Chapter 1-Actuarial advice Flashcards
- List 16 clients in the private sector whom actuaries advise or provide information to.
There are many clients whom actuaries can advise or provide information to. In the private sector these include: • policyholders • prospective policyholders • members of benefit schemes and their dependants • employers • insurance company - board of directors • insurance company - shareholders • insurance company creditors • trustees of benefit schemes • sponsors of benefits schemes • employees • auditors of insurance companies • auditors of the sponsors of benefit schemes • investment fund managers • members of investment schemes • sponsors of capital projects • banks.
- Describe the public sector clients actuaries may advise.
In the public sector actuaries advise government departments and related organisations, such as central banks and regulatory bodies. As in the private sector, advising actuaries might be employees of the relevant organisation, or independent consultants.
- In giving actuarial advice, what is important to identify in relation to the stakeholders involved, and why?
It is important to identify all the stakeholders involved when any actuarial advice is given. In most circumstances different categories of stakeholder have different interests. In most situations one or more stakeholders will remunerate the actuary, but there will be several other stakeholders with significant interests who do not contribute directly to the actuary’s remuneration.
In many cases the advice given to a client by an actuary will impact on other stakeholders. The actuary needs to consider the interests of all stakeholders, and not only those who seek (and pay for) advice.
It is important to consider all stakeholders because omitting a stakeholder will distort the context, eg one stakeholder’s risk can be a source of another stakeholder’s gain.
It is also necessary to retain a sense of proportion in considering who else may be affected by advice given.
- Where an actuary is advising the board of directors of an insurance company, which is planning a large expansion in business, who else may that advice have an impact on?
- the level of benefits that the company’s policyholders receive
- the level of premium charged to the company’s new and existing policyholders
- the level of dividend that the shareholders of the insurance company receive
- the volume of new business the company can write
- the level of taxes that the government receives on the profits earned by the company
- other insurance companies that are competing in the same market
- reinsurance companies through the level of reinsurance business that the company requires
- the employees of the insurance company through the employment benefits they receive
- job security for the employees of the insurance company
- the work of the regulatory authorities that monitor the insurance company
- other insurance companies who may be required by legislation to contribute to a compensation scheme that pays benefits to the policyholders of insurance companies that fail
- employed sales staff and independent intermediaries.
5.1 Outline the interests on which actuaries may provide advice for the following stakeholders: policyholders and prospective policyholders.
- personal protection against death and illness
- protection of property
- investment
5.2 Outline the interests on which actuaries may provide advice for the following stakeholders: members of the benefit schemes and their dependants.
the provision of benefits on future events such as death, retirement, illness and withdrawal.
5.3 Outline the interests on which actuaries may provide advice for the following stakeholders: employers.
- protection against financial loss arising from the death or il l-health of employees
- protection of assets
- provision of work-related benefits that will attract and retain good quality staff
- meeting legislative requirements
- managing the costs of running the business
- quantification of the amount of surplus capital in the business
- investment of surplus capita l.
5.4 Outline the interests on which actuaries may provide advice for the following stakeholders: insurance company - 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
- meeting policyholders’reasonable expectations
- good corporate governance
- obtaining appropriate and adequate reinsurance to protect the business.
5.5 Outline the interests on which actuaries may provide advice for the following stakeholders: insurance company - shareholders.
obtain a good return on their investment that appropriately reflects the level of risk that has been taken.
5.6 Outline the interests on which actuaries may provide advice for the following stakeholders: insurance company - creditors.
the certainty that the monies owed to them will be paid.
5.7 Outline the interests on which actuaries may provide advice for the following stakeholders: trustees of benefit schemes.
- managing the assets of the scheme
- paying the benefits promised under the scheme as they fall due
- maintaining solvency.
5.8 Outline the interests on which actuaries may provide advice for the following stakeholders: 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.
5.9 Outline the interests on which actuaries may provide advice for the following stakeholders: employees.
- provision of protection benefits on death or sickness
- provision of pension benefits on retirement
- investment of surplus personal funds.
5.10 Outline the interests on which actuaries may provide advice for the following stakeholders: auditors of insurance companies (sponsors of benefits schemes).
advice on the assessment of provisions (future liabilities).
5.11 Outline the interests on which actuaries may provide advice for the following stakeholders: investment fund managers.
advice on investment strategy, particularly taking into consideration the need to meet liabilities.
5.12 Outline the interests on which actuaries may provide advice for the following stakeholders: members of investment schemes.
how to invest in order to meet specific liabilities or objectives, such as saving for retirement.
5.13 Outline the interests on which actuaries may provide advice for the following stakeholders: sponsors of capital projects.
- assessment of the risks underlying the project
- consideration of potential risk mitigation techniques
- evaluation of the future cashflows.
5.14 Outline the interests on which actuaries may provide advice for the following stakeholders: banks.
- the provision of investment and savings products and the use or investment of surplus funds.
- monetary strategy.
5.15 Outline the interests on which actuaries may provide advice for the following stakeholders: government
• 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
• funding benefit provision by the State
• monitoring the funding of benefit provision by the State
- Explain why and how certain factual information about the client should be sought in order to give advice.
Such advice will often set out alternative solutions and the implications of each solution. These solutions must always be relevant to the particular circumstances of the client.
In many cases the client will give a brief to, or agree terms of reference with, an actuary without specifying the client’s particular position. This is normally not because the client is trying to hide information, but because the client is so knowledgeable about their own position that they inadvertently thinks everyone else is well informed.
It is important that before starting analysis of the problem, the actuary is fully briefed about the client. There will be a significant amount of information in the public domain, for example information in any company accounts or similar publications. Many clients also have web sites that contain important information. Before starting on the specific task, the actuary should research and assimilate such information. This exercise might then require a follow-up pre-project meeting with the client to ensure that their position has been fully understood.
- In giving advice, what should the actuary be aware of and what should he try to avoid happening?
At all times the actuary should be aware of any conflict of interest. An example of when a conflict of interest could arise is when an actuary is advising both the trustees and the sponsor of a benefit scheme. The primary concern of the trustees will be the security of members’ benefits whereas the employer will also be concerned about costs.
- Explain why subjective attitudes of clients - especially towards risk - are relevant to an actuary giving advice.
As well as the factual information referred to in the previous section, there is a wealth of subjective information that the actuary needs to assimilate before giving advice. As with the information discussed in the previous section, if the actuary is not aware of information regarding the client’s background, ethical position and culture, there is a risk that the advice given will be inappropriate.
Corporate bodies have a risk appetite, which is essentially driven by the risk appetite of their stakeholders, particularly their owners.
Corporate bodies frequently describe their risk appetite openly in the annual accounts or other published statements.
It is also important for the actuary to be aware of the general style and culture of the client. This is often best achieved by an initial meeting at the client’s premises, or the opportunity for a more general discussion with the client in a less formal session than a business meeting.
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- Describe the three types of advice that can be given by an actuary.
- indicative advice - giving an opinion without fully investigating the issues - for example in response to a direct oral question
- factual advice - based on research of facts, eg legislation
- recommendations - researched and modelled forecasts, alternatives weighted, recommendations made consistent with requirements, work normally peer-reviewed.
- Who else may need to be involved in providing the advice?
There will also be occasions when other professionals need to be involved in providing the advice, such as accountants or lawyers.