CH0 - What is subject CP1 all about

Question 1

What is the actuarial control cycle?

Answer 1

It is a fundamental tool of risk management, the process of analysing, quantifying, mitigating and monitoring risks.

Αποτελεί θεμελιώδες εργαλείο διαχείρισης κινδύνων, τη διαδικασία ανάλυσης, ποσοτικοποίησης, μετριασμού και παρακολούθησης των κινδύνων

Question 2

What 5 processed does the actuarial control cycle involves?

Answer 2

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 and 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 approached adopted.

Question 3

What makes the actuarial control cycle ‘actuarial’? (11)

Answer 3

1. The estimation of the financial impact of uncertain future events.
2. A long-term rather than short-term horizon.
3. The recognition of stakeholders’ requirements and risk profiles.
4. Decisions need to be made in the short term in the light of likely future outcomes.
5. The use of models to represent future financial outcomes.
6. The use of assumptions based on appropriate historical experience.
7. The need to allow for the general business environment - the impact of legislation, regulation, taxation, competition.
8. Interpretation of the results of modelling to enable practical strategies to be developed.
9. Monitoring and periodically analysing the emerging experience.
10. Modifying models / strategies in the light of this analysis of the emerging experience.
11. The application of professional judgment.

Question 4

2.Specifying the problem

Answer 4

The first stage of the actuarial cycle is to identify and analyse the risks of the various stakeholders in detail, and to set out clearly the problem from the point of view of each stakeholder.

Question 5

3. Developing the solution (10)

Answer 5

1. An examination of the major actuarial models currently in use and how they may be adjusted for the particular problem to be solved.
2. Selection of the most appropriate model to use for the problem, or construction of a new model.
3. 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.
4. Interpretation of the results of the modelling process.
5. Consideration of the implications of the model results on the overall problem.
6. Consideration of the implication of the results for all stakeholders.
7. Determining a proposed solution to the problem.
8. Consideration of alternative solutions and their effects on the problem.
9. Formalising a proposal.
10. Communicating the proposed solution, and alternatives, to the stakeholdrer(s) responsible for decision taking.

Question 6

4. Monitoring the experience

Answer 6

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.

Question 7

Feedback loops

Answer 7

It is vital that the results of the monitoring process are used. Monitoring might indicate that the problem was not fully or correctly specified - in other words the solution developed does not solve the problem that it now appear exists. Alternatively, monitoring might indicate that the solution as developed did not take some vital feature into account.

Question 8

Examples of practical applications of the actuarial control cycle

Answer 8

1. Identifying alternative investment and risk management options.
2. Asset liability management
3. Determining the current level of profit or solvency and estimating future solvency.
4. Assessing the need for capital to protect against the consequences of risk events.
5. Assessing the need for and the calculation of provisions.
6. Determining the contributions / premiums required to ensure that benefit promises payable on future financial events can be met.
7. Determining and monitoring mortality, expense and persistency assumptions for use within the design of and reserving for contracts or schemes.
8. Monitoring the effect of investment mismatching.

Question 9

5 Steps of the process

Answer 9

1. The general economic and commercial environment
2. Specifying the problem
3. Developing the solution
4. Monitoring the experience
5. Professionalism

Question 10

1. The general economic and commercial environment

Answer 10

This step of the process sets the scene and ensures the actuary is fully aware of the environment in which the problem is being solved and the impact of the environment on the decisions made.

Question 11

5. Professionalism

Answer 11

Professionalism needs to be demonstrated throughout the actuarial control cycle process and in the communication of the results. (TAS)