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CA1 > CA1 > Flashcards

CA1 Flashcards

1
Q

Corporate structures

A
  • Mutual societies
      • no dividends
      • finance cannot readily be raised
  • Proprietaries
      • easy access to capital markets
      • greater economics of scale
      • more dynamic mangement
  • Private companies
      • smilar restrictions to raising capital as mutuals
      • Close involvement of owners is a management advantage
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2
Q

Mitigating risk

A
  • Avoiding
  • Accepting and minimizing
  • Sharing
  • Transferring
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3
Q

Information asymmetry

A
  • Anti-selection
  • Moral hazard
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4
Q

Key roles of the state

A
  • Provide benefits (e.g. retirement / medical care / unemployment)
  • Educate or require education (about importance of providing for the future)
  • Regulate to encourage or compel (benefit provision by or on behalf of population, e.g. by tax breaks)
  • Regulate bodies providing benefits to ensure security for promises made
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5
Q

Funding level of a defined benefit scheme

A

Value of assets / Value of liabilities

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6
Q

Types of pension schemes

A
  • Defined benefit scheme
  • Defined contribution scheme
  • Defined ambition scheme
    • Risks are share between the different parties involved
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7
Q

Types of pension scheme members

A
  • Actives
    • Still earning future benefits
  • Deferrred member
    • stopped earning future benefits but have existing benefit entitlement
  • Current pensioneers
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8
Q

Provider of pensions

A
  • Occupations schemes
    • offered by employers to their employees
  • Personal pension plans or arrangements
    • purchased from an insurance company by an individual
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9
Q

Regulatory regimes

A
  • Unregulated markets
  • Voluntary odes of conduct
  • Self-regulation
      • No government intervention
      • Implemented by people with greatest knowledge
      • Respond rapidly to chcanges in market needs
      • Closeness of regulator to industry
      • regulator may accept industry’s point of view and not consumer
      • inhibit entrants to the market
  • Statutory regulation
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10
Q

Forms of regulation

A
  • Prescriptive
  • Freedom of action
    • rules on publicity
  • Outcome-based
    • Freedom of action, but prescribe outcome that will be tolerated
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11
Q

Maintaining confidence

A
  • Capital adequacy
  • Competence and integrity
    • Require professional qualifications
    • Prevent an individual working in a particular industry if they are not deemed a “fit and proper” person
  • Compensation scheme
  • Other protection for investors
    • Ensure that the market is transparent, orderly and provides proper protection to investors
  • Stock exchange requirements
    • Fulfill specificed obligations for the disclosure of financial and other information
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12
Q

Dealing with information asymmetry

A
  • Disclosure and education
  • Remove conflict of interest
    • restrict to publily available information
    • Chinese walls
  • Negotiation / Price controls
    • Maximum commission rates
    • fee basis instead of commission
    • max premium rates / management charges
  • Remove unfair features of insurance contracts
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13
Q

Reasons for need of regulation

A
  • Confidence
  • Information asymmetry
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14
Q

Aims of regulation

A
  • Correct perceived market inefficiencies
  • Protect consumers of financial products
  • Maintain confidence in the financial system
  • Help reduce financial crime
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15
Q

Actuarial controll cycle (ACC)

A
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16
Q

Underwriting

A

a process used by the (life) insurer to decide the level of risk posed by a potential policyholder. As a result of underwriting, the policyholder may be charged a higher than standard premium, given a lower than standard benefit, or even declined insurance.

