CIA.FCT-1 Flashcards
What is the forecast period for FCT
Forecast period should be long enough to capture:
(1) risk emergence
(2) financial impacts
(3) ripple effects
(4) corrective action
How do you determine the materiality standard for FCT
FCT sets the materiality standard with management input and by specifically considering:
- size of insured
- financial position
- nature of regulatory test
Define the term base scenario
a set of assumption on risk factors that are consistent with the business plan over the forecast period
Define the term adverse scenario
a scenario that is developed by stress-testing assumptions used in the business plan
Define the term solvency scenario
a plausible adverse scenario:
- should fall above the 95th percentile on the loss distribution
- or possible as high as the 99th percentile and beyond depending on circumstances
Define the term going-concern scenario
an adverse scenario that is more likely and less severe than a solvency scenario:
- should fall above the 90th percentile on the loss distribution
What is a ripple effect
an event that occur when an adverse scenario triggers a change in 1 or more inter-dependent assumptions
What is an integrated scenario for FCT
a scenario created by combining 2 or more risks factors to produce a new plausible adverse scenario
Identify considerations in the development of a climate change scenario (3)
Physical risk: frequency and severity of wildfires, floods, winds events, rising sea levels
Transition risk: due to the economic shift to greener technologies
Liability risk: exposure to climate-related litigation
When is a stochastic FCT model appropriate (2)
Risks where statistical loss distribution may be inferred
Risks related to capital markets
When can the actuary report that the insurer is in satisfactory condition (3 conditions)
(1) under the base scenario: insurer meets it internal target capital ratios as determined by ORSA
(2) under the going-concern scenarios: insurer meets the regulatory minimum capital ratios
(3) under solvency scenarios: must have assets > liabilities
Possible types of opinion the AA could include in the FCT report
- Satisfactory
- Satisfactory subject to appropriate corrective action (AA must be comfortable)
- Not satisfactory
How many adverse scenarios should an FCT report include
at least 3, including 1 going-concern scenario and 2 solvency scenarios
(multiple risk categories)
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Frequency and severity risk
Causes:
- catastrophe
- large claim
Ripple effects:
- loss of reinsurance for remainder of term
- increase in reinsurance rates or non-availability of reinsurance at the next renewal
Corrective management actions:
- reviewing reinsurance coverage, type, or contract terms at renewal
- implementing rate increases
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Liabilities for incurred claims
Causes:
- selection of inadequate loss development factors
- class actions and other mass torts effective retroactively
Ripple effects:
- reduced CSM or increased LC
- rating agency downgrade
Corrective management actions:
- reviewing reserving and claim settlement practices
- implementing rate increases
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Inflation risk
Causes:
- severe recession in the economy
- significant, rapid, and sustained increase in the general rate of inflation
Ripple effects:
- a rapid and sustained increase in market interest rate (to bring down inflation)
- increase in operating expenses
Corrective management actions:
- implementing rate increases
- reviewing types of product offered
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Business volume significantly lower than the base scenario
Causes:
- entry of a new and strong competitor in the market
- inability to implement planned premium rate increases
Ripple effects:
- higher expenses (marketing)
- forced sale or liquidation of assets
Corrective management actions:
- implementing rate increases
- reducing personal and slowing down hiring
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Business volume significantly higher than the base scenario
Causes:
- Withdrawal or failure of major competitors from a market
- Withdrawal or failure of major competitors from a market
Ripple effects:
- higher expenses (hiring of employees…)
- less favorable loss experience on new business due to inadequate pricing
Corrective management actions:
- implementing rate increases
- underwriting actions
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Reinsurance risk
Causes:
- reinsurer insolvency
- increase in reinsurance rates
Ripple effects:
- increase in reinsurance rates arising from the need to obtain replacement reinsurance
- reduced availability of reinsurance
Corrective management actions:
- changing the reinsurance structure
- changing reinsurers
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Market and Credit risk
Causes:
- A significant change in the yield curve
- A significant change in foreign exchange rates
Ripple effects:
- forced sale or liquidation of assets
- significant positive or negative cash flows impacting the insurer’s liquidity position
Corrective management actions:
- selling or reinvesting assets
- changing investment strategy
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Government and political issues risk
Causes:
- rate freeze
- a change to regulations regarding use of rating variables that may impact the adequacy of rates
Ripple effects:
- higher FCFs than expected
- reduced availability of insurance to the public
Corrective management actions:
- reducing volume of business written or withdrawing from the jurisdiction or line of business
- reviewing the target mix by line of business or jurisdiction
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Off-balance-sheet items risk
Causes:
- structured settlement
- contingent liabilities or losses
Ripple effects:
- forced sale or liquidation of assets
- signification positive or negative cash flows, affecting the insurer’s liquidity position
Corrective management actions:
- selling or reinvesting assets
- changing the reinsurance strategy
Identify 2 causes, 2 ripple effects and 2 corrective management actions for: Related companies risk
Causes:
- a reduction in reliance on the parent company for financial support
- an increase in the provision of financial support to the parent
Ripple effects:
- regulatory action to protect local policyholders
- management focus on group rather than company priorities, potentially delaying remedial action
Corrective management actions:
- finding alternative sources of funds for operational support
- selling or reinvesting assets
Identify adverse scenarios: Expense Risk (5)
- inflation
- technology obsolescence
- court-awarded damages (ripple effects: reputational damages, litigation impacts)
- company structure
- merger and acquisitions (ripple effects: change in product pricing, low sales, higher cancellations or non renewals)
Identify and describe climate related risks (2), 2 ripple effects and 2 management actions
- Physical risk, which arises from an increase in frequency and severity of climate events, that
could disrupt critical operations, threaten the value of investments, and/or increase
insurance risks. - Transition risk, which is driven by a shift towards a lower carbon footprint economy, could
stem from current or future government policies, changes in investor or consumer
sentiment, technological advancements, or climate-related litigation.
Ripple effects:
- increased frequency of catastrophe events
- increased severity of catastrophe events
- increase in reputational risk
- change to insured products (electric vehicles)
Management actions:
- implementing rate increases
- reviewing type of product offered
Identify 2 ripple effects and 2 management actions of Technology and cyber risks
Ripple effects:
- disclosure of data breach and possible reputational damage
- decline in new business
Management actions:
- purchase of cyber insurance
- invest in cybersecurity and IT infrastructures
2 ways of selecting adverse scenarios
- percentiles (if a loss distribution is available)
- reverse stress-testing
Describe the method of reverse stress-testing in an FCT analysis
start by considering a specific adverse scenario where the insurer’s surplus becomes negative (assets < liabilities)
work backwards to find the risk factors required to produce that scenario
determine if the scenario is plausible (risk factors can deteriorate to that degree considering insurer’s current financial position)
if yes than adverse scenario may be a solvency scenario
Describe social inflation
social inflation is the increase in costs due to the changes in public behavior, being more likely to submit claim or more likely to sue, resulting in high costs to the company, and can result in inadequate premiums and loss reserves
