Chapter 1, 2 - Professionalism & Stakeholders Flashcards
Professional role of an actuary to stakeholders:
Actuaries help stakeholders to - IDENTIFY - ANALYSE - MANAGE - and MITIGATE the FINANCIAL RISKS they face.
What are actuaries’ main jobs in the financial industry?
- assess,
- quantify,
- manage,
- monitor,
the risks inherent in:
- financial structures,
- products,
- schemes,
- contracts,
- transactions that provide benefits on future financial events.
Skills necessary to perform the actuarial role (ACC):
DEVELOP THE SOLUTION
- PROJECT and discount future cashflows using assumptions
- Use ECONOMIC ANALYSES to form judgements about future inflation and interest rates
- handle ASSUMPTIONS in a critical manner,
- build appropriate MARGINS into assumptions and appreciate the impact of such margins,
- Build, parameterise, test and implement MODELS,
- Use data relating to future LIABILITIES to estimate payments that need to be met
- handle DATA in a critical manner.
MONITOR THE EXPERIENCE
- manage the ACCUMULATION of assets to meet future liabilities.
- monitor the progress of the ACCUMULATION of a fund,
- manage the VARIANCE in the progress of a fund to ensure that future liabilities are met
- calculate the CONTRIBUTIONS required to build up a fund over time to meet future liabilities,
- analyse the variation between the actual and expected EXPERIENCE,
- advise on REINSURANCE and other risk transfer mechanisms,
- contribute to decisions on INVESTMENT POLICIES aimed at meeting future liabilities.
Roles of actuaries as professionals in the workplace & with govt.
- participate with govt. in SHAPING LEGISLATION that affects financial structures, products, schemes, contract and transactions that provide benefits on future financial events;
- understand when & where the expertise of other professionals is needed and work with them to SOLVE PROBLEMS,
FUZZY STUFF:
- operate within an environment that requires professionalism, scrutiny & transparency in the disclosure of information,
- apply the highest standards of independence and due diligence to protect the public interest. There should be no conflict of interest for an actuary in working for a client and at the same time serving the public interest.
- communicate the results of all his/her work.
Statutory roles of actuaries
Mainly relate to the certification of the adequacy of the valuation of assets and liabilities for a financial institution eg. life insurer, general insurer or pension scheme.
Certify:
- proper RECORD being kept for valuing liabilities
- proper PROVISION for liabilities made
- PREMIUMS / contributions for future years will be sufficient, to meet commitments.
- Assets/liabilities are valued in accordance with any legislative rules
- liabilities valued in the context of the assets, which are valued according to the appropriate rules
- statement of the difference btn assets and liabilities
- He/she has complied with professional guidance.
6 principles of the Actuaries’ Code
- integrity
- impartiality
- communication
- competence and care
- compliance
- speaking up (whistleblowing)
SAP vs APN
- Standard Actuarial Practice is compulsory to follow and failure to do so may result in a disciplinary process
- Actuarial Practice Notes are guidelines and any departures from it must be outlined
Proportionality Definition
Work performed must be proportionate to:
- Scope of the decision/assignment it relates to
- Benefit users expect to obtain from the work
Materiality Definition
Matters are material if they could
… individually or collectively …
INFLUENCE the DECISIONS to be taken by users of the related actuarial information.
Assessing materiality is a matter of reasonable judgement which requires consideration of the users and the context in which the work is performed and reported.
3 groups of principles when considering the application of a principle in TAS
- Principle is not applicable
- Is applicable but its inclusion is not material to the decision
- Is applicable and its inclusion is material to the decision.
Professionalism
Way in which an actuary carries out the work and presents the advice resulting from the use of the skills acquired.
Requirements to operate as a professional actuary in the workplace with coworkers & clients:
- recognises VIEWS of others
- detachment from own circumstances
- acts with INTEGRITY
- good COMMUNICATOR
- gives sound ACTUARIAL ADVICE (due to competence and skills)
- develops a direct, personal and trusting RELATIONSHIP with client (to suitable solutions).
Knowing the client
- Sufficient BACKGROUND about the client to put the task into context -> info. in the public domain eg. accounts, websites
- Have a pre-project meeting with the client
- Actuary should consider RISK APPETITE & CULTURE of the client
- Aware of CIRCUMSTANCES & OBJECTIVES of the client
- Aware of any potential CONFLICTS of interest within the actuarial firm
Procedure for completing a task at work
- agree exactly WHAT “the task” is; problems to be addressed
- gather & assess available INFORMATION
- decide on a METHOD
- set ASSUMPTIONS
- arrive at “the SOLUTION(s)”
- check the SOLUTION
- COMMUNICATE the answer
Questions to ask before embarkation on a task
- How will the results be REPORTED & to whom.
- What will the IMPLICATIONS of results be & for whom.
- How will implementation of the results of proposals be MONITORED?
- What can be learnt from the actual outcomes compared with those expected?
- What RESOURCES are required?
- Is the TIMESCALE for task completion reasonable?
- What EXPERTISE is required?
- Will the advice be used for EXECUTIVE action or is it purely advisory?
Issues regarding “what is the problem?”
- WHO owns the problem
- WHAT are the questions that need answering?
- CAN it be broken down into smaller problems?
- WILL answers be relevant in finding an optimal solution to the problem?
Considerations when “checking the answers”
- Do the answers look reasonable?
- Do the sensitivity tests applied to the answers look reasonable?
- What range of answers is consistent with the level of confidence associated with the assumptions made?
- Has a peer reviewed the answers?
4 Drivers promoted by the Actuarial Quality Framework
- Methods (reliability and usefulness of actuarial methods)
- Actuaries (technical skills of actuaries and ethics and professionalism of actuaries)
- Communication (communication of actuarial information and advice)
- Environment (working environment for actuaries and other factors outside the control of actuaries)
Possible clients whom actuaries can advise (private sector)
INSURANCE COMPANY:
- prospective policyholders
- policyholders
- board of directors
- shareholders
- creditors
- auditors
- employees
- employers
BENEFIT SCHEMES:
- members and their dependants
- trustees
- sponsors
- auditors of the sponsors
OTHER:
- investment fund managers
- members of investment schemes
- sponsors of capital projects
- banks
Issues on which actuaries can advise policyholders
- personal protection against death and illness
- protection of property
- investment
Issues on which actuaries can advise members of benefit schemes and their dependants
- provision of benefits on future events such as death, retirement, illness and withdrawal
Issues on which actuaries can advise employers
PROTECTION
- against financial loss arising from the death or ill-health of employees
- of tangible assets
- of intangible assets
PROVISION
- provision of work-related benefits that will attract and retain good quality staff
BUSINESS
- meeting legislative requirements
- managing the costs of running their business
- quantification of the amount of surplus capital in the business
- investment of surplus capital.
Issues on which actuaries can advise insurance companies - board of directors
- meeting LEGISLATIVE REQUIREMENTS for the management of the business
- investing and managing the ASSETS of the company
- managing the LIABILITIES of the company
- determining the levels of PROVISIONS to hold to meet future liabilities
- setting PREMIUM RATES
- ensuring that policy proceeds are paid
- meeting policyholders’ reasonable expectations
- meeting the demands of shareholders
- good corporate GOVERNANCE
- obtaining appropriate and adequate REINSURANCE to protect the business
Issues on which actuaries can advise insurance company shareholders
- obtaining a good return on their investment commensurate with risk.
Issues on which actuaries can advise insurance company creditors
- Certainty that the monies owed to them will be paid
Issues on which actuaries can advise trustees of benefit schemes
- managing the assets of the scheme
- paying the benefits promised under the scheme as they fall due
- maintaining solvency
Issues on which actuaries can advise sponsors of benefits schemes
- providing protection benefits that meet the needs of the members and their dependants
- providing retirement benefits that meet the needs of the members
- managing the cost of providing the benefits
- meeting legislative requirements
Issues on which actuaries can advise employees
- provision of protection benefits on death
- provision of pension benefits on retirement
- investment of surplus personal funds
Issues on which actuaries can advise auditors of insurance companies
- assessment of long-term liabilities for life insurance companies
- assessment of long-tail claims reserves for general insurers.
Issues on which actuaries can advise auditors of the sponsors of benefit schemes
- assessment of the future liability to pay benefits.
Issues on which actuaries can advise government
LEGISLATION
- setting legislation that impacts on the provision of financial products, schemes, contracts and transactions that provide benefits on future financial events
- Monitoring the adherence to this legislation
BENEFIT PROVISION
- Funding benefit provision by the State
- Monitoring the funding of benefit provision by the State.
Issues on which actuaries can advise the regulator
- ensuring that regulatory requirements are met.
3 types of advise that can be given
- indicative advice
- factual advice
- recommendations
indicative advice
giving an opinion without fully investigating the issues (ex. responding to a direct oral question)
factual advice
based on research of facts, e.g. legislation
recommendations
researched and modelled forecasts, alternatives weighted, recommendations made consistent with requirements.
In giving advice, actuaries should:
- set out alternative solutions and the implications of each solution on both the client and on other affected stakeholders
- outline the assumptions made than the reasons for making them
3 Basel II risk categories
- market risk
- credit risk
- operational risk
Corporate structure of mutuals
- no shareholders
- better benefits for the same cost
- can’t readily raise finance by usual methods
- certain products may be restricted or more highly priced (especially those that are capital intensive)
- product pricing is either “at cost” or takes allowance for surplus distribution to with-profit policyholders
Proprietary / Public Companies
- Easier access to capital markets for finance
- Economies of scale
- More dynamic management
The underwriting cycle relates to
- profitable business leading to new entrants, greater competition, “soft” premium rates and reduced profits,
leading to: - insurers leaving the market or reducing their involvement, increased premium rates or loss of business or reduced solvency and the need for capital.
In giving actuarial advice, what are the considerations to make wrt. the stakeholders involved?
Important to identify that:
- Stakeholders involved all have different interests
- Need to think of stakeholders with significant interests regardless of whether they remunerate the actuary
- Omitting a stakeholder’s interests might distort the context e.g. one stakeholder’s risk can be a source of another stakeholder’s gain
- Necessary to retain a sense of proportion when considering who else may be affected by advice given
- Need to consider vulnerable stakeholders.
