Chapter 0: ACC

Question 1

What makes the ACC actuarial?

Answer 1

• The estimation of financial impact of future events.
• A long term rather than a short term time horizon.
• Different stakeholders.
• Decisions need to be made in the short term in light of likely future outcomes.
• The use of models to represent future financial outcomes.
• The use of assumptions based on appropriate historical experience.
  The need to allow for general business environment (legislation, regulation, tax).
• Interpretation of results of modelling to enable practical strategies to be developed.
• Monitoring and periodically analysing the emerging experience.
• Modifying models in the light of this analysis of the emerging experience.
• Application of proffesional judgement.

Question 2

Factors of the general economic and commercial environment

Answer 2

ESPERIA (an enchanted place far away)
* External Environment
* Stakeholders
* Providers of benefits
* Economic Influences
* Regulation
* Insurance products
* Asset Classes

Question 3

What does the “specifying the problem” stage in the ACC involve?

Answer 3

• Setting out clearly the problem from the viewpoint of the stakeholder.
• Identify and analise the risks of each stakeholder.
• Consider strategic courses of action that can be used to mitigate risks.
• Analyzing options for designing solutions to the problem to transfer risk from one stakeholder to another.

Question 4

What does “Developing the solution” stage of the ACC involve?

Answer 4

Model Construction
* An examination of the major actuarial models currently in use and how they may be adjusted for the current problem to be solved.
* Selection of the most appropriate model to use for the problem or construction of a new model.
* consideration and selections of the assumptions to be used in the model.

Model Results
* Interpretation of the model results.
* Consideration of implications of model results on the problem.
* Consideration of the implications of model results on all stakeholders.

Solution
* Detemining a proposed solution to the problem.
* Consideration of alternative solutions and their effects on the problem.
* formalising a proposal.
* Communication of proposed solution and alternatives.

Question 5

What does the “monitoring the experience” stage of the ACC involve?

Answer 5

• Analyzing periodically the actual experience agains expected.
• Identifying causes of departure from expected experience and determining whether it is likely to occur again or not.
• Feeding back into specifying the problem and developing the solution stages of ACC.
• Making sure the model is consistent with assumptions and reflects the current experience.

Question 6

10 applications of the ACC in actuarial work

Answer 6

• Asset-liability management (e.g. setting investment strategy)
• Monitoring the effect of investment mismatching
• Considering insurance and reinsurance options
• Determining the profitability of a product
• Determining the need of calculations of provisions
• Determining the solvency levels (current and future)
• Assesing capital requirements
• Determining premiums / contributions
• Assumption setting for contract design

Question 7

Why is the ACC suitable for the use of risk managing?

Answer 7

Risk management also follows a cyclical process:
* Analyzing situations, products and projects to determine the risks to which they are exposed.
* Quantifying the financial consequences of the risk events occuring
* considering and quantifying appropriate methods for mitigating, managing and transferring risks.
* Monitoring the situation and the risk management procedures implemented as time developes.
* modifying or changing the risk management approaches adopted over time in light of emerging experience.

Question 8

what does mitigating risk involve?

Answer 8

• avoiding
• sharing
• transferring
• accepting or minimising

Question 9

Investment Risk

Answer 9

The uncertainty associated with the outcome of making an investment (VaR as measurement)

Question 10

Credit Risk

Answer 10

The risk that a person / organisation will fail to make a payment they have promised.

(e.g. failure to make interest payments on set dates of corporate bonds or failure to repay the face value of the bond on the redemption date).

Question 11

Market Risk

Answer 11

Risks related to investment market values.

Question 12

Mortality Risk

Answer 12

• Life Insurance: risk of higher mortality than expected.
• Annuity: risk of lower mortality than expected (need to pay annuity for longer).

Question 13

Inflation Risk

Answer 13

Risk of real liabilities larger than anticipated due to inflation (e.g. salaries, consumer prices, medical expenses)

Question 14

Underwriting Risk

Answer 14

Risk of failures in underwriting leading to the insurer taking on risks at inadequate prices.

Question 15

Insurance Risk

Answer 15

Risk of more claims being made than expected.
(e.g. due to higher than expected mortality / morbidity rates)

Question 16

Exposure Risk

Answer 16

Risk of more claims arising from a particular event due to the insurer having greater exposure to a particular peril than had been appreciated.
Might be due to inadequate diversification within the portfolio of business written.

Question 17

Finance Risk

Answer 17

The risk of not being able to obtain finance when needed or getting finance at a higher cost than anticipated.

Question 18

Operational Risk

Answer 18

The risk of loss due to fraud or mismanagement within the organisation itself.

Question 19

External Risk

Answer 19

The risk arising from external events e.g. changes in legislation.