APN 106-Actuaries and Long-term Insurers Flashcards

1
Q

Outline a high level overview of the responsibilities of the head of actuarial function? (5)

A

• Two components review/oversight and reporting i.e. expressing an opinion or advising the board of director and senior management

• HAF should be sufficiently independent with activities underlying associated actuarial roles

• Statutory duties
o Set on in the prudential standards of the Insurance Act 2017

• Professional responsibility

• Reporting requirements
o Provide board of directors with annual reports regarding opinions and advice

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2
Q

Describe the requirements and process with respect to the appointment and termination of HAF? (4)

A

• Fit and proper requirements needs to be satisfied
o Appropriate technical expertise and practical experience
o Appropriate practicing certificates for line of work
o Compliance with professional code of conduct and continual professional development

• Consultation with current HAF

• Inform board of directors their responsibility according to the APN and the Insurance Act

• On resignation/termination notify PA on any issues that may prejudice compliance with the Insurance Act

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3
Q

Describe the HAFs responisbilities regarding the evaluation of data used in calculations of technical provisions, SCR and MCR? (3)

A

 Ensure data is adequate, accuracy, representative

 Ensure material completeness and correctness (limitations e.g. relevance, consistency over time),

 satisfied with data controls (recon of movements, recon to administration systems, data to accounts, recon after cleaning process, recon inputs and outputs of model)

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4
Q

Describe the HAFs responisbilities regarding the evaluation of assumptions used in calculations of technical provisions, SCR and MCR ? (8)

Describe the issues in assumptions that should be brought to the boards attention? (5)

A

o Assumptions (reasonable assumptions)
 Review source data
 Review Credit taken for reinsurance or other forms of risk transfer
 Compare to experience analysis
 Review process/policy for setting assumptions and judgement made
 Review Assumptions outside insurers control
 Sensitivity testing
 Highlight assumptions with material impact and high uncertainty in value
 Review stochastic estimates

o Assumptions (brought to attention of the board)
 Allowance for options and guarantees
 Credit for reinsurance recoverables
 Future management actions
 Interpretations of discretionary elements
 Actions of management that may have an influence on assumptions

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5
Q

Describe the HAFs responisbilities regarding the evaluation of Models used in calculations of technical provisions, SCR and MCR ? (4)

A

 Reference to prudential standards to ensure compliance

 Review description of methodology and ensure proportional to risk

 Review approximations used in the event where standard methods where prevented

 Review documentation and controls (changes, usage, storage)

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6
Q

Describe the HAFs responsibilities regarding the analysis of changes and use of internal models in calculations of technical provisions, SCR and MCR ? (2)

A

o Analysis of change
 Discuss instances where the actual experience materially deviates from assumptions

o SCR using partial or full internal models
 Extensive reviews needs to be complement according to the prudential standards

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7
Q

List the main responsibilities of the HAF with respect to the financial position of the insurer? (5)

A

• Risks to solvency and liquidity
• Solvency capital ratio (include comments on changes)
• On-going solvency/ORSA report
• Risk monitoring as part of ORSA
o Evaluation of standardised formula (SCR) to measure risks

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8
Q

List the components of a report that HAF prepares regarding on-going solvelcy/ORSA reort for the board? (10)

A

o Include summary of ORSA in reports to the board

o Capital requirement needed over business planning period

o Consequent impact on solvency

o Impact of distributions and capital injections

o Key risks which may affect projections

o Key unusual features of projections (new launch, maturity, reinvetment)

o future actions that can be taken if solvency deteriorates

o Sufficiency of financial resources to meet liabilities as they fall due

o Interaction between business plan and future solvency

o stress and scenario tests

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9
Q

List the components othat HAF considers regarding the monitoring of future risk? (12)

A

 Terms and conditions of existing business and current new business including options and guarantees

 Existing investments and the asset liability management strategy

 Marketing plans i.e. sales volumes and costs of sales

 Persistency of business and discontinuance terms

 Pricing of internal unit funds for unit linked polices

 Current and future expenses

 Current and future mortality and morbidity assumptions

 Underwriting

 Reinsurance

 Allocations to shareholder and policyholders

 Current and future tax position

 Nature and availability of surplus

 Allocation of capital and relevant costs of capital

 Systems controls

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10
Q

Describe evaluation of standardised formula (SCR) to measure risks taking into account risk profile and boards risk appetite? (6)

A

 Insurers risk profile relative to industry profile (calibration required)

 Material non-standard features of the insurer (product terms, reinsurance, investments)

 The significance of the risk in overall risk profile and SCR calculations

 Allowance for additional risks not in the standardised formula

 Sensitivity of SCR to various risks

 The availability of internal and external models to evaluate the calibration

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11
Q

Describe the HAFs responsibility regarding shareholder distributions? (3)

