Chapter 0: CA1 Flashcards
5 Nodes of the Actuarial Control Cycle
- General Commercial and Economic Environment
- Specifying the problem
- Monitoring the Experience
- Developing the Solution
- Professionalism
Key Topics Under the General Commercial and Economic Environment
- Stakeholders
- Providers of benefits
- Regulation
- External environment
- Insurance products
- Asset Classes
- Economic Influences
Key topics when specifying the problem
- Risk and risk management
- Contract design
- Project management and capital project appraisal
- Capital requirements
Key topics in developing the solution
- Modelling
- Data
- Setting assumptions
- pricing and funding
- provisioning
- asset management
- capital management
- surplus management
- accounting and reporting
Basic elements incorporated in the actuarial control cycle (that makes it “actuarial”)
- Estimation of the FINANCIAL IMPACT of uncertain future events
- A LONG-TERM rather than short-term horizon
- Recognition of STAKEHOLDERS’ requirements and risk profiles
- Decisions need to be made in the short term in the 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 the impact of legislation, REGULATION, taxation, competition
- Interpretation of the results of modelling to enable practical strategies to be developed
MONITORING and periodically analysing the emerging experience
- Modifying models/strategies in the light of this analysis of the emerging experience.
Specifying the problem
Analyse the risks of the various stakeholders in detail and set out clearly the problem from the point of view of each stakeholder.
Gives an assessment of the risks faced and how they can be managed mitigated or transferred.
Developing the solution
MODEL CONSTRUCTION
- An examination of the major actuarial models currently in use and how they may be adjusted for the particular problem to be solved
- Selection of the most appropriate model to use for the problem, or construction of a new model
- Consideration and selection of the assumptions to be used in the model.
MODEL RESULTS
- Interpretation of the results of the modelling process
- Consideration of the implications of the model results on the overall problem.
- Consideration of the implications of the results for all stakeholders
SOLUTION
- determining a proposed solution to the problem
- consideration of alternative solutions and their effects on the problem
- formalising a proposal
Monitoring the experience
Critical that the models used are dynamic and reflect current experience where it 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.
Investment risk
The uncertainty associated with the outcome of making an investment.
Credit risk
The risk that a person or an organisation will fail to make a payment that they have promised.
Potential stakeholders
- investors
- lenders/creditors
- trustees
- members of benefit schemes
- financial intermediaries
- insurers
- beneficiaries of insurance policies
- reinsurers
Risks occur when
- The value of assets/proceeds are not as expected
- The value of liabilities/outgoes are not as expected
Market risks
Risks related to changes in investment market values.
Credit risk
Risk of failure of third parties to repay debts.
Risks associated with liability outgoes
- Inflation risk
- Underwriting risk
- Insurance risk
- Exposure risk
- Finance risk
- Operational risk
- External risk
Inflation risk
Risk of real liabilities being larger than anticipated due to inflation.
Underwriting risk
Risk of failures in underwriting leading the insurer to take on risks at an inadequate price.
Insurance risk
Risk of more claims being made than expected.
Exposure risk
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.
Finance risk
Risk of not being able to obtain finance when required or not being able to obtain it at the anticipated cost.
Operational risk
Risk of loss due to fraud or mismanagement within the organisation.
External risk
Risk from external events.
Possible solutions to mitigating risks
- avoiding
- accepting and minimising
- sharing
- transferring
risk together with ongoing monitoring.