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17
Q

With-profit: Factors when setting level of bonus

A
  • Smooth benefits (keep back profits in good years to help in bad years)
  • Policyholder expactations (e.g. based on past bonus distributions)
  • Competitors (looking at what competitors are doing)
  • Regulatory limits (adhering to regulatory limits on payout)
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18
Q

Pure endowment and endowment assurance: Customer needs

A
  • Means of transferring wealth from parents to children (guarantee that substantial wealth transfer will be made, even in the case of death)
  • Sometimes used as a means of repaying the capital on a loan
  • Saving money for retirement
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19
Q

Whole life assurance: Customer needs

A
  • Provide for funeral expenses
  • Meeting liability to tax on the death (e.g. inheritance tax or death duties)
  • Generally providing long-term protection to dependents
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20
Q

Term assurance: Customer needs

A
  • Providing protection against financial loss for the assured’s dependants
  • Decreasing term assurance to repay balance outstanding under a loan
  • Where the policyholder is a corporate body or partnership, provide p_rotection against the financial loss that might arise on the death of a key person_ within the organisation
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21
Q

Convertible or renewable term assurance: Customer needs

A
  • Combine attractions of a term assurance (cheap death cover) with the certainty of being able either to convert to a a permanent form of contract, or to renew the original contract without health evidence being provided
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22
Q

Income drawdown: Customer needs

A
  • Should the member die before having to secure an annuity, the member’s heirs can inherit the balcance of the funds
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23
Q

Income drawdown: Risks

A
  • If only the income earned on the fund is taken, income could be volatile
  • If too high a level of income is taken the capital could reduce to zero before the member dies
  • Charges taken in relation to administering the arrangement may be high
  • Remaining fund on the member’s death may be insufficient to provide adequate benefits for a dependant
  • May be tax charge on the residual fund on the member’s death
24
Q

Rating factor

A

A factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the likelihood and/or severity of the risk. It must, therefore, be a risk factor or a proxy for a risk factor of risk factors.

25
Q

Financial loss insurance covers

A
  • Pecuniary loss
    • Protects insurance against bad debts or other failure of a third party
  • Fidelity guarantee insurance
    • Covers the insured against financial losses by dishonest actions by its employees
  • Business interruption cover
    • Indemnifies the insured against losses made as a result of not being able to conduct business
26
Q

Liability insurance covers

A
  • Employers’ liability
  • Motor third party liability
  • Public liability
  • Product liability
  • Professional indemnity (cover to indemnify against negligence in the provision of a service)
27
Q

Property damage insurance covers

A
  • Household and commercial buildings property
  • Moveable property
  • Motor property
  • Marine property (hull and cargo)
  • Aircraft
28
Q

Commercial considerations associated with a contract design

A
  • Profitability
  • Marketability
  • Competitiveness
  • Statutory / Regulatory requirements
29
Q

General insurance fixed benefits covers

A
  • Personal accident insurance
  • Health insurance (e.g. hospital cash)
  • Unemployment insurance
30
Q

Level and form of benefits

A

Level: Amount

Form:

  • Regular / One-off
  • Monetary or non-monetary (goods or services)
31
Q

Motor insurance is commonly written on three bases

A
  • third party only
  • third party, fire and theft
  • fully comprehensive
32
Q

Level and form of benefits relating to a term assurance contract

A
  • Amount of the sum assured
  • Whether the benefit is decreaseing of level
  • additional rider benefits (e.g. critical illness)
  • waiver of premium benefit (e.g. in case of sickness, accident, unemployment)
  • whether or not the premiums can be reviewed
  • A renewal option at the end of the term, with or without further underwriting
33
Q

What should be a primary consideration in deciding what level of discretionary benefits to offer?

A

PRE (Policyholders’ Reasonable Expectations)

34
Q

Variables impacting profitability of an insuarnce contract

A
  • Claims experience
    • Claims frequency
    • Claims severity
    • Claims inflation
    • options and guarantees
  • Expenses and expense inflation
  • Investment returns
  • Withdrawal experience
  • New business sales volumes and mix
35
Q

Aspects of a contract design that improve marketability

A
  • Innovative design features such as options and guarantees
  • Simplicity - easy to understand
  • Transparency - good disclosure of information to the customer
  • Low charges
36
Q

Capital Project definition

A

Any project where there is initial expenditure and then, once the project comes in to operation, a stream of revenues less running costs.

