Acronyms Flashcards

Question

Which acronym corresponds to regulatory influences on assets held

Answer 1

Types of assets an investor can hold Extent to which mismatching is allowed Currency matching requirement Hold certain assets, eg gov bonds Single counterparty maximum exposure Custodianship of assets Amount of any one asset used to determine solvency may be restricted Mismatching reserve

Answer 2

A SAD CUTER INVESTOR

Answer 3

Accounting regulations Size of assets Accrual of liabilities in the future Diversification Currency of liabilities Uncertainty of liabilities Tax treatment of assets/investor ESG issues Risk appetite Institution’s objectives Nature of liabilities Voluntary and legal restrictions Existing portfolio Solvency requirements Term of the liabilities Other fund strategies (competitors) Return (expected)

Answer 4

SCARCER FILES

Answer 5

Simple but retains key features Clear results Adequately documented Range of implementation methods Communicable workings and outputs Easy to understand Refineable and developable Frequency of cash flows - balance accuracy vs practicality Independent verification of outputs Length of run not too long Expense not too high Sensible joint behaviour of variables

Answer 6

Implemented in a number of ways? Fit for purpose Expertise available in house? Number of expected uses Cost Easy to use? Deterministic or Stochastic

Answer 7

Tables (eg actuarial mortality tables) Reinsurers Abroad (data from overseas contracts) Industry data National statistics Experience investigations on existing contract Regulatory reports and company accounts Similar contracts

Answer 8

Quantity (credibility) Up-to-date? Errors Relevance (heterogeneity) Incomplete? Exceptionals Detail and format

Answer 9

Legislation/regulation Use of the assumptions Needs of the client Consistency across assumptions How financially significant are the assumptions?

Answer 10

BEST ARCHER

Answer 11

Balance of homogenous groups underlying the data may have changed Economic situation may have changed Social conditions may have changed Trends over time (medical, demographically) Abnormal fluctuations Random fluctuations Changes in regulations Heterogeneity within the group to which the assumptions will apply Errors in data Recording differences (eg in categorisation of smoker)

Answer 12

Spurious Time Adverse Temporary… …initial Class

Answer 13

EGG NACHOS

Answer 14

Education Genetics Gender Nutrition Age Climate and geography Housing Occupation Smoker status

Answer 15

Commission Overheads Sales/Advertising Terminal eg future benefits Renewal admin, eg collecting premiums/contributions Asset management Initial expenses, eg setting up new clients Design of the contract

Answer 16

AMPLE DIRECT FACTORS

Answer 17

Admin systems Marketability Profitability Level and form of benefits Early leaver benefits Discretionary benefits Interests and needs of customers Risk appetite of the parties involved Expenses vs charges Competition Ts and Cs of contracts Financing (capital requirements) Accounting implications Consistency with other products Timing of contributions or premiums Options and guarantees Regulatory requirements Subsidies (Cross-)

Answer 18

Actuaries Lawyers Providers of benefits Accountants Customers Administrators Shareholders/Financial backers

Answer 19

Strategic decision making improved Avoid surprises Volatility of profits reduced Improved profits via capital efficiency Opportunities exploited for profits Understand interdependencies/aggregation React quickly to emerging risks Stakeholders given confidence

Answer 20

Credit Operational Market Business External Liquidity

Answer 21

Political Natural Economical Financial Crime Project Business

Answer 22

Complicated products Rubbish (ie incompetent) advisor Integrity of advisor is lacking (potentially due to sales related payments) Models or parameters unsuitable Errors in data relating to beneficiaries State-encouraged but inappropriate actions

Answer 23

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

Answer 24

Partially transfer Ignore Reduce Accept (retain all) Transfer Evade (avoid)

Answer 25

Feasibility and cost Impact on frequency/severity/expected value Resulting secondary risks Mitigation required in response for secondary risks

Answer 26

Smooth results Avoid large losses Diversification Limit exposure to risk (single event, accumulation) Increase capacity to accept risk Financial assistance Expertise

Answer 27

Suitable special terms Avoid anti-selection Financial underwriting against over-insurance Actual experience in line with that assumed in pricing Risk classification/rated fairly Identify substandard risks

