Chapter 0

Question 1

What are the stages involved in the actuarial control cycle?

Answer 1

Outside triangle:
> The general commercial and economic environment
> Professionalism

Inside the triangle:
> Specifying the problem
> Developing the solution
> Monitoring the experience

Question 2

What makes the actuarial control cycle “actuarial”? 7)

Answer 2

1> Estimation of financial impact of uncertain future events

2> Long term rather than short term time horizon => decision to be made in the short term in light of likely future outcomes

3> Considerations of stakeholders (risk appetite and requirement), legislation, regulation, tax and competition

4> Use of assumptions based on appropriate historical experience

5> The use of models and interpretation of the results to develop strategies

6> Monitoring and periodically analyzing the emergence of experience in order to update model and strategies

7> Application of professional judgement.

Question 3

What does specifying the problem stage of the actuarial cycle involve? (4)

Answer 3

1> Setting out clearly the problem from the viewpoint of each stakeholder

2> Assessing and analyzing the risk of each stakeholder

3> Considering the strategic courses of action available to mitigate the particular risk in question

4> In, particular, analyzing the options of designing solutions to the problems that transfer risk from one set of stakeholder to another

Question 4

What does developing the solution stage of the actuarial cycle involve? (10)

Answer 4

1> Examining the major actuarial models currently in use

2> Selecting the most appropriate model to use, or constructing a new model

3> Considering + selecting the assumptions to be used in the model

4> Understanding the sensitivity of the results to the assumptions

5> Interpreting the results of the modelling process

6> Considering the implications of the results on the overall problem and for each stakeholder

7> Determining a proposed solution to the problem

8> Considering alternative solutions and their effect on the problem

9> Formalizing a proposal

10> Communicating the proposed solution + alternatives to the stakeholders responsible for decision taking

Question 5

What does the monitoring the experience stage of the actuarial control cycle involve? 5

Answer 5

1> Analyzing periodically actual experience vs expected

2> Identifying causes of departure from expected experience

2.1> and determining whether each source is one-off or likely to recur

3> Feeding back into the specifying the problem and developing the solution stages of the ACC

4> Making sure that the model is dynamic => assumptions are consistent and reflects current experience

5> Monitoring of new contracts + new elements of contract should occur more frequently

Question 6

What are the application of the actuarial control cycle in the actuarial work?

Answer 6

1> Asset-liability management

2> Monitoring the effects of investment mismatching

3> Considering insurance and Reinsurance options

4> Considering other risk management options

5> Determining the profitability of a contract

6> Considering the need and calculation of provisions

7> Determining the current and future solvency levels

8> Assessing capital requirements

9> Determining premiums/contributions

Question 7

Key Topics under the General Commercial and Economic Environment (ESPERIA)

Answer 7

ESPERIA

> External environment
Stakeholders
Providers of benefits
Economic Influences
Regulation
Insurance products
Asset Classes

Question 8

Investment risk (def.)

Answer 8

The uncertainty associated with the outcome of making an investment

Question 9

Credit risk (def.)

Answer 9

A risk that a person or an organisation will fail to make a payment that they have promised

Question 10

Exposure risk

Answer 10

Risk of more claims being made from a particular event due to the insurer having greater exposure to a particular peril than had been appreciated.

This might be due to inadequate diversification within the portfolio of business written

Question 11

External risk

Answer 11

Risk from external events; fires, floods, changes in regulation

Question 12

Operational risk

Answer 12

Risk of loss due to fraud or mismanagement within the organisation

Question 13

Finance risk

Answer 13

Risk of not being able to obtain finance when required or not bein able to obtain it at the anticipated cost

Question 14

Insurance risk

Answer 14

The risk of more claims being made than expected (e.g. due to higher than expected mortality or morbidity rates)

Question 15

Underwriting risk

Answer 15

Risk of failures in underwriting leading to the insurer to take on risks at an inadequate price

Question 16

Inflation risk

Answer 16

Risk of real liabilities being lager than anticipated due to inflation

Question 17

Market risk

Answer 17

Risk related to changes in investment market values

Question 18

Risks occur when what happens?

Answer 18

1> The value of assets/proceeds are not as expected

2> The value of liabilities/outgoes are not as expected

3> The relative value of assets and liabilities or net cashflows are not as expected

Question 19

Risks associated with liability outgoes (7)

Answer 19

1. Inflation risk - real liabilities larger than anticipated due to inflation. e.g. salaries, consumer prices, medical costs
2. Underwriting risk - failures in underwriting -> insurer taking risks at inadequate prices
3. Insurance risk - more claims being made than expected (mortality, morbidity)
4. Exposure risk - more claims due to greater exposure at a particular peril
5. Finance risk - not being able to obtain finance when required or not getting it at anticipated cost
6. Operational risk - loss due to fraud or mismanagement
7. External risk - arising from external event e.g. changes in legislation

Question 20

What can we do with risks?

Answer 20

Avoid
Reduce
Share
Transfer
Accept

Question 21

Risk measure

Answer 21

Risk = Probability x Impact