37
Q

Capital Project Appraisal: Initial Appraisal

A
  • Strategic issues
  • Resources
  • Synergies
  • Other projects (compatibility)
  • Key risks (sufficient upside potential)
  • Political Constraints (within and without the organisation)
38
Q

Capital Project Appraisal Techniques

A
  • net present value (NPV)
  • internal rate of return (IRR)
  • payback period
  • discounted payback period
39
Q

Issue of IRR

A

Can have multiple solution –> Take lowest positive solution

40
Q

Issues with NPV

A
  • Highly dependent on risk discount rate
  • Says nothing about the length of the project or the time until profits are made
  • Cannot be used to compare projects since it is an absolute amount that will depend on the size of the project
41
Q

Issues with payback period

A
  • Ignores the time value of money
  • ignores cash flows beyond the date that payback is achieved
  • ignores the scale / size of the project
42
Q

Capital Project: Difference between

  • Sensitivity analysis
  • Scenario testing
A
  • Sensitivity analysis: investigates how the profitability of the project changes in response to a change in a single assumption in isolation
  • Scenario testing: varies several assumptions simultaneously and in a mutually consistent fashion
43
Q

Capital Project: Discount rate for projects with a higher than normal degree of systemic risk

A
  • Look at other companies that habitually engage in such projects
  • Problem: those companies may have more experience in these projects
44
Q

Capital Project: Risk Identification

A
  • Make a high-level preliminary risk analysis
  • Hold brainstorming session of project experts and senior internal and external people
  • Carry out desktop analysis to supplement the results from the brainstorming session, by identifying further risks and mitigation options
  • Carefully set out all identified risks in a risk register, with cross-references to other risks where there is interdependency
45
Q

Capital Project: Analysis of risks

A
  • Frequency of occurrence
  • Consequences if risk occurs
  • Correlation between risks
  • Controllability of the risks
46
Q

Capital Project: Risk Matrix - type of risks

A
  • Political
  • Natural
  • Economic
  • Financial
  • Crime
  • Project
  • Business
47
Q

Money Markets definition

A

Covers

  • Bank deposits
  • Short-term securities
48
Q

Money market instruments

A
  • Treasury bills
  • Local authority bill
  • Bills of exchange
  • Certificate of deposit (CDs)
  • Commercial paper
  • Term deposits
  • Call deposits
49
Q
A
50
Q

Types of deposits

A
  • Call deposits: Depositor has instant access to withdraw the capital
  • Notice deposits: Depositor has to give a period of notice before withdrawal
  • Term deposit: No access to the capital before maturity
  • Certificate of deposit (CD): Short-term security issued by banks and building societies showing that a stated sum of money has been deposited for a specified time for a specified rate of interest. (usually 28 days to 6 months)

CD is tradable!

51
Q

Theories to explain deviations in the yield curve compared to the expectation

A
  • Liquidity preference theory
    • Investors require a greater return for assets committed for a longer period of time.
    • less downward sloping yield curve (or more upward sloping)
  • Inflation risk premium theory
    • Under the 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 which are more vulnerable to inflation than shorter-dated stocks
  • Market segmentation theory
    • Market segmentation theory says that yields at each term to redemption are determined by supply and demand from investors with liabilities of that term.
52
Q

Gross redemption yield

A

The return that you would expect to get on a bond if you hold it until redemption. Note that this assumes that you could reinvest the coupons at the same rate, and it ignores expenses, tax and default risk.

53
Q

Price of a semi-annual coupon bond

A
54
Q

SYSTEM T

A
  • Security (risk)
  • Yield (real or nominal)
  • Spread (diversification, volatility)
  • Term
  • Expenses
  • Marketability
  • Tax
55
Q

Running yield definition

A
  • Bond: coupon/price
  • Equity: dividend/price
  • property: rent/price
56
Q

Corporate bond

  • income cover
  • capital cover
A
  • income cover: number of times the operating profit (before interest payable and tax) covers the interest on the particular loan in question (including equal and prior ranking loans)
  • capital cover: number of times the assets of the company (excludinng intangibles and after notionally paying current liabilities) cover the amount of the loan (including prior ranking loans)
57
Q

Real rate of return calculated from nominal rate of return and inflation rate

A

CA1 (10 decks)

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