Answer 28

BAD MEDICS

Answer 29

Benefit improvement for a benefit scheme Accounts and reports - published/internal Discontinuance/surrender benefits Mergers and acquisitions Excess of assets over liabilities and so whether discretionary benefits can be awarded Disclosure information for beneficiaries Investment strategy Contribution/premium setting Supervisory solvency reports

Answer 30

Board independence and governance Risk appetite, exposure and management Investment strategy and performance Strategic objectives (progress towards) Key objectives (performance against)

Answer 31

Strategy for investment Contribution obligation Risks involved Insolvency entitlement Benefit entitlements Expense charges

Answer 32

Payment commencement Request Intervals Combination Entry

Answer 33

Consistency in accounting treatment from year to year Avoiding distortions resulting from contribution fluctuations Recognising the realistic costs of accruing benefits Disclosure of appropriate information

Answer 34

Sponsor is aware of financial significance of benefits Informed decisions can be made Mis-selling is avoided Manages the expectations of members Encourages take up Regulatory requirement Security of scheme improved as sponsor/trustees are made more accountable

Answer 35

REG CUSHION

Answer 36

Regulatory requirements to demonstrate solvency Expenses of launching a new product/starting a new operation Guarantees can be offered Cashflow timing management Unexpected events cushion, eg adverse experience Smooth profit Help demonstrate financial strength Investment freedom to mismatch in pursuit of higher returns Opportunities, eg M&A New business strain financing

Answer 37

DIVERGENCE

Answer 38

Divergence of actual vs expected (show financial effect/significance of) Information to management and for accounts Variance of whole is equal to the sun of variances from the individual sources Experience monitoring to feedback into ACC Reconcile values for successive years Group into one-off/recurring sources of surplus Executive remuneration schemes (data for) New business train (show effects of) Check on valuation assumptions and calculations Extra check on valuation data and process

Answer 39

Claim amount payable bears some relationship to financial loss Policyholder has an interest in the risk Risk is of a financial and reasonably quantifiable nature

Answer 40

Ice cream makes cats feel marvellous

Answer 41

Identification Classification Measurement Control Financing Monitoring

Answer 42

My car will drive rapidly

Answer 43

Merging funds Change assets Weaken valuation basis Defer distribution of surplus Retain surplus (don’t distribute anything to shareholders)

Answer 44

Dogs love chasing squirrels for scooby snax

Answer 45

Derivatives Liquidity Facilities Contingent capital Senior unsecured loans Financial reinsurance Subordinated debt Securitisation Liq facilities, unsecured loans and contingent capital

Answer 46

The Minimum Capital Requirement is the threshold at which companies are no longer permitted to trade. The Solvency Capital Requirement is the target level of capital below which companies may need to discuss remedies with their regulators

Answer 47

Market Value of Assets (MVA) Market Value of Liabilities (MVL) Available capital (MVA - MVL) The available capital is then compared to the economic capital requirement to determine if more capital is required

Answer 48

The amount of capital that a provider determines is appropriate to hold in excess of liabilities, to cover its risks under adverse outcomes, generally with a given degree of confidence and over a given time horizon Ie a 1-in-50 one year VaR

Answer 49

Value of premium = value of benefit + value of expenses + contribution to profit

Answer 50

The total assets to be held in excess of provisions calculated on a best estimate basis. The regulator may also require an additional buffer to be held as a buffer for adverse experience. OR the regulator could require a basis much stricter than best estimate that incorporates the additional cash buffer in its calculations

Answer 51

Active - the risk taken by managers relative to given benchmarks Strategic - the risk that the strategic benchmark doesn’t match liabilities Structural - where there is a mismatch between the aggregate of the portfolio benchmarks and the total fund benchmark

Answer 52

A life insurance product Can act as a savings product Invests a single premium for a fixed term or whole of life Withdrawals are allowed but may have penalties Less flexible than income drawdown

Answer 53

General insurance Covers losses from bad debts or failure of a third party

Answer 54

General insurance product Includes dishonest actions by employees such as fraud or embezzlement

Answer 55

Please send letters to John Robertson

Answer 56

Pay as you go Smoother pay as you go Lump sum in advance Terminal funding Just in time funding Regular contributions

Answer 57

For looking at the financial impact of plausible and possibly adverse set of events for a company. Deterministic as it would be difficult to set mathematical models to some scenarios. So good for when the event being modelled doesn’t land itself to being described by a probability distribution (low probability events) Or when there is insufficient data to create a probability distribution Quantifies only the severity of the scenario not the probability that it occurs.

