Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Exam 6C - Fall 2023 > CIA.FCT-1 > Flashcards

CIA.FCT-1 Flashcards

1
Q

Briefly describe the purpose of stress testing (4)

A
  1. Risk
    - Identify and control risks
  2. Complement:
    - Provide a complement to other risk management tools & simulate shocks
  3. Capital
    - Support capital management
  4. Liquidity
    - Improve liquidity management
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Describe the stress testing purpose: “risk identification & control”

A

Stress testing can be used to address institution-wide risks and consider concentrations and interactions between risks in stress environments that might otherwise be overlooked. Knowing the sources of threat will help advise the insurer where it is most vulnerable & aid the development of potential management actions that could be applied

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Describe the stress testing purpose: “Complementing other tools”

A
  • Stress tests would complement risk quantification methodologies that are based on complex, quantitative models using historical data and estimated statistical relationships.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Describe the stress testing purpose: “supporting capital management”

A
  • Stress testing would form an integral part of an institution’s internal capital management where rigorous, forward-looking stress testing can identify severe events, including a series of compounding events or changes in market conditions.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Describe the stress testing purpose: “improving liquidity management”

A
  • For assessing the institution’s liquidity profile and the adequacy of liquidity buffers in case of both institution-specific and market-wide stress events
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Identify and briefly describe the key elements of FCT (Financial Condition Testing) (5)

A
  • Base Scenario - must develop a base scenario (usually the insurer’s current business plans)
  • Adverse scenario - must develop mutliple adverse scenarios (Ex: COVID, climate change)
  • Corrective action: identification and analysis of corrective management actions to mitigate risks
  • Report - submit recommendations to management and the board of directors (or chief agent)
  • Opinion - Appointed Actuary signs an opinion regarding the financial condition of the insurer
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Identify key metrics that must be understood when performing FCT (2)

A
  • Regulatory capital minimum(s)
  • Insurer’s internal target capital requirements - determined by ORSA
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Identify the “preliminary” step and the “extra” step in addition to “BACRO” when performing FCT

A

Preliminary step (rev):
- review financial position at year-end for each year in historical period
Extra step at the end (reg):
- Identify possible regulatory action

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a review of operations and financial position

A
  • Review balance sheet, statement of income, and source of earnings for an appropriate number of years
  • Analyze any trends in these numbers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the forecast period of FCT

A

The forecast period should be long enough to capture:
1. Risk emergence
2. Financial impacts
3. Ripple effects
4. Corrective action

Generally 3-5 years although there is no minimum (should also be consistent with ORSA)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How do you determine the materiality standard for FCT

A

FCT sets the materiality standard with management input and by specifically considering:
- Size of insurer
- Financial position
- Nature of regulatory test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define the term: base scenario

A

A set of assumptions used to forecast the insurer’s financial position over the forecast period. The assumptions on risk factors should be consistent with the business plan (if plan is realistic & consistent)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define the term: adverse scenario

A

A scenario that is developed by stress-testing assumptions used in the business plan (look specifically for risk factors that threaten financial condition)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define the term: solvency scenario

A

A plausible adverse scenario (an adverse scenario that has a non-trivial probability of occuring)
- Should fall above the 95th percentile on the loss distribution (if the distribution is available)
- Or possibly as high as the 99th percentile and beyond depending on circumstances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Define the term: going-concern scenario

A

An adverse scenario that is more likely and/or less severe than a solvency scenario
- Should fall above the 90th percentile on the loss distribution (if distribution is available)
- Could include risks not considered in solvency scenarios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is a ripple effect?

A

-An event that occurs when an adverse scenario triggers a change in 1 or more inter-dependent assumptions
- Can include policyholder actions, management’s routine actions, regulatory actions

Example: a ripple effect of an earthquake may be loss of reinsurance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is a corrective management actions?

A

An action management takes to mitigate adverse ripple effects

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is an integrated scenario in FCT?

A

A scenario created by combining two or more risk factors to produce a new plausible adverse scenario

Example: combine a low-probability scenario with a higher-probability adverse scenario

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Identify considerations in the development of a climate change integrated adverse scenario

A

Consider these climate-related risks (PTL):
- Physical risk - frequency and severity of wildfires, floods, wind events, rising sea levels
- Transition risk - due to economic shift to greener technologies
- Liability risk - exposure to climate-related litigation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Identify examples of IFRS17 measurement features to consider for FCT scenarios (3)

A

IFRS 17 Liabilities:
- generally make no provision for default risk, reinvestment risk or other asset-related risks.
- only include provision for maintenance expenses that are directly attributable to the administration of the contracts
- do not reflect certain benefits such as the impact of discounting arising from deferred tax assets and risk premiums that are deducted in determining discount rates.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Identify key elements that an FCT model should reproduce (4)

A
  • Balance sheet: assets,liabilities,retained earnings…
  • Income statement: revenue & expenses
  • Regulatory measures of capital adequacy: MCT ratio, and possibly others like BCAR or MSA ratios
  • Sources of earnings: detail on sources of premium and investments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the recommended loss distribution percentile for a going-concern scenario