A

• Insurer cannot declare or pay dividends if the insurer fails or is likely to fail to meet the financial soundness condition

• The impact of distribution on solvency and liquidity position should be communicated

• Specifically if current or project solvency fall short from minimum or target capital specified in capital management policy

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12
Q

Describe the HAFs considerations regarding providing an opinion on ALM policy? (8)

A

o Types of risks

o Measurement of risk exposure (relative to risk appetite)

o Sources of asset liability management exposure
 Funds backing SCR, the economic capital and funds in excess of these requirements
 Subsidiaries
 Non-profit guaranteed policyholder liabilities
 With profit liabilities
 Options and guarantees
 Interaction with our risk types

o Principles and requirements of investment mandates

o Setting and monitoring risk limits

o Reporting of risk monitoring processes/breaches

o Operational structures and responsible committees

o Asset-liability management requirements for product approval and pricing

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13
Q

Outline why the HAF should meet with the investment committee? (4)

A

• Set investment mandates

• Ensure that investment mandates reflect the nature, term, uncertainty and currency of liabilities

• Monitor compliance of investment mandates

• Monitor and manage market risk of investment strategies

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14
Q

List the outcomes that the HAF will use to evaluate the underwriting policy? (9)

A

o Balance
o Justification
o Fairness
o Objectivity
o Consistency (underwriting policy with product design, pricing and claims management)
o Consistency with objectives and business strategy
o Consistency with risk appetite
o Compliance with regulation and guidelines
o Data requirement for sufficient quality

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15
Q

List the considerations that the HAF will use to evaluate the reinsurance policy? (8)

A

o Adequate to support the objectives of the business defined in the business strategy
o Expected affect in current and future solvency
o Data used for reinsurance purposes are of sufficient quality
o Consider sufficiency of reinsurance
 Stress and scenario tests
 Capacity and retention of the programme
 Impact of a catastrophe
 Review models to determine sufficiency
o Identification of gaps and limitations
o Credit worthiness considerations
o Alternative risk transfer methods
o Review process for selecting reinsuarnce

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16
Q

List the consideration of hat the HAF will use to evaluate product design, premiums and conditions? (18)

A

o Terms and conditions of existing business and current new business including options and guarantees
o Existing investments and the asset liability management strategy
o Marketing plans i.e. sales volumes and costs of sales
o Persistency of business and discontinuance terms
o Pricing of internal unit funds for unit linked polices
o Current and future expenses
o Current and future mortality and morbidity assumptions
o Underwriting
o Reinsurance
o Allocations to shareholder and policyholders
o Current and future tax position
o Nature and availability of surplus
o Allocation of capital and relevant costs of capital
o Appropriateness of data and assumptions used for pricing
o Premium rates for similar products
o Changes in economic conditions and general external environment
o Key risks in product design
o Results of profit testing, business plan projections, scenario and sensitivity testing, stochastic modelling

17
Q

Describe the HAFs duties regarding treating customers fairly? (4)

A

• Not a requirement of the Insurance Act but forms part of the HAFs duties

• This include monitoring the following is consistent with policyholder reasonable expectations:
o Surrender values and associated penalties
o Bonus/surplus distributions
o Fees, expense charges and risk charges

• HAF must be satisfied that all unit pricing and fund charges are consistent with reasonable expectations
o Allocation/ de-allocation prices
o Creation and cancellation prices
o Compensation of for incorrect unit pricing

• Where a distinction is made regarding the premium, benefits and terms and conditions of a policy the HAF needs to ensure that it is actuarially justified

18
Q

Describe the HAFs duties regarding profit distributions? (6)

A

• The HAF needs to evaluate and provide advice to the board regarding distribution of profit
• Review the calculation of excess assets for that business in accordance with PPFM
• The factors considered in motoring risks should be considered if relevant
• In a report of the recommendations the following should state the HAFs:
o Conclusion from appraisal of relevant experience and way in which recommendations were derived
o Understanding of financial and business objectives
o SCR vs. eligible funds after surplus distribution
o Interpretation of legal advice and how this has affected recommendations
o Interpretation of PRE including PPFM, policy and marketing literature, historic distributions
o Opinion of how recommendations meet fairness between categories of policyholders and the policyholder and insurer
• The affordability of bonuses and the adequacy of bonus stabilisation reserve should be reviewed annually
• The board should be informed of the impact of the deviations on financial positions and the impact on current and future PRE

19
Q

Describe the role of a HAF in evaluating significant transactions involving the insurer? (4)

A

• Provide an opinion on the soundness of any transfer or significant transaction
o Transfer
o Merger or amalgamation
o Acquisition or disposal
• HAF should consider the potential conflicts of interest and manage these appropriately
• Consider the post-transaction financial soundness on a prudential supervision reporting basis
• Keep in mind that report could be available to various stakeholders