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Exam 6c 2025 > CIA.FCT&OSFI.ORSA > Flashcards

CIA.FCT&OSFI.ORSA Flashcards

1
Q

FCT def

A

is one several stress-testing processes within an insurer’s overall risk management process.

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2
Q

Goal of FCT

A
  1. identify threats to the insurer’s financial condition.
  2. take corrective actions to address those threats. (It should be performed at least once during each financial year.)
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3
Q

How often should AA investigate insurer’s financial position / condition

A

AA should make an investigation at least once each year of insurer’s financial position & financial condition, as revealed by FCT for selected scenarios.

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4
Q

AA report regarding to FCT findings

A

AA should write report to board of directors or appropriate committee of the board.
Report should identify possible actions & reasons dealing with any threats to satisfactory financial condition; comment on consistency of the results & possible actions with ORSA

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5
Q

Goal of ORSA

A

enhance an insurer’s understanding of the relationship between risk profile & capital needs.

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6
Q

why does an insurer perform stress-testing [Hint: risk-complement-Cap-Liq]

A

[1] risk
- identify & control risk
[2] complement
- provide a complement to other risk management tools AND simulate shocks
[3] Cap
- support capital management
[4] Liq
- improve liquidity management

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7
Q

describe the stress-testing purpose: ‘risk identification & control’

A
  • risk identification:
    • identify concentrations & interactions of risks
  • risk control:
  • adjust individual portfolios or overall business strategy
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8
Q

describe the stress-testing purpose: ‘complementing other tools’

A
  • test statistical models used to determine Value-at-Risk
    • simulate SHOCKS to test model robustness to economic changes
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9
Q

describe the stress-testing purpose: ‘supporting capital management’

A
  • identify severe events and/or compounding events that impact capital requirements
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10
Q

describe the stress-testing purpose: ‘improving liquidity management’

A
  • assess liquidity profile and adequacy of buffers FOR institutional & market-wide stresses
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11
Q

identify & 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 plan)
  • Adverse scenario - must develop multiple adverse scenarios
    (Ex: COVID, climate change, one of Alice’s legendary all-night dance parties)
  • 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
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12
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
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13
Q

identify the ‘preliminary’ step and the ‘extra’ step in addition to ‘BACRO’ when performing FCT

A

preliminary step:
- review financial position at year-end for each year in historical period
extra step at the end:
- identify possible regulatory action

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14
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
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15
Q

what is the forecast period for 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)
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16
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

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17
Q

define the term base scenario

A

a set of assumptions on risk factors that are consistent with the business plan over the forecast period
(if plan is realistic & consistent)

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18
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)

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19
Q

define the term solvency scenario

A

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

20
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

21
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
22
Q

what is a corrective management action

A
  • an action management takes to mitigate adverse ripple effects
23
Q

what is an integrated scenario for FCT

A
  • a scenario created by combining two or more risks factors to produce a new plausible adverse scenario
    Example: combine a low-probability scenario with a higher-probability adverse scenario
24
Q

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

A

Consider these climate-related risks:
* 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

25
Q

Identify examples of IFRS 17 measurement features to consider for FCT scenarios (3)

A

[1] IFRS 17 liabilities make no provision for:
default risk
reinvestment risk
asset-related risks
[2] IFRS 17 liabilities do not reflect certain benefits such as:
impact of discounting arising from deferred tax assets
impact of discounting arising from risk premiums that are deducted in determining discount rates
[3] IFRS 17 liabilities only include maintenance expenses directly attributable to administration of contracts
[4] Risk adjustment incorporates the entity’s view of risk and may incorporate diversification benefits not realized in adverse scenarios
[5] IFRS 17 liabilities includes the CSM when evaluating solvency scenarios (see FCT Reporting for further details)

26
Q

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

A

[1] balance sheet: assets, liabilities, retained earnings,..
[2] income statement: revenue & expenses
[3] regulatory measures of capital adequacy: MCT ratio, and possibly others like BCAR or MSA ratios
[4] sources of earnings: detail on sources of premium and investments

27
Q

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

A

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

28
Q

what is the recommended loss distribution percentile for a solvency scenario

A

95th → 99th percentile (if the loss distribution and percentiles are available)
* or even beyond the 99th percentile in some cases (the source text didn’t provide details)

29
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)

30
Q

how does an actuary validate a FCT model in a static environment

A

base scenario should show continuity of results from year-to-year (cash, liabilities, surplus,..)

