Chapter 0: What is Subject A311 all about? Flashcards
What is the actuarial control cycle?
The Actuarial Control Cycle (ACC) is a model that can be applied to many aspects of actuarial work.
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.
What makes the ACC a ‘control cycle’?
The term ‘cycle’ and the use of two-way arrows in the diagram, highlights the importance of monitoring and feedback, and the inter-relationship between elements of the cycle.
The feedback mechanism isn’t an automatic process. It requires the actuary to exercise professional judgement.
What makes the ACC ‘actuarial’?
The ACC 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 time horizon, but decisions to be made in the short term in the light of likely future outcomes.
* the recognition of stakeholders’ requirements and risk profiles
* 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 medlling to enable practical strategies to be developed
* monitoring and periodically analysing the emerging experience in order to update models and strategies
* the application of professional judgement.
What does the ‘specifying the problem’ stage of the ACC involve?
- Setting out clearly the problem from the point of view of each stakeholder
- Assessing and analyzing the risks for each stakeholder
- Considering the strategic courses of actions available to mitigate the particular risks in question.
- Analyzing the options for designing solutions to the problem to transfer risk from one set of stakeholders to another.
This stage requires thorough analysis and understanding of the nature, scope and potential impact of the problem to facilitate effective decision-making in subsequent stages of the ACC.
What does the ‘Developing the solution’ stage of the ACC involve?
Model Construction
* An examination of the major actuarial modles currently in use and how they may be adjusted for the particular problem
* Selection of the the most appropriate model to use for the problem, or construction of a new model
* Considerations and selection of the assumptions to be used in the model.
Model Restuls
* 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.
What does the ‘monitoring the experience’ stage of the ACC involve?
- Analyze periodicall the actual experience against expected
- Identifying the causes of departure from the expected experience and determining whether each source is one-off or likely to recur
- Feeding back into the specifying the problem and developing the solution stages of the ACC
- Making sure the model is ‘dynamic’ (i.e. assumptions are consistent) and reflects current experience.
Monitoring should be carried out regularly. For a new contract, where there is lots of uncertainty, monitoring should take place more frequently initially.
List 10 applications of the ACC in actuarial work
- Asset-liability management
- Monitoring the effects of investment mismatching
- Considering insurance and reinsurance options
- Determining the profitability of the contract
- Considering the need for and calculation of provisions
- Determining the solvency levels
- Assessing capital requirements
- Determining premiums / contributions
- Assumption setting for contract / scheme design
Outline why the ACC is suitable for use in risk management
Risk management also invovles the following cyclical process:
* analyzing situations, products and projects to determine the risks to which they are exposed
* quantifying the financial consequences of the risk events occurring
* considering and quantifying appropriate methods for managing, mitigating and transferring the risks
* monitoring the situation and the risk management procedures implemented as time develops
* modifying or changing the risk management approaches adopted over time, in light of emerging experience.
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 in developing the solution
- Selecting Appropriate Actuarial Models
- Appropriate Assumptions
- Implications for all Stakeholders
- Determine a Proposed Solution and Alternatives
Investment risk
The uncertainty associated with the outcome of making an investment.
(They might, for example, use variance of return as a measure of investment risk)
Credit risk
The risk that a person or an organisation will fail to make a payment that they have promised
(An example of credit risk for corporate bonds would be the failure to make interest payments on set dates or failure to repay the face value of the bond on the redemption date.)
Market risk
Risks related to changes in investment market values
Mortality Risk
Mortality refers to the likelihood of death. Mortality risk may be defined as there being more or less deaths than expected or priced for.
(In life insurance, for whole of life products there is a risk of higher mortality than expected (more deaths) and for annuity products there is a mortality risk of fewer deaths than expected (longer lifespans).)
Inflation risk
Risk of real liabilities being larger than anticipated due to inflation.
(e.g. of salaries, consumer prices, medical costs, court awards)
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 (e.g. due to higher than expected mortality or morbidity rates)
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
The risk of loss due to fraud or mismanagement within the organisation itself
External risk
The risk arising from external events, e.g. changes in legislation.
Possible solutions to mitigte risk
- avoiding
- accepting and minimizing
- sharing
- transferring risk together with ongoing monitoring
