CA1 Flashcards
Main difficulties of overseas investment
M ismatching domestic liabilities
T axation
V olatility of currency
Practical problems with investment overseas
C ustodian needed A dditional admin required T ime delays E xpenses incurred/expertise needed R egulation poor P olitical Instability I nformation harder to obtain (and less of it) L anguage difficulties L iquidity Problem A ccounting differences R estrictions on foreign ownership/repatriation problems
Socio-economic factors influencing mortality
G enetics E ducation N utrition O ccupation M arital I ncome Level C limate/Geography S ex
H ousing
A ge
What is Big Data?
L arge set of data
S ourced from different sources
D ecision making in real time: can be analyzed very quickly
Main assumptions
B enefit Inflation I nvestment Return S pecific Rates (Mortality, Frequency, Morbidity, Severity,...) E xpense inflation C hanges to base assumptions T iming of expenses, claims and premiums
T ax
Considerations in assessing different models
F it for purpose E xpertise available inhouse N eed flexibility C ost of each option E xpected number of times used D esired accuracy
Categories of Expenses
Variable/Fixed
Indirect/Direct
Funtion (NMT: New, Maintain, Terminate)
Factors to consider when setting assumptions
L egislation/Regulation U se of data N eed of client C onsistency between assumptions H ow financially significant?
Reasons why disclosure is important
S ponsors aware of financial significance
I nformed decisions can be made
M anage expectation
M is-selling avoided
E ncourage pick-up
R egulation
S ecurity increased as sponsors become more accountable
Regulatory Influences on Assets hold
T ype of assets allowed to invest in
E xtend to which mismatching allowed
C urrency mismatching requirements
H old certain assets, eg gvt bonds
S ingle counterparty maximum exposure
C ustodianship of assets
A mount of one asset used to demo solvency may be restricted
M ismatch Reserve
Factors affecting investment strategy
S ize of assets (absolute/relative) O bjectives U ncertainty of the liabilities N ature of the liabilities D iversification E xisting Portfolio R eturn (expected long-term)
T ax R estrictions: statutory/legal/voluntary A ccrual of liabilities in the future C urrency of the existing liabilities T erm of existing liabilities O ther fund strategies (competitors) R isk Appetite S olvency and accounting requirements
Why financial providers need capital
R egulatory requirements to demonstrate solvency
E xpense of launching a new product/starting a new operation
G uarantees that can be offered
C ashflow: time management U nexpected Events Cushion S mooth profits H elp demonstrate financial strengths I nvestment freedom to mismatch in pursuit of higher earnings O pportunities (eg M&A) N ew business strain financing
Considerations when using past data to set future assumptions
B alance of homogeneous group underlying data might have changed
E conomic situation might have changed
S ocial conditions might have changed
T rends over time (medical, demographic)
A bnormal fluctuations R andom fluctuations C hange in regulation H eterogenity of group to which assumptions apply E rrors in data R ecording differences
Problems with industry data
Q uantity U p to date E rrors R elevance I ncomplete? E xceptional D etail and format
Theories of the yield curve
L iquidity preference
I nflation risk premium
M arket segmentation
E xpectations
Characteristics of a prime property
C omparable property for rent reviews and valuation
A ge, condition and flexiblity of use
L ocation
L ease structure
S ize
T enant quality
R isk Responses
P artially transfer I gnore R educe A ccept T ransfer E vade
Ways of valuing assets
S moothed market value
H istoric book value
A djusted book value
M arket value
F air Value
A rbitrage Value
D iscounted Cashflow
S tochastic Modell
External environment factors
C ommercial/Corporate Structure R egulation E nvironmental A dequacy of Capital T ax E conomic
G overnance R isk management requirement A ccounting N ew business environment D emographics
L ifestyle I nternational practice S ocietal trends T echnology S tate benefits
Economic Factors
I nflation
S hort-term interest rate
F iscal deficit I mport/export E mployment R eturns on alternative investment C urrency E conomic growth
Importance of risk reporting
F inancing R ating Agencies A ttractiveness for Investor U nderstand risks D evelope risk control system
C hange yty R egulation I nteraction M onitor effectiveness of risk control system E merging risk identification
General reasons for holding cash
P rotect money value O pportunities U ncertainty of Liabilities R ecently received cashflow S hort-term liabilites
Risk Management Tools
M anagement Controls
U nderwriting
D iversification (LGRI)
C laims Control
Economic situations in which cash is attractive
G eneral economic uncertainty
R ecession expected
I nterest expected to rise
D omestic currency expected to weaken
Benfits of a good risk management system
S tability/quality of business improved A void surprises M anagement of capital improved O pportunities exploited for profit S ynergies identified A rbitrage identified S takeholders given confidence
Benefit scheme info to disclose in accounts
D irectors’ benfit costs
I nvestment return over year
M embership movements
C hange in surplus/deficit over a year L iabilities accruing over a year A ssumptions I ncrease in post-service liabilities M ethod S urplus/deficit
Reason for analysing surplus
D ivergence of actual and expected
I nformation to management and for accounts
V ariance of whole is equal to the sum of individual levers
E xperience monitoring to feed back into ACC
R econcile values for successive years
G roup into one-off/recurring sources of surplus
E xecutive renumeration scheme (data for)
N ew business strain (show effects of)
C heck on valuation assumptions and calculations
E xtra check on valuation data and process
Possible reasons for using ART
D iversification E xploits risk as opportunity S olvency improves/source of capital C heaper then reinsurance A vailable when reinsurance is not R esults smoothed T ax advantages E fficient risk management tool S ecurity of payment improved