Answer 58

A projection of the financial condition of a company under a specific adverse event over a period of time Also deterministic Commonly used to model extreme market movements Asset portfolios are subject to extreme changes in underlying assumptions such as correlations and volatilities

Answer 59

1. To identify weak areas in the portfolio and investigate the effects of specific stress situations under different combinations or correlations and volatilities 2. To gauge the impact of major market turmoil affecting all model parameters, while ensuring consistency between correlations when stressed

Answer 60

Often a regulatory requirement This is the construction of a severe stress scenario that just allows the firm to continue to operate.

Answer 61

This is an extension of stress testing Can include dynamic interactions between variables Very complex Timely to run to the point it could be impractical Therefore can limit the number of variables that can be run stochastically

Answer 62

Solvency ratio Asset-liability ratio Return of capital employed Price/Earning ratio Divided yield

Answer 63

Claims ratio (claims : premium income) Incurred expenses to premium income Operating ratio (total of incurred claims and expenses : premium income) Commission to premium income Outward reinsurance premiums to gross premium income

Answer 64

DAMOD Dalmatians are more outgoing dogs

Answer 65

Data recording - accurate data ensures adequate provisions are established - reduces operational risks of holding poor data Accounting and auditing - enables proper provisions to be established, and regular premiums to be collected - reassures providers of finance of the company’s financial position Monitoring of liabilities taken on - important to monitor liabilities to protect against the aggregation of specific risks (i.e. to ensure not all risks are of the same kind) - where the onboarding of new policies leads to lots of new business strain, it is important to monitor new liabilities such that business levels are within the providers’ resources Options and guarantees - require care to monitor, particularly in determining if they will bite or not Due diligence - performed on third parties before entering into an agreement, such as an outsourcing company - reduces credit risk - may not be relevant to question if doesn’t involve third parties

Answer 66

Very large data sets Data brought together from multiple sources Data which can be analysed very quickly, such as in real time

Answer 67

Identify and understand reasons for divergence Identify any trends, particularly adverse trends, to take corrective action Update assumptions and methods adopted so they reflect expected future experience more closely Provide information to management and other key stakeholders Check if experience is in line with national and industry statistics, and if not to revise approach to sales and advertising Discuss mortality experience with underwriters and reinsurers

Answer 68

The cost will be amortised over the expected future useful lifetime of the system Product allocation by product and function Allocated based on use, such as by timesheet analysis Loaded on to the charge for each policy ie under management expenses

Answer 69

Involves identifying all current and future risks Listing example risks To identify these risks we can hold brainstorming sessions with key stakeholders, staff and senior management May also involve obtaining expert opinion Compiling a risk register to set out the risks and any interdependencies Involves preliminary identification of risk identification processes

Answer 70

Categorising the risks into groups, such as by location or business function, external or internal An ‘owner’ of each risk is allocated who is responsible for the control processes of the risk This is usually a member of the senior management team

Answer 71

Need to estimate the likely severity and probability of each risk, including correlations between risks Use a risk scoring (1-5) approach to identify the largest risks and focus on these Score the risks before and after risk mitigation techniques are applied to determine the impact of the techniques Perform relevant stress and scenario tests, looking at extreme adverse scenarios This may be difficult depending on what is being modelled ie climate change Decide what risks to avoid, transfer etc (PIRATE)

Answer 72

Consider how to mitigate the likelihood of the risk, or how to mitigate against the severity of the risk Low severity, high probability risks should be diversified away High severity, low probability risks should be avoided or mitigated as far as possible Risk mitigation techniques include: (reinsurance, diversification etc) Define the risk appetite of the business

Answer 73

Determining the likely cost of each risk and the cost of any control options Involves ensuring the company has adequate resources to continue its objectives after a loss event occurs

Answer 74

Experience monitoring is a Kay component of the ACC Regularly review and reassess risks previously identified Also involves identifying new risks Review effectiveness of control measures, allowing for any changes in regulations, legislation, working practices etc. The results of the monitoring process can be used to update models and assumptions, although some risks may be hard to quantify

Answer 75

Integrated risk covers Securitisation Post loss funding Insurance derivatives ie weather options Swaps

Answer 76

Maximum caps on claims Use excesses to reduce costs Exclusions in the contract terms for higher risk events Tight policy wording Note that the costs of implementing a tight control system must be compared with the benefits gained from it

Answer 77

Cross Check Spot Check (for individual policies or data entries) Reasonableness checks Reconciliation checks

Answer 78

It is a banking product used as a capital management tool (along with contingent capital and liquidity facilities) It involves the bank providing a loan to the insurer’a parent company (if it has one) to be used to support the insurer

Answer 79

State what the initial problem is Need to set measurable targets relating to profits and market share Need to identify key stakeholders, such as… Need to identify key risks, such as… Then these risks should be analysed What expertise do we have available?