A

90-95th percentile (if the loss distribution and percentiles are available)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the recommended loss distribution percentile for a solvency scenario

A

95-99th percentile (if the loss distribution and percentiles are available)
- Or even beyond the 99th percentile in some cases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How does an actuary validate an FCT model on an accounting basis

A

Verify: statement of income = (cash flows) + (change in balance sheet items)

25
How does an actuary validate a FCT model in a static environment
- Base scenario should show continuity of results from year-to-year (cash, liabilities, surplus) This can be used to compare two FCT models and determine which is valid
26
How does an actuary validate a new FCT model or model update
NEW MODEL: run with data at (t-1) & compare to actual data at t (should be close) MODEL UPDATE: do a retrospective test (compare prior base scenario projection to current data)
27
How does an actuary validate a FCT model in a changing environment?
ASK: does model properly QUANTIFY changes in results under different assumptions COMPARE: 2 adverse scenarios (magnitude & direction of change should be consistent with assumptions)
28
When is a stochastic FCT model appropriate? (2)
- When risk distributions are easily inferred (Ex: CATS) - Capital market risks
29
When is a deterministic FCT model appropriate?
- When distributions are NOT easily inferred - Actuary then selects scenarios based on (historical experience, credibility of data)
30
What is a combination stochastic/deterministic model
When results of a stochastic model are used to derive a deterministic scenario that reproduces the stochastic results
31
How are ripple effects in a FCT analysis modeled? (2)
AUTOMATICALLY: by computer model MANUALLY: by actuary based on knowledge of situation
32
What are some considerations in FCT model segmentation? (3)
MANAGEMENT: segment around mgmt structure (LOBs, cost centers) PRODUCT: is smallest subdivision - may combine similar products INVESTMENT: segments are based on asset categories
33
Identify an important IFRS 17 concept to consider when creating an FCT scenario
CSM (Contractual Service Margin) for the GMA and VFA approaches
34
Identify aspects of IFRS 17 that should be considered when creating FCT scenarios (4)
- The impact of adverse scenarios on onerous groups will not be absorbed by the CSM but will be reflected in earnings immediately. - Modelling will need to capture the behaviour of groups of contracts rather than individual contracts. - The need to model and report on groups of reinsurance contracts held separately from the underlying primary insurance contracts - Modelling of NB and RN will need to capture the determination of whether a groups of contracts is onerous or profitable at inception under the base and adverse scenarios.
35
What is the purpose of an FCT report?
COMMUNICATION to BoD: - Identify risks to an insurer's financial condition - Identify ways to mitigate and reduce risk
36
Who are the audiences for an FCT report (3)?
BoD: - prefers an interpretive summary (vs a detailed statistical report) Management: - Receives a more detailed report Regulatory: - Focuses on solvency issues
37
Identify the possible types of opinion that AA could include in their FCT report (3)
- Satisfactory - Satisfactory subject to appropriate corrective action - Not satisfactory
38
When can AA report that the financial condition of an insurer is satisfactory?
The following conditions must hold throughout the forecast period: 1. Under the base scenario, insurer meets its internal target capital ratio(s) as determined by the ORSA 2. Under the going-concern scenarios, insurer meets the regulatory minimum capital ratio(s) (MCT above or equal to 100%) 3. Under solvency scenarios, must have assets greater than liabilities
39
How many adverse scenarios should an FCT report include?
- At least 3, including 1 going-concern scenario and 2 solvency scenarios - They should also be chosen from multiple risk categories
40
Identify the 12 P&C risk categories
Claim Frequency and Severity Risk Liability for Incurred claims risk Inflation Risk Volume and mix of business risk Reinsurance held risk Market and Credit Risk Expense Risk Government and Political Risk Off-balance sheet items risk Related Companies risk Climated-related risks Technology and cyber risk
41
Identify 2 causes, ripple effects and management actions for the following P&C risk: Claim Frequency and Severity Risk
Causes: - Single catastrophic event - Single large claim Ripple effects: - Forced sale or liquidation of assets - Rating Agency downgrade Management actions: - Implementing rate increases, where possible - Reviewing reinsurance held coverage, type, or contract terms at renewal
42
Identify 2 causes, ripple effects and management actions for the following P&C risk: Liability for incurred claims risk
Causes: - Selection of inadequate loss development factors - Change in mix of business Ripple effects: - Forced sale or liquidation of assets - Rating agency downgrade Management actions: - Implementing rate increases, where possible - Reviewing reserving and claim settlement guidelines
43
Identify 2 causes, ripple effects and management actions for the following P&C risk: Inflation Risk
Causes: - A significant, rapid, and sustained increase in the general rate of inflation - A severe recession in the economy Ripple effects: - A rapid and sustained increase in market interest rates - Increase in operating expenses Management actions: - Implementing rate increases, where possible - Reviewing reinsurance held coverage, type, or contract terms at renewal
44
Identify 2 causes, ripple effects and management actions for the following P&C risk: Volume and mix of business risk
