CIA - FCT1 Flashcards
What is the purpose of stress testing? (4)
- identify & control RISK
- provide a COMPLEMENT to other risk management tools + simulate shocks
- support CAPITAL MANAGEMENT
- improve LIQUIDITY MANAGEMENT
Describe Risk ID and Risk Control with regards to the purpose of stress testing.
RISK ID: identify concentrations & interactions of risk
RISK CONTROL: adjust individual portfolios and overall business strategy
Describe Complementing other tools with regards to the purpose of stress testing.
- to test the statistical models USED to determine Value-at-Risk
- simulate SHOCKS to test a model’s robustness to economic changes
Describe supporting Capital Management with regards to the purpose of stress testing.
To identify SEVERE events and/or COMPOUNDING events that impact capital requirements.
Describe improving Liquidity Management with regards to the purpose of stress testing.
To ASSESS liquidity profile & adequacy of buffers FOR institutional & market-wide stresses.
Identify the elements of FCT (Financial Condition Testing) (5)
1) BASE scenario
2) Adverse Scenario
3) Corrective Action
4) Report
5) Opinion
Describe FCT process step 1 - Base Scenario
Base Scenario: must develop a base scenario (usually is, or is based on, the insurer’s current business plan)
Describe FCT process step 2 - Adverse Scenario
Adverse Scenario: Must analyze the impact of several adverse scenarios
Ex.: drop in the stock market
Describe FCT process step 3 - Corrective Action
Corrective Action: Identification and analysis of corrective management action to mitigate risk
Describe FCT process step 4 - Report
Report: Submit recommendations to management and the board of directors (or Chief Agent)
Describe FCT process step 5 - Opinion
Opinion: Appointed Actuary (AA) signs an opinion regarding the financial condition of the insurer
Identify key metrics that must be understood when performing FCT (2)
- regulatory capital minimum
- insurer’s internal target capital requirements
Identify the ‘preliminary’ step and the ‘extra’ step in addition to ‘BACRO’ when performing the FCT
Preliminary - Review the financial condition at year end for each year in the historical period
Extra - identify possible regulatory action
What is a review of operations and financial position?
- review the B/S, the Statement of Income, and the source of earnings for an appropriate amount of years
- analyze any trends in the these numbers
What is the forecast period for the FCT?
The forecast period should be long enough to capture:
1) risk emergence
2) financial impacts
3) ripple effects
4) corrective action
- > Generally, this means 3-5 years; although, there is no minimum (should also be consistent with ORSA)
How do you determine the Materiality Standard for FCT?
FCT sets the materiality standard with management input and by specifically considering:
- the size of the insurer
- the insurer’s financial position
- the nature of the regulatory test
Define the term Base Scenario.
A set of assumptions on risk factors that are consistent with the business plan over the forecast period (if the plan is realistic and consistent).
Define the term Adverse Scenario.
A scenario that is developed by stress-testing assumptions used in the business plan.
- look specifically for risk factors that threaten financial condition
Define the term Solvency Scenario.
A plausible adverse scenario (an adverse scenario that has a non-trivial probability of occurring).