Chapter 1: Professionalism Flashcards

1
Q

Jobs that actuaries do

A
  1. Actuaries LOOK AT RISKS.
    They assess, quantify, manage and monitor them.
  2. Actuaries BUILD AND TEST MODELS that project and discount cashflows.
    To do this actuaries need to be able to
    … handle data,
    … use economic and demographic analyses to estimate assumptions
    … and decide on margins.
  3. Actuaries MANAGE FUTURE LIABILITIES.
    They advise on contribution rates,
    … premium rates and
    … on investment strategy.
  4. Actuaries MONITOR EXPERIENCE.
    They compare actual with expected experience,
    … analyse any variation and
    … manage the variation over time.
  5. Actuaries WORK WITH OTHER PROFESSIONALS and understand when to refer to others.
    They should:
    - communicate well,
    - avoid conflicts of interest and
    - encourage transparency in the disclosure of information.

Actuaries may work with the government to shape legislation and protect the public interest.

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2
Q

Statutory roles reserved only for actuaries

A
  • Actuary must ensure that PROPER RECORDS have been kept
  • and that PROPER PROVISION for the liabilities have been made.
  • The liabilities must be valued in the context of the assets and in accordance with legislation and professional guidance.
  • A statement of surplus must be produced.

The actuary must confirm that (in his view):
… premiums or contributions are adequate
… given reasonable assumptions and free assets
… to meet the liabilities

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3
Q

Responsibility of the government actuary

A

the government actuary is primarily concerned with

  • occupational pension schemes
  • public sector pensions arrangements
  • pensions policy and regulation in general.

It is also concerned with

  • social security
  • regulation and supervision of insurance companies.
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4
Q

What does being “a professional” mean?

A
  • taking personal responsibility for actions
  • acting with integrity and detachment from personal circumstances
  • developing a trusting relationship with the client
  • recognising that others have valid views
  • achieving, demonstrating and maintaining competence in specialist field
  • being reliable, i.e. producing good quality work on time.
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5
Q

What does an actuary need to know about a client before undertaking a professional task?

A
  • for whom they are working in the company
  • background information on the client
  • whether there are any conflicts of interest
  • be aware of what complaints procedures are in place
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6
Q

How can conflicts of interest be avoided?

A
  • keep detailed records of assignments
    if possible, decline one of the assignments causing the conflict.

However, it may be difficult to avoid a conflict of interest. In such cases:

  • disclose the conflict of interest to the parties concerned
  • establish chinese walls to seperate data and staff
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7
Q

Frequent conflict of interest

A

Between a client and a client’s customers.
In the financial world, there may be legislation to ensure that providers of financial products consider the interests of their customers.

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8
Q

When carrying out an actuarial task, what are the 10 broad areas that any actuary should consider?

A
  • Exactly who the client is, and whether there are any conflicts
  • Exactly what the problem is, and how it can be broken down
  • Agreeing the scope of the problem with the client
  • The understanding and competence of the actuary
  • The data, assumptions and the methodology used
  • checking the results produced
  • how to report and communicate the results
  • the implications of the results
  • the implementation of the results
  • professionalism
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9
Q

What things should the actuary bear in mind when communicating results?

A
Make sure that the CLIENT UNDERSTANDS the results and listens. 
So present the results clearly and
- pitch them at the right level.
Include background information such as 
- data issues, 
- assumptions, 
- methodologies
-  and risks (but don't let it dominate)

Demonstrate how the results can be used to give an optimal solution.
It may be necessary to state where the clients initial brief ends, or to issue a health warning to say that the advice is only fit for a specific purpose and is not appropriate in other circumstances.

Ensure that relevant professional guidance should be complied with

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10
Q

What are the 5 stages of the Actuarial control cycle?

A
  • specifying the problem
  • developing the solution
  • monitoring the experience
  • the general economic and commercial environment
  • professionalism
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11
Q

“Specifying the problem”

A

You should specify an example objective,

  • identify various risks and
  • suggest possible courses of action for handling these risks.
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12
Q

“Develop the solution”

A

Talk about models.

  • Suggest an APPROPRIATE MODEL to use and give examples of the assumptions needed.
  • You would need to consider the IMPLICATIONS of the model results on all stakeholders.
  • You may want to suggest ALTERNATIVE SOLUTIONS
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13
Q

“Monitor the experience”

A

This involves making the model dynamic:

analyse the differences between actual and expected experience
—–and whether such differences are one-off or recurring

FEEDBACK into the actuarial control cycle, e.g. updating the assumptions or respecifying the problem.

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14
Q

List Stakeholders in Insurance Company

A
Competitors
Auditors
Pension scheme (Potential/Existing)
Employees
Regulator
Existing/potential Policyholders
Directors
Potential purchasers
Intermediaries
Creditors
Shareholders
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15
Q

List Stakeholders in DB Scheme

A
Accountants
Taxpayers
Auditors
Creditors 
Trustees 
Sponsors 
Government
Administrators
Members
Employees
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16
Q

List the External Environment Factors

A
Commercial Issues
Regulation and Legislation
Environmental issues
Accounting Standards
Tax
Economic Issues (e.g. inflation/int rates)
Governance
Risk management requirements
Experience from overseas
Adequacy of capital
Trends - demographic
Lifestyle Considerations
Institutional Structure (mutual/proprietary)
Social trends
Tech
State benefits
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17
Q

3 Types of Advice from Actuary

A

Indicative - Giving opinion without fully investigating the issue

Factual - Based on research of facts e.g. legislation

Recommendations - Consistent with requirements after doing research/modelling

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18
Q

Potential Conflicts of Interest

A

Regulatory authority (notify them if client if acting in way that would prejudice customers)
Independence (should be independent from each side)
Specialists (if their company is specialists they may be working both sides)
TCF (customer/client interests)

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19
Q

Professional jobs require what?

A
Professional Manner
Reliability
Others views are valid
Familiarity with clients and needs
Engender trusting - direct and personal relationship
Competence
Conflicts of
Interest - 
No jargon, clear communication
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20
Q

How do you manage C of I

A
Disclosure to both parties
Records of work assignments
Avoid them
Whistle blowing if TCF ignored
Chinese
Walls
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21
Q

3 Parts of Actuarial Control Cycle

A

Specify Problem
Monitor
Develop Solution

22
Q

What do Statutory roles involve?

A

Statement of A/L
Compliance with professional guidance
Assets and Liability valn with legisln
Liability valuation in context of assets
Provision for liabilities
Ensuring premiums/contributions sufficient to meet future commitments considering free assets
Records should be accurate and kept for liability valuation

23
Q

Expand on 1st part of ACC

A

Analyse
Stakeholders (the risks of them)
Set out clearly the problem from each point of view

Risk
Assesment and
Managing (it gives clear assessment of them)

Sub
Cycle to determine price of plans
Alternate
Risk
Tranfer - analysis for design of plans transferring risk from one stakeholder to another
24
Q

Expand on 2nd part of ACC

A

Interpret results of modelling
Determine proposed solution to problem
Examine if the actuarial models used can be adapted
Select the most appropriate model or new one
Proposal formalise
Alternative solution considerations and effects
Implication of model…
Results on overall problem
Stakeholder implications from results

25
Q

Expand on the 3rd part of the ACC

A

Feedback into problem spec and soln dev stage
Reccurence of departures from target outcome
Updating the..
Investigation
Departures of the target outcome of models are identified
Experience is monitored and investigation updated for that

26
Q

What are the principal aims of regulation?

A

Inefficiency in markets (correct perceived)
Confidence maintaining in financial system
Efficient market promotion

Maintain confidence in financial system
Orderly rake promotion
Prevent and reduce financial crime

27
Q

What are the 5 types of regulation?

A
Mixed regimes
Unregulated 
Self regulation
Statutory
Voluntary cods of conduct
28
Q

Advantages of self regulation?

A

Rapid response to changes in market needs is possible theoretically
Implemented by people with greatest knowledge of market who have great incentive for optimal cost benefit ratio
Cooperation with self regulator more likely than government bureaucracy

29
Q

Main problems with self regulator

A

3rd parties views are less likely to be taken into account rather than industry point of view
Closeness of regulator to industry
Inhibit new entrants is possible
Low public confidence even if regime operating efficiently and effectively

30
Q

Advantages of statutory regulation?

A

Confidence is higher from public
Open to less abuse than alternatives
Economies of scale may be achieved by grouping activities by function and not type of business

31
Q

Disadvantages of statutory regulation

A

Costly
Inflexible
Rules that are unnecessary costly and do t achieve aims may be implemented by outsiders
Crap
Efficiency, attempts to improve market efficiency by government

32
Q

What ae the 5 type of financial products (contracts)?