Causes: - Business volume significantly lower than base scenario - Business volume significantly higher than base scenario Ripple effects: - Higher expenses - Shift in portfolio mix Management actions: - Implementing rate increases, where possible (both scenarios) - Reducing personnel or slowing down hiring (lower) - Reviewing distribution channels (higher)
45
Identify 2 causes, ripple effects and management actions for the following P&C risk: Reinsurance held risk
Causes: - Reinsurer insolvency - Reduction in capacity Ripple effects: - Increase in reinsurance held rates arising from the need to obtain replacement coverage - Reduced availability of reinsurance held Management actions: - Changing reinsurers - Reducing primary policy limits
46
Identify 2 causes, ripple effects and management actions for the following P&C risk: 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 - Rating agency downgrade Management actions: - Selling or reinvesting assets - Changing the investment strategy
47
Identify 2 causes and ripple effects for the following P&C risk: Expense Risk
Causes: - Inflation - Mergers and acquisitions, or assumptions of new business Ripple effects: - Rating agency downgrade - Litigation impacts
48
Identify 2 causes, ripple effects and management actions for the following P&C risk: Government and Political risk
Causes: - A rate freeze or rollback of rates by a government body or regulator on LOBs and jurisdictions in which rates are subject to regulatory approval - A change to legislation that prescribes levels of insurance coverage, such as automobile accident benefits Ripple effects: - Forced sale of liquidation of assets - Increased litigation costs Management actions: - Creating or expanding a separate company or distribution channel - Reviewing reinsurance held coverage, type, or contract terms at next renewal
49
Identify 2 causes, ripple effects and management actions for the following P&C risk: Off-balance sheet items risk
Causes: - Structured settlements (exposed to credit risk from institution selling annuity) - Letters of credit and pledged assets (lending institution may default on payment) Ripple effects: - Forced sale or liquidation of assets - Significant positive or negative cash flows, affecting the insurer’s liquidity position Management actions: - Selling or reinvesting assets - Changing the reinsurance held strategy
50
Identify 2 causes, ripple effects and management actions for the following P&C risk: Related Companies Risk
Causes: - A reduction in reliance on the parent company for financial support - A rating agency downgrade reflecting difficult financial conditions at the group level Ripple effects: - A need to provide for service disruptions - Regulator action to protect local policyholders Management actions: - Implementing rate increases, where possible - Selling or reinvesting assets
51
Identify 2 causes, ripple effects and management actions for the following P&C risk: Climate-related risks
Causes: - Physical risk: increased freq/sev of climate events - Transition risk: shift towards green initiatives Ripple effects: - Increased frequency of catastrophe events - Increased severity of catastrophe events Management actions: - Selling or reinvesting assets - Finding alternative sources of reinsurance
52
Identify 2 ripple effects and management actions for the following P&C risk: Technology and cyber risk
Ripple effects: - Disclosure of data breach, and possible reputational damage and fines as a result - Decline in new business Management actions: - Invest in cybersecurity and IT infrastructure to combat possible risks and exposure to a cyber event and ensure compliance with existing legislation - Purchasing cyber insurance to mitigate against losses arising from future attacks
53
Identify 2 more corrective management actions that are applicable only in certain situations
- Suspend dividend payments (possible only if company pays dividends) - Reduce capital transfers to parent or home office (possible only for subsidiaries or branch offices)
54
Identify methods for selecting adverse scenarios (2)
- Percentiles (if loss distribution is available) - Reverse stress-testing
55
Describe the method of reverse stress-testing in an FCT analysis
- Start by considering a specific adverse scenario where the insurer's surplus become negative (surplus = assets - liabilities) - Work backwards to find the risk factors required to produce that scenario - Determine if it's plausible for risk factors of the insurer's current financial position to deteriorate to that degree (if yes, then this adverse scenario may be solvency scenario)
56
Should the actuary integrate the FCT report with the ORSA report or keep them separate?
- Actuary should use judgment - May produce 2 independent reports or 1 integrated report
57
Identify considerations supporting integration of FCT and ORSA (4)
- FCT uses internal target capital ratios developed by ORSA (and these target ratios may develop over the time frame of a projection) - ORSA is useful in assessing & developing adverse scenarios - May be more efficient to integrate the reports (both require data collection and similar types of analysis, both may be released at the same time) - A single integrated report may be better for the end user
58
Identify challenges regarding integration of FCT and ORSA
Oversight: AA is responsible for FCT whereas the board and senior management is responsible for ORSA Different methodology: FCT follows a prescribed regulatory basis while ORSA reflects own models and assumptions Staff responsible: different for FCT versus ORSA and coordination may be costly
59
Define: social inflation
Refers to the claims inflation resulting from changes in the likelihood of claimants bringing suits, the size of awards, the standards of liability, or the attitudes of claimants towards settlement of their claims

Exam 6C - Fall 2023 (56 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions