Chapter 0: What is A311 all about Flashcards
5 nodes of the Actuarial control cycle
- General Commercial and Economic Environment
- Specifying the problem
- Developing the Solution
- Monitoring the Experience
- Professionalism
Key Topics Under the General Commercial and Economic Environment
ESPERIA, a magical environment far away
- External environment
- Stakeholders
- Providers of benefits
- Economic Influences
- Regulation
- Insurance products
- Asset Classes
Key topics when specifying the problem
- Assessment of NEEDS
- Assessment of RISKS
- Core Business Requirements
- Strategic Courses of Action
Key topics in developing the solution
- Selecting Appropriate Actuarial Models
- Appropriate Assumptions
- Implications for all Stakeholders
- Determine a Proposed Solution and Alternatives
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 analyzing the emerging experience
- Modifying models/strategies in light of this analysis of the emerging experience.
- The application of professional judgement.
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. - Provide an analysis of the options for the design of plans to transfer risk from one set of stakeholders to the next.
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
- communicating the proposed solution and the alternatives
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 previous stages - Identifying causes of departures and considering the
recurrence of departures. - Feedback loops
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
- Members of benefit schemes
- Reinsurers
- Insurers
- Trustees
- Beneficiaries of insurance policies
- Investors
- Lenders/creditors
Risks occur when
- The value of assets/proceeds are not as expected
- The value of liabilities/outgoes are not as expected
- The relative value of assets and liabilities or net cash flows are not as expected
Market risk
Risks related to changes in investment market values
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 form external event
Possible solutions to mitigate risks
- avoiding
- accepting and minimizing
- sharing
- transferring risk together with ongoing monitoring.
Key topics in monitoring experience
- Monitor actual vs expected results
- Analysis of Surplus/Deficit
- Possible reasons for departures and adjust accordingly
Deviations in cash flows are due to
Changes in:
- Amount
- Timing
Formula for risk and what affects it
Risk = Probability x Impact
Affected by risk appetite and objectives