Answer 80

Risks will need to be transferred, mitigated or managed A model will be required to price the product Is there expertise available in house, do we need to source this from elsewhere Assumptions will need to be set, could hire an external party to help with this Key assumptions will be… Data will need to be collected, such as from… Premium rates will need to be set for different groups of customers An analysis of various design options could be undertaken New products should go through significant sensitivity testing and scenario analysis

Answer 81

Actual experience should be reviewed against expectations Need to monitor: business volumes, whether the premium is sufficient, competitors pricing, and other key assumptions like mortality Will need to update the rest of the ACC if actual experience varies from assumptions

Answer 82

Check data is valid, and there is enough consistent data Create homogeneous groups, using risks factors but balancing accuracy and credibility Exposed to risk analysis, dividing this data by the same groupings as before Calculations Analyse the claim/mortality/surrender rates Compare results with assumptions, standard tables etc Analyse demographic experience, such as business volumes/mix Analyse financial experience, such as inflation, expenses etc Also involves investigating investment returns, comparing against a benchmark Where there are differences feed this back into ACC

Answer 83

Liquidity preference theory - based on the generally accepted belief that investors prefer liquid assets to illiquid ones. Therefore requiring more encouragement (higher yields) to commit longer term. Inflation risk premium theory - the yield curve will tend to slope upwards because investors need a higher yield to compensate them for holding longer dated stocks more variable to long term inflation rates. The inflation risk premium theory doesn’t apply to index linked bonds. Market Segmentation Theory - yields at each term to redemption are determined by supply and demand from investors with liabilities at that term. If demand is high for some investors then price will go up. If supply is impacted by the size of the fiscal deficit and actions taken by gov to finance the deficit. Expectations theory - the shape of the yield curve is determined by economic factors which drive the market’s expectations for future short-term interest rates. (An upward sloping yield curve may indicate that investors expect inflation to rise, and hence short-term interest rates)

Answer 84

Required return = required risk free real rate of return + expected inflation + risk premium For equities the risk premium is “equity risk premium” and for bonds it is “inflation risk premium” Expected return = initial income yield + expected capital growth If assets are fairly priced, these will be equal. If Exp return > required return, then the asset appears cheap

Answer 85

Project expected results Project items such as revenue and balance sheet as if the actual experience had been the same as all of the assumptions. This involves building a model of the expected future experience of the provider. Modelling considerations Can use pre-existing models for pricing individual products and combine them to give an overview of future revenue. Multiply the revenue of each policy by expected numbers to be sold. However all variables and interdependencies must be consistent when combined Need to multiply all these future assumptions with the assumed numbers of policies in force from previous years. Comparison Compare actual vs expected experience, including investment returns, lapses, mortality, inflation and sales etc Compare expenses This is best done on a policy level than by aggregate to identify where these costs have come from (ie new business strain could be a “good” cost)

Answer 86

Reduce the likelihood of claims Reduce the cost of claims Control expenses (ie periodically reviewing them, ensuring expenses are commensurate with claim sizes) Reduce the number of lapses or numbers that don’t renew Follow an investment strategy that increases investment return (subject to an acceptable level of risk) Adopt an effective tax management policy

Answer 87

Users of the data, and meeting all requirements Access requirements to the data and systems Quality and quantity of data Errors and checks, creating a version control and having backups Costs, in house expertise, complexity, flexibility to accommodate different levels of sales and customer, good outputs Data legislation Data governance policy Regulations Data protection Big data considerations

Answer 88

The TWRR is the compounded growth rate of 1 over the period being measured. It does not consider cash flows in or out of the portfolio The MWRR is identical to the IRR. It is the discount rate at which PV assets = PV liabilities It does consider cash inflows and outflows