Chapter 0-Introduction to Subject CP1 Flashcards
- What is the actuarial control cycle?
The actuarial control cycle is a model that can be applied to many aspects of actuarial work.
- Outline the key disadvantage and the key advantage of the actuarial control cycle.
Like all models, it does not necessarily always fit the problem under consideration at all times or in all circumstances. However, like all good models, it is simple, and it helps the user to obtain a clearer understanding of the situation.
- List the processes involved in the actuarial control cycle approach to problem solving.
This involves the following processes:
• Analyse situations, products and projects to determine the risks to which they are exposed.
• Quantify the financial consequences of the risk events occurring.
• Consider and quantify appropriate methods of managing, mitigating or transferring the risks.
• Monitor the situation and the risk management procedures implemented as time develops.
• In the light of experience modify or change the risk management approaches adopted.
- Explain why the actuarial control cycle is a ‘cycle’.
Actuarial work usually includes all phases of the cycle. The term ‘cycle’, and the use of two-way arrows in the diagram, highlights the importance of monitoring and feedback, and the inter-relationships between elements of the cycle.
In actuarial and risk management work, the feedback mechanism within the cycle is not an automatic process resulting in a pre-determined, unconscious adjustment, as happens in some engineering systems. The feedback mechanism in the actuarial control cycle requires the actuary to exercise professional judgement.
- Explain why the actuarial control cycle is ‘actuarial’.
Although the underlying problem-solving model is completely general, the actuarial control cycle incorporates the following basic elements, which are common to all actuarial and risk management work:
• the estimation of the financial impact of uncertain future events
• a long-term rather than short-term horizon
• the 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 general business environment - 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
• the application of professional judgement.
6.1 Explain the following step of the actuarial control cycle: specifying the problem
The first stage of the actuarial control cycle is to analyse the risks of the various stakeholders in detail, and to set out clearly the problem from the point of view of each stakeholder.
This stage of the control cycle considers the strategic courses of action that could be used to handle the particular risks in question. It gives an assessment of the risks faced and how they can be managed, mitigated or transferred.
This stage also provides an analysis of the options for the design of solutions to the problem that transfer risk from one set of stakeholders to another.
6.2 Explain the following step of the actuarial control cycle: developing the solution.
This stage involves:
• 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 - the assumptions used in a model are critical and it is necessary for the actuary to have a good understanding of their sensitivities
• 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
• determining a proposed solution to the problem
• consideration of alternative solutions and their effects on the problem
• formalising a proposal
• communicating the proposed solution, and alternatives, to the stakeholder{s) responsible for decision taking.
6.3 Explain the following step of the actuarial control cycle: monitoring the experience.
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.
An important part of this monitoring will be the identification of the causes of any departure from the targeted outcome from the model and a consideration as to whether such departures are likely to recur.
6.4 Explain the following step of the actuarial control cycle: feedback loops.
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 appears exists. Alternatively monitoring might indicate that the solution as developed did not take some vital feature into account or some of the initial assumptions were incorrect.
More usually, the monitoring process indicates that the solution should be refined, perhaps to bring it up to date, or to reflect current experience, rather than that the solution was not appropriate. If these results are not fed back into the cycle it is likely that unsatisfactory consequences for one or more stakeholders will result.
- List eight applications of the actuarial control cycle to actuarial work.
- identifying alternative investment and risk management options
- asset-liability management
- determining the current level of profit or solvency and estimating future solvency
- assessing the need for capital to protect against the consequences of risk events
- assessing the need for and calculation of provisions
- determining the contributions I premiums required to ensure that benefit promises payable on future financial events can be met
- determining and monitoring mortality, expense and persistency assumptions for use within the design of and reserving for contracts or schemes
- monitoring the effect of investment mismatching.