A
Derivatives
Reinsurance contracts
Investment schemes
Pension schemes
Insurance contracts
33
Q

What are the types of needs?

A

Future, relate to future aspirations
Logical, determined by analysis and prioritisation
Emotional, what customer thinks/wants to be necessary rather than needs
Current, has an immediate effect on circumstances

34
Q

How can we summarise a consumers logical needs?

A

Protection eg. Against death
Unknown, accumulation for unknown purpose out of remaining income or capital eg. Take advantage of tax regime
Known, accumulation for known purpose eg. Retirement income

35
Q

Which people can provide benefits for individuals?

A

Financial institutions or other corporations
Individuals
State
Employers or groups of them

36
Q

What ways can the state play a role in benefit provision, which of them are financial?

A

Regulate to encourage/compel provision by or on behalf of some of population,
Educate/require education about importance of providing for the future,
Direct provision
Regulation of provision from other providers
Encourage provision
Security, ensure promises made are kept to through regulation of bodies providing benefits,
Some or all of the population provided with benefits,

37
Q

Give examples of the state providing benefits?

A
Pensions
Statutory sick pay
Protection for dependants on death
Savings plans eg NSandI
State bank
Gilts
38
Q

Why would an employers provide benefits?

A

Pooling of expenses and expertise
Encouragement or compulsion from state
Retain and attract good staff
Dependants, desire to look after employee and dependants above state benefits level

39
Q

How can employers play a role In providing benefits?

A

Educate
Compel or encourage
Orderly financing of benefits for employees
Schemes, like pension schemes, provide facility for provision of benefits

40
Q

How does a flexible benefit system meet needs of different employees?

A

Groups, different groups of people select benefits relevant to them
Menu of different benefits offered
Changing benefits is possible as circumstances change
Cost of changes and new benefits is small to the employer

41
Q

What 3 ways can an employer finance a flexi benefit scheme?

A

Employer alone
Employer and employee, subject to legislation
Employers grouped together,usually same industry, be careful about defined benefits due to problems in bankruptcy

42
Q

What ways can an individual provide benefit provision?

A
Savings, for example salary
Pooling finances with a group e.g. Religious organisations
Accumulation of property
Continuing care retirement communities
Equity release schemes
43
Q

Being a Professional

A
  • Need to be reliable – in particular delivering the work that meets the clients requirements in terms of detail, quality and timeliness
  • What level of detail/information is required?
  • Does the timescales look reasonable – when does client want the info?
  • Need to also recognise other stakeholders and what is in the public interest
44
Q

Know your client

A

Need to have sufficient background about client
• What products does it sell
• What is it looking to buy
• What expertise does it have

45
Q

Conflicts of Interest

A
  • Need to consider whether consultancy advises any of the possible counterparties
  • It is important that there are different advisors who are independent particularly if they are analysing the same data
  • Consider whether “Chinese walls” or other procedures could reduce the possible conflicts
  • Need to ensure that any price sensitive information is correctly protected
  • Also need to consider the incentives for the consultancy – i.e. is commission based on selling the targets, leading to them suggesting the targets that could generate the most revenue for the consultancy
46
Q

The Task

A
  • Need to consider how recommendations will be presented back to the insurance company (i.e. formal presentation of possible actions in a report)
  • What resources are required to assess counterparties/variables?
  • What will the implications of the results be and for whom – will this lead to impacts on the customers and/or job losses
47
Q

What is the problem?

A

The consultant needs to understand the scope of the task: constraints, definitions.

48
Q

Answering the Questions

A
  • The consultant needs to have access to all the relevant factors.
  • Where sufficient facts are not available – will need to mention to client when giving recommendations
  • Also needs to understand who will review the work – will suitable client team review internally?
49
Q

Assumptions

A

Any assumptions made on the possible targets need to be determined and explained to the client (e.g. growth expectations)

50
Q

Methodology

A

The methodology will need to be determined

51
Q

Communication of the answers

A
  • Client needs to understand the recommendations, hence the results need to be clear
  • Assumptions, areas of risk and uncertainty should also be clearly presented
  • Need to consider any professional guidance and regulation
  • Need to ensure that they are answering questions within their expertise
  • And seek guidance from others if required
  • Ensure that adequate documentation is kept on the work being done
52
Q

Checking the answers

A
  • Answers will need to be reviewed to ensure the decisions look reasonable.
  • Will a range of possible solutions be offered with differing sensitivity analysis attached