C1 - Actuarial advice

Question 1

List 16 clients in private sector whom actuaries advice

Answer 1

1. Policyholders
2. Prospective policyholders
3. Members of benefit schemes and their
   dependants
4. Employers
5. Insurance Company – board of directors
6. Insurance Company – shareholders
7. Insurance Company – creditors
8. Trustees of benefit schemes
9. Sponsor of benefit schemes
10. Employees
11. Auditors of insurance companies
12. Auditors of the sponsors of benefits schemes
13. Investment fund managers
14. Members of investment schemes
15. Sponsors of capital projects
16. Bank

Question 2

Describe the public sector clients actuaries might advice

Answer 2

In the public sector, actuaries advise government departments and related organisations, such as
1. Government bodies
2. Regulatory bodies
3. Central bank

Question 3

In giving actuarial advice, what is important to identify in relation to the stakeholders involved, and why?

Answer 3

• In most circumstances different categories of stakeholders have different interests.
• One or more stakeholders will renumerate the actuary, but there will be several other stakeholders with significant interests who do not contribute directly to the actuary’s renumeration.
• Advise given by actuary will impact on other stakeholders. Actuary needs to consider the interests of all stakeholders.
  -Omitting a stakeholders will distort the context,

-Also necessary to retain a sense of proportion in considering who else may be affected by advice given.

Question 4

Where an actuary is advising the board of directors of an insurance company, which is planning a large expansion in business, who else might the advice have an impact on?

Answer 4

• Level of benefits that the company’s policyholders receive
• Level of premium charges to the company’s new and existing policyholders
• Level of dividend that the shareholders of the insurance company receive
• Volume of new business the company can write
• Level of taxes that the govt receives on the profits earned by the company
• Other insurance companies that are competing in the market
• Reinsurance companies through the level of reinsurance business that the company requires
• Employees of the insurance company through the employment benefits they receive
• Job security for the employees of the insurance company
• Work of the regulatory authorities that monitor the insurance company
• Other insurance companies who may be required by legislation to contribute to a compensation scheme that pays benefits to the policyholder of insurance companies that fail
• Employed sales staff and independent intermidiaries.

Question 5

Outline the interests on which actuaries may provide advice for –

Current policyholders and prospective policyholders

Answer 5

Personal protection against
- death / illness
- Requiring LT nursing care
- Personal liability claim (eg motor accident)
Retirement planning
Protection of property
Investment

Question 6

Outline the interests on which actuaries may provide advice for –

Employers

Answer 6

1. Protection against financial loss arising from death or ill-health of employees
2. Protection of tangible / intangible assets
3. Provision of work-related benefits to attract / retain staff
4. Meeting legislative requirements
5. Manage costs of running business
6. Raising, quantifying and investment of capital

Question 7

Outline the interests on which actuaries may provide advice for –

Insurance companies – board of directors

Answer 7

1. Pricing & Provisioning
2. Meeting legislative requirements
3. Managing assets and liabilities
4. Ensuring policy proceeds are paid
5. Meeting PRE
6. Meeting shareholders’ demands
7. Good corporate governance
8. Arranging Reinsurance

Question 8

Outline the interests on which actuaries may provide advice for –

Insurance companies – shareholders

Answer 8

Obtaining a good return on their investment

Question 9

Outline the interests on which actuaries may provide advice for –

creditors

Answer 9

Certainty that monies owed to them will paid

Question 10

Outline the interests on which actuaries may provide advice for –

Trustees of benefit schemes

Answer 10

• Managing the assets of the scheme
• Paying the benefits promised under the scheme as they fall due
• Maintaining solvency

Question 11

Outline the interests on which actuaries may provide advice for –

Sponsors of benefit schemes

Answer 11

• Providing protection benefits that meet the need of the members and their dependants
• Providing retirement benefits that meet the needs of the members.
• Managing the cost of providing benefits
• Meeting legislative requirements

Question 12

Outline the interests on which actuaries may provide advice for –

Government

Answer 12

• Setting legislation that impacts on the provision of financial products, schemes, contracts and transactions that provide benefits on future financial events
• Monitoring the adherence to this legislation
• Funding benefit provision by the state
• Monitoring the funding of benefit provision by the state

Question 13

Explain why and how certain factual information about the client should be sought in order to give advice

Answer 13

• Advice will often set out alternate solutions and the implications of each solution
• These solutions must always be relevant to the particular circumstances of the client.
• Public info (company accounts, website etc) can be used to gather info.
• Follow-up pre-project meeting with the client may be required to ensure their position has been fully understood.

Question 14

In giving advice, what should actuary be aware of and what should he try and avoid happening?

Answer 14

-The actuary should be aware of conflict of interest e.g. Actuary advising both the trustees and the sponsor of a benefit scheme

Question 15

Explain why subjective attitudes of client – especially towards risks - are relevant to an actuary giving an advice

Answer 15

• If the actuary is not aware of information regarding the client’s background, ethical position and culture, there is a risk that the advice given will be inappropriate.
• Charities have objectives that cannot be quantified in financial terms.
• Corporate bodies have a risk appetite, driven by the risk appetite of their shareholders, particularly their owners.
• Important for an actuary to be aware of the general style and culture of the client.

Role of actuaries in the marketing of financial services is to present the results in full business context. This means that actuaries need to think through the implications for all the stakeholders involved.

Question 16

Describe the 3 types of advice that can be given by an actuary

Answer 16

1. Recommendations – research and modelled forecasts, alternatives weighted, recommendations made consistent with requirements, work normally peer-reviewed
2. Indicative advice: giving an opinion without fully investigating the issues e.g. response to a direct question
3. Factual advice: based on research of facts e.g. legislation

Question 17

Who else may need to be involved in providing advice?

Answer 17

Other professionals, such as accountants and lawyers

Question 18

Explain what the actuary should communicate to the client in relation to the assumptions made

Answer 18

1. The assumptions must also be relevant to the particular circumstances of the client.
2. Explain to the client the reasons for making those assumptions.
3. Explain the implications of making alternate assumptions and of any alternate solutions that may have been considered but eventually not recommended on both the client and other stakeholders who may be affected.

Question 19

Give an example of a situation where a life insurance company actuary will be giving an advice as opposed to making a decision

Answer 19

1. Recommendation of bonus rates on with-profit policies to the board of directors
2. The actuary may have made some implicit decisions in formulating the advice, e.g. grouping pf policyholders for the purpose of bonus allocation. These implicit decisions should be disclosed as part of the process of giving advice

Question 20

Give an example of a situation where a life insurance company actuary will be making decisions as opposed to giving advice

Answer 20

1. Determination of surrender values
2. An actuary may also have an executive role within an organization and may be making decisions on matters such as provisioning, reinsurance programs, asset allocation.
3. In such situations there is a danger that the actuary will take decisions based on their own conclusions and the actuary should seek further advice or peer review of the decision made.
4. Rationale behind any decisions taken should be properly documented, including documentation of alternatives that have been considered.

Question 21

Add alternate to TAS, FRC, etc relevant to CP1 from IAI

Answer 21

TBC