31
Q

how does an actuary validate a new FCT model or model update

A

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)

32
Q

how does an actuary validate a FCT model in a changing environment

A

ASK: does model properly QUANTIFY changes in results under different assumptions
COMPARE: 2 adverse scenarios (magnitude & direction of change should be consistent with assumptions)

33
Q

when is a stochastic FCT model appropriate (2)

A
  • when risk distributions are easily inferred (Ex: cats)
  • capital market risks
34
Q

when is a deterministic FCT model appropriate

A
  • when distributions are NOT easily inferred
  • actuary then selects scenarios based on (historical experience, credibility of data)
35
Q

what is a combination stochastic/deterministic model

A

when RESULTS of a stochastic model are used to DERIVE a deterministic scenario that REPRODUCES the stochastic results

36
Q

how are ripple effects in a FCT analysis modeled (2)

A

AUTOMATICALLY: by computer model
MANUALLY: by actuary based on knowledge of situation

37
Q

what are some considerations in FCT model segmentation (3)

A

MANAGEMENT: segment around mgmt structure
PRODUCT: smallest subdivision - may combine similar products
INVESTMENT: asset categories

38
Q

identify an important IFRS 17 concept to consider when creating an FCT scenario

A
  • CSM (Contractual Service Margin) for GMA and VFA approaches
39
Q

does the PAA (Premium Allocation Approach) have a CSM component? Explain.

A
  • No, but PAA requires a Loss Component (LC) for onerous contracts
    (and LC cannot be offset by future profits so ‘level of aggregation’ is an important consideration)
40
Q

identify aspects of IFRS 17 that should be considered when creating FCT scenarios

A
  • The impact of adverse scenarios on onerous groups is not absorbed by the CSM - it will be reflected in earnings immediately.
  • Modelling will need to capture the behaviour of groups of contracts rather than individual contracts
  • Groups of reinsurance contracts are modeled separately from the underlying primary insurance contracts issued.
  • The business volume forecast requires sufficient granularity to model the timing of recognition of new cohorts.
41
Q

what is the general goal of ORSA

A

enhance insurers’ understanding of the relationship between (risk profile, capital needs)

42
Q

does OSFI approve an insurer’s ORSA

A

NO, but OSFI will REVIEW a company’s ORSA as part of its assessment of the company

43
Q

what is the relationship between ERM (Enterprise Risk Management) & ORSA

A

(ERM, ORSA) should be WELL-INTEGRATED so that (analysis, results) are consistent between them

44
Q

identify ORSA’s key elements (5)

A

ORR-IO-RM
RISK identification & assessment
RELATE risk to capital
Oversight
(M&R) MONITORING & REPORTING of risks
(I&O) INTERNAL controls & OBJECTIVE review

45
Q

describe the ORSA key element ‘risk identification & assessment’

A

[MFE]
identify & assess the MATERIALITY of forseeable & emerging risks

46
Q

describe the ORSA key element ‘relating risk to capital’

A
  • set ICT (Internal Capital Target) using stress-testing techniques
  • must WITHSTAND a specified loss without falling below (Supervisery Capital Requirements)
47
Q

describe the ORSA key element ‘Oversight’

A

Senior Management Responsibility: should have a good understanding of:
- nature and significance of the risk exposures
- risk mitigants
- risk management methods
- capital adequacy

Exam 6c 2025 (20 decks)

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