CA1 Flashcards
(70 cards)
1
Q
Main difficulties of overseas investment
A
M ismatching domestic liabilities
T axation
V olatility of currency
2
Q
Practical problems with investment overseas
A
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
3
Q
Socio-economic factors influencing mortality
A
G enetics E ducation N utrition O ccupation M arital I ncome Level C limate/Geography S ex
H ousing
A ge
4
Q
What is Big Data?
A
L arge set of data
S ourced from different sources
D ecision making in real time: can be analyzed very quickly
5
Q
Main assumptions
A
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
6
Q
Considerations in assessing different models
A
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
7
Q
Categories of Expenses
A
Variable/Fixed
Indirect/Direct
Funtion (NMT: New, Maintain, Terminate)
8
Q
Factors to consider when setting assumptions
A
L egislation/Regulation U se of data N eed of client C onsistency between assumptions H ow financially significant?
9
Q
Reasons why disclosure is important
A
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
10
Q
Regulatory Influences on Assets hold
A
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
11
Q
Factors affecting investment strategy
A
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
12
Q
Why financial providers need capital
A
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
13
Q
Considerations when using past data to set future assumptions
A
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
14
Q
Problems with industry data
A
Q uantity U p to date E rrors R elevance I ncomplete? E xceptional D etail and format
15
Q
Theories of the yield curve
A
L iquidity preference
I nflation risk premium
M arket segmentation
E xpectations
16
Q
Characteristics of a prime property
A
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
17
Q
R isk Responses
A
P artially transfer I gnore R educe A ccept T ransfer E vade
18
Q
Ways of valuing assets
A
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
19
Q
External environment factors
A
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
20
Q
Economic Factors
A
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
21
Q
Importance of risk reporting
A
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
22
Q
General reasons for holding cash
A
P rotect money value O pportunities U ncertainty of Liabilities R ecently received cashflow S hort-term liabilites
23
Q
Risk Management Tools
A
M anagement Controls
U nderwriting
D iversification (LGRI)
C laims Control
24
Q
Economic situations in which cash is attractive
A
G eneral economic uncertainty
R ecession expected
I nterest expected to rise
D omestic currency expected to weaken
25
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
```
26
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
```
27
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
28
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
```
29
Info to disclose to benefit scheme members
```
S trategy of investement
C ontribution Obligation
R isks Involved
I nsolvency entitlement
B enefit entitlements
E xpense charges
```
30
Expenses Incurred by Product Provider
C ommission
O verhead
S ales/Marketing
T erminal
R enewal
A sset Management
I nitial
D esign of Contract
31
Aims of a Regulator
G ive confidence
R educe financial fraud
I nvestigate Breaches
P rotect consumer
32
Functions of a Regulator
S anction
E nforce regulation
R eview & influence government policy
V et and register firms & individuals
I nefficiencies of market corrected
C heck management and conduct of providers
E ducate public
33
When information from benefit scheme should be disclosed
```
P ayment commencement
R egular
I nterval
C ombination
E ntry
```
34
Type of Selection
```
S purious
T emporary
A dverse
T iming
I nitial
C lass
```
35
Type of Actuarial Advice
F actual
I ndicative
R ecommendation
36
Additional criteria for an insurable risk
M oral hazard avoided
U ltimate limit of liability
D ata available for pricing
P ooling of risks
I ndependant
S mall probability
37
Reasons for underwriting
```
S pecial Terms (Price & Exclusions)
A void anti-selection
F inancial underwriting/avoid over-insurance
A ctual experience vs expected
R isk classification
I nsustainable health risks
```
38
Reasons for using reinsurance
S mooth results
A void large losses
D iversification
L imit risk exposure (per event/accumulated)
I ncrease risk limit
F inancing help
E xpertise
39
Investment & Risk characteristics of assets
```
S ecurity
Y ield
S pread
T erm
E xpenses/Exchange Rate
M arketability
```
T ax
40
Contract Design Stakeholders
```
A ctuaries
L awyers
P roviders of Benefit
A ccountants
C ustomer
A dministrator
S hareholder
```
41
Inappropriate Advice
```
Complex Product
R ubbish Advisor
I ntegrity of advisor
M odel/parameter error
E rrors in members data
S tate-encouraged but inappropriate actions
```
42
Identification of causes of risks in project
```
P olitical
N atural
F inancial
E conomic
C rime
P roject
B usiness
```
43
Reasons for calculating provisions
B enefit entitlement improved
Accounts (internal/external)
D iscontinuance
```
M ergers & Acquisitions
E xcess of assets over liabilities
D isclose information to beneficiaries
I nvestment strategy
C ontribution setting
S tatutory
```
44
Source of Data
```
T ables (mortality)
R einsurer
A broad (data from other country)
I ndustry
N ational Statistics
E xperience of own contracts
R egulatory reports
S imilar contracts
```
45
Model design: operational issues
```
S imple but retains key features
C lear results
A dequately documented
R ange of implementation methods
C ommunicable workings and output
E asy to understand
R efineable & developable
```
```
F requency of cashflows: balance accuracy vs practicability
I ndependent verification of output
L ength of run not too long
E xpense not too high
S ensible joint behaviour of variables
```
46
Contact Design Factors
```
A dministration
M arketability
P rofitability
L evel of Benefits
E arly leaver benefit
```
```
D iscretionary
I nterest and need of customers
R isk appetite of parties involved
E xpenses vs charges
C ompetition
T erms and conditions of contract
```
```
F inancing
A ccounting implications
C onsistency with other products
T iming of contributions of payments
O ptions & guarantees
R egulatory requirements
S ubsidies (cross)
```
47
Characteristics of Investors
```
T ax position
R egulation on investor
A ssets already held
I ncome/cashflow requirements
T astes
O ther assets and other investments
R isk appetite
```
48
Management control systems
M onitor liabilities taken in
O ptions & Guarantees (hedge/immunize)
D ata recording
A ccounting & auditing
49
Capital Management Tools
```
B anking Products
I nternal restructuring
R einsurance (trad/non-trad)
S ubordinated Debt
E quity Capital
S ecuritisation
```
50
Monitoring
P rovide management information
A dverse trends & corrective actions
U pdate assumptions
51
How risk included in pricing
P rofit criterion
R isk discount rate
M argin
52
Liquidity Risk
N ot sufficient funds to meet obligations, although solvent
| N o capacity to handle volume of assets bought or sold when deal required (financial markets)
53
Method to quantify asset risk
R etrospective tracking error
P rospective tracking error
V alue at risk
54
Ways of financing future benefits
J ust in time
L ump sum funding
R egular payments
P ay as you go
55
Stakeholders in a benefit scheme
```
M embers
E mployers
S ponsors of the scheme
T rustee of the scheme
E mployee of employers/sponsors
R egulator
S hareholders
```
56
General considerations for financing benefits
T ax advantages
B enefit of surplus generated
R egulation
P referential treatment of some members
57
Net Asset Value per share
Net Asset Value per share (NAV) is defined as the book value of the shareholders’ interests in a company, usually excluding intangibles such as goodwill, divided by the number of shares in issue.
58
Sources for a model
B uy a commercial model
U se an existing model after modification
D evelop a new model
59
Main uses of data for financial institution
A dministration
```
F inancial control, management information
R isk management
Accounting
M arketing
E xperience statistics
S tatutory returns
```
P remium rating, product costing, determining contributions
I nvestment
E xperience analyses
S etting provisions
60
Factors affecting the level of equity market
E xpectation of real interest rate and inflation
L evel of economic growth
I nvestors perception of risikiness
C urrency movements
C hange to tax rules
A ttractiveness of alternative Investments
61
Factors affecting the level of property markets
O ccupation
D evelopment cylcle
I nvestment Market
62
Reasons for poor quality data
A lack of sufficient consistent data to provide a credible result
The data may not be detailed enough i.e. of the wrong sort
It may contain errors or mistakes – either inherently or after processing
63
What involves the actuarial control cycle
A nalyze the situation, products and projects to understand the risk exposure
Q uantify consequences of risk events
D etermining appropriate approaches to risk management
M onitoring situation and risk management procedures
64
Indirect costs of regulation
A ltering consumer behaviour
U ndermining of the sense of professional responsibility amongst intermediaries and advisors
R eduction in self-regulation by the market
R educed product innovation
R educed competition
65
Mitigating information assymetries
```
D isclosure of information in plain language
C hinese Walls
C ooling off periods
C ustomer legislation
W histle blowing
```
66
Key features of an investment trust company (ITC)
Stated investment objective
closed-ended
public companies
gearing is allowed
67
Key features of an unit-trust (UT)
```
stated investment objective
open-ended
governed by trust law
limited power to use gearing (ie borrowing)
investors buy units in a trust
```
68
Advantages of indirect investment vs direct investment
A ccess to larger, more unusual investments
D iscount to NAV, assets might be bought more cheaply (ITC)
D iversification
D ivisibility
E conomies of scale
H igher expected return, due to higher volatility (ITC)
E xpenses associated with direct investments avoided
E xpertise of investment manager
M arketability better
T ax advantages possible
V aluation easier, as quoted
69
Goals of government policy to set interest rates
C ontrol inflation
E ncourage economic growth
M anagement of the level of exchange rate
70
Diversification
```
L ines of business
G eography
R einsurers
I nvestment - asset classes
I nvestment - assets held within a class
```
