C0 Intro to CP1 Flashcards
What is the actuarial control cycle?
ACC is a fundamental tool of risk mgmt.
The process of:
analyzing,
quantifying,
mitigating and
monitoring risk.
The central part of the model is based on a simple approach to problem solving:
firstly, define the problem
then design and implement a solution
then monitor the effectiveness of the solution and revise it if necessary.
List the processes involved in the ACC approach to problem solving
This involves the following processes
1. analyse situations, products and projects to determine the risks to which they are exposed
2. quantify the financial consequences of the risk events occurring
3. Consider and quantify appropriate methods of managing, mitigating or transferring the risks
4. Monitor the situation and the risk management procedures implemented as time develops
5. In the light of experience modify or change the risk management approaches adopted
ACC Diagram
GE- S-D-M - P
Explain why the actuarial control cycle is a ‘cycle’
The term ‘cycle’ and the use of 2 way arrows in the diagram, highlights the importance of monitoring and feedback, and the interrelationships between the elements of the cycle.
In actuarial and risk management work., the feedback mechanism within the cycle is not an automated process resulting in a predetermined, unconscious adjustment, as happens in some engineering systems.
The feedback mechanism in the actuarial control cycle requires the actuary to exercise professional judgement
Explain why the actuarial control cycle is ‘actuarial’
Although the underlying problem solving model is completely general the actual control cycle in corporates the following basic elements, which are common to all actuarial and risk management work
* the estimation of the financial impact of uncertain future events
* a long term rather than short term horizon
* the recognition of stakeholders’ requirements and risk profiles
* decisions need to be made in the short term in light of likely future outcomes
* the use of models to represent future financial outcomes
* the use of assumptions based on appropriate historical experience
* The need to allow for the general business environment, the impact of legislation regulation taxation competition
* interpretation of the results of modelling to enable practical strategies to be developed
* monitoring and periodically analysing the emerging experience
* modifying models and strategies in the light of this analysis of the emerging experience
* the application of professional judgement
Describe -“Specify the problem” stage.
The first stage of the actuarial control cycle is to analyse the risks of the various stakeholders in detail, and to set out clearly the problem from the point of view of each stakeholder.
This stage of the control cycle considers the strategic courses of action that could be used to handle the particular risks in question.
It gives an assessment of the risks faced and how they can be managed mitigated or transferred. This will reflect the desire of most institutions to manage their risk both in their core business and in activities incidental to their core business.
This stage also provides an analysis of the options for the design of solutions to the problem plans that transfer risk from one set of stakeholders.
Describe -“Develop the solution” stage.
This stage involves
* an examination of the major actuarial models currently in use how they may be adjusted for the particular problem to be solved
* selection of the most appropriate model to use for the problem, or construction of a new model
* consideration and selection of the assumptions to be used in the model. The assumptions used in a model are critical and it is necessary for the actuary to have a good understanding of their sensitivities.
* Interpretation of the results of the modelling process.
* consideration of the implications of the model results on the overall problem
* consideration of the implication of the results for all stakeholders
* determining a proposed solution to the problem
* consideration of alternative solutions and their effects on the problem
* formalising a proposal
* Communicating the proposed solution and alternatives, to the stakeholders responsible for decision taking
Describe -“Monitoring the experience” stage.
It is critical that the models used are dynamic and reflect current experience where that is relevant. This stage deals with the monitoring of experience and its feedback into the problem specification and solution development stages of the control cycle, such as updating the investigation.
An important part of this monitoring will be the identification of the causes of any departure from the targeted outcome from the model and a consideration as to whether such departures are likely to occur.
Describe -“Feedback Loop” stage.
It is vital that results of monitoring are used.
-Monitoring might indicate that the problem was not fully or correctly specified, or solution developed doe snot solve the problem that it now appears exists
-Solution developed did not take some vital features into account or some of the initial assumptions were incorrect.
- More usually, the monitoring process indicates that the solution should be refined. Bring it up to date or to reflect current experience.
It these results are not fed back into the cycle, it is likely that unsatisfactory consequences for one or more stakeholders will result.
List eight application of ACC to actuarial work.
- P: Assessing the need for and calculation of provisions
- A: Determining and monitoring mortality, expense and persistency assumptions for use within the design of and reserving for contracts or schemes.
- L: Determining the current level of profit or solvency and estimating future solvency
- A: Identifying alternative investment and risk management options
- M: Monitoring the effect of investment mismatching
- A: Asset-liability management
- C: Assessing the need for capital to protect against the consequences of risk events.
- C: Determining the contributions/premiums required to ensure that the benefits promises payable on future financial events can be met.
