds if there is a shortfall in the scheme - the amount and timing of which is unknown.
  4. Insufficient liquid assets with which to make the contributions.
  5. Insolvency risk due to excessive contributions.
  6. Take-over by a third party who is unwilling to make the contributions.

(In a defined ambition scheme, such as a defined benefit promise with a defined contribution underpin, there is also the risk that contributions have to increase due to the guarantee costing more than expected)

27
Q

In a DC scheme, what are the 4 contribution risks?

A
  1. Contributions are unaffordable to sponsor (because in poor financial circumstances)
  2. Insufficient liquid assets with which to make the contributions
  3. If contributions are linked to inflation or a salary index, that index may increase faster than expected.
  4. If contributions are fixed, benefits may be less than expected / unable to provide for an expected standard of living.
28
Q

List six possible causes of inappropriate advice in relation to the provision of benefits

A

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.

29
Q

What 3 factors make a risk insurable?

A
  1. 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)
  2. The risk must be of a financial and reasonably quantifiable nature. (the claim amount has to be able to compensate for the loss)
  3. 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 worthwhile)
30
Q

List 6 additional criteria that a risk should ideally meet to be insurable (to reduce volatility by the law of large numbers)

A

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
31
Q

List 6 possible responses from which a stakeholder can choose when faced with a risk

A

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)
32
Q

How could each risk mitigation option be evaluated?

A

FIRM

  • Feasibility and cost of implementing the option
  • Impact on frequency / severity / expected value
  • Resulting secondary risks
  • Mitigation required in response to secondary risk
33
Q

List 5 ART products

A
  1. Integrated risk covers
  2. Securitisation
  3. Post loss funding
  4. Insurance derivatives
  5. Swaps
34
Q

Why do insurers underwrite business?

A

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
35
Q

List 6 additional reports that might accompany the accounts

A

CIRCUS

Chairperson’s / CEO’s statement
Investment report
Remuneration report
Corporate governance report
(Uncertainty) Risk report
Strategic report

36
Q

List the reasons why disclosure of information to scheme beneficiaries and also to the provider or sponsor or regulator is important

A

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
37
Q

List 7 capital management tools available to providers to meet their responsibilities and to achieve their goals

A

Financial Reinsurance
Securitization
Subordinated debt
Banking products
Derivatives
Equity
Internal sources of capital

38
Q

What is Solvency II and what are the three pillars on which it is based?

A

Solvency II is a solvency regime for insurance companies. It is a regulatory requirement for all EU states.

The three pillars are:

  1. Quantification of risk exposures and capital requirements
  2. A supervisory regime
  3. Disclosure requirements
39
Q

3 Pillars the Basel framework is based on

A
  1. Minimum capital Requirements
  2. Risk Management and supervision
  3. Market Discipline and Disclosure

ARM 2023 (39 decks)

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