CP1 Acronyms Part 5-8 Flashcards
Factors that determine the type of approach to use
FENCED
Ch.17 Modelling
Fit for purpose
Expertise available in house
Need for flexibility
Cost of each option
Expected number of times used
Desired level of accuracy
Operational issues that should be considered when building the model
SCARCER FILES
Ch.17 Modelling
- Simple but retains key features
- Clear results
- Adequately documented
- Range of implementation methods
- Communicable workings and output
- Easy to understand
- Refinable and developable
- Frequency of cashflows
- Independent verification of results
- Length of run not too long
- Expenses not too high
- Sensible joint behaviour of variables
Data risks faced by an actuary
QUERIED
Ch.18 Data
- Errors or omissions
- Lack of data for credibility overall
- Or for estimating tails of distribution
- Data from other sources may not be relevant
- Historical data may not reflect the future
- Past abnormal evets
- Random fluctuations
- Past data not reflecting future trends
- Changes in data recording
- Changes in the balance of homogeneous groups
- Heterogeneity in the group to which the assumptions are to relate
- Not up to date past data, and other changes, like social changes
- It may be difficult to form homogeneous groups with sufficient data volumes for credibility
- Data may be in the wrong form
- Data may not have been collected for this purpose
- Lack of confidence in the data means a lack of confidence in the actuary’s conclusions
- Different sources of data
TRAINERS
Ch.18 Data
- Tables (e.g. actuarial mortality tables)
- Reinsurers
- Abroad
- Industry
- National statistics
- Experience of existing contract
- Regulatory reports and company accounts
- Similar contracts
Ch.18 Data
- Problems with industry data
DR DONEQ
Ch.18 Data
- Detail insufficient
- Risk factors coded in different ways
- Differences between insurers and industry (heterogeneity of data)
o Operate in different geographical locations
o Policies are targeted at different socio-economic group
o Different contract terms (e.g. excesses and exclusions)
o Different underwriting or claims settlement procedures
o Use different sales channel - Out of date
- Not everyone contributes (incomplete data)
- Errors
- Quality is only as good as that of contributors
- Factors to consider when setting assumptions
LUNCH
Ch.19 Setting assumptions
- Legislative or regulatory constraints
- Use of the assumptions
- Needs of the client
- Consistency with other assumptions
- How financially significance
Ch.19 Setting assumptions
- Selection
STATIC
Ch. 20 Mortality and Morbidity
- Spurious selection
Ascribing mortality differences to groups formed by factors which are not the true causes of the differences - Time selection
Mortality and morbidity normally vary with calendar time, due to medical advances - Adverse selection
Characterised by the way in which groups are formed, usually involves an element of self-selection - Temporary initial selection (due to underwriting)
Mortality/morbidity pattern is observed to differ only for the first s years - Class selection
The population can be divided, e.g. by gender, a permanent attribute of the individuals concerned
Types of expenses/ Cost involved
COST RAID
Ch.21 Expenses, Ch.22 Contract design
- Commission
- Overheads
- Sales / advertising
- Terminal
- Regular administration
- Asset management
- Initial administration
- Design of the contract
- Parties involved in contract design
ALPACAS
Ch.22 Contract design
- Actuaries
o Pricing
o Provisioning new contracts
o Modifications to existing contracts - Lawyers
o Drafting the contracts
o Ensuring contract provider is not exposed to greater risks than intended
o Clear contract wording is essential to
Minimise disputes
Avoid reputational risk over uncertainty as to whether a benefit is payable - Providers
o Influences the contract design process by requiring a contract that meets their needs and the needs of their customers in a cost-effective way
o Their needs are influence by factors such as
Chosen market
Expertise
Liquidity
Capital available - Accountants
o Ensure income and outgo are properly accounted for - Customer
o Influence the contract design process through their needs, this is influenced by (Acronym: “CRAB”)
Capacity to pay
Risks to be covered
Attitude to risk
Benefits needed through time - Administrators
o Look after the contracts from inception to termination
o Simpler contract design, the easier and less expensive the admin will be - Shareholders / Financials backers
o Want a return on capital commensurate with the level of risk taken
o Want regular reports demonstrating proper use of the finance provided
Influence the contract design process through their needs,influenced by
CRAB
Ch.22 Contract design
Capacity to pay
Risks to be covered
Attitude to risk
Benefits needed through time
Price charged depends on
LCCP
Ch.23 Pricing and financing strategies
Level of competition in the market
* Underwriting cycle
*Distribution system
Cross subsidies
Loss leader
Premium frequency
- Criteria for comparing financing strategies
FLOSSR
Ch.23 Pricing and financing strategies
- Flexibility
Whether the method gives the sponsor flexibility in meeting the cost (e.g. pay more in profitable years and less when business is doing badly) - Liquidity
Whether the method might lead to large or unexpected cash calls for the sponsor that might be difficult to meet - Opportunity cost
From the sponsor’s perspective, whether the money is being tied up in the benefit scheme instead of being used elsewhere - Security
Earlier money is set aside, the more secure - Stability
Whether the method results in a stable cost to the sponsor - Realism
Whether the method gives a realistic feel for the cost of the scheme
Methods that set aside money gradually over the members working lifetime (i.e. that follows the accrual concept) are more realistic
Ch.23 Pricing and financing strategies
Steps taken to ensure risk identificaiton(Happy BDay Christiano Ronaldo)
HBDCR
Ch.25 Risk identification and classification
High-level preliminary analysis
* To ensure that the project is worth considering in more detail (if risk is too high might not want to carry on with project)
Brainstorming session
* With internal and external project experts and representatives who have an understanding of the different areas affecting the project
* Allows a wide range of risks to be identified and the correlations between them understood
Desktop analysis
* Where the results of the brainstorming session are analysed further and put into context
* E.g. by considering other similar projects run by other organisations
Consult with experts
* Including gathering opinions on how the project may be financed
Risk register/matrix
* Risk identified will be stored either in a risk register or risk matrix
Ch.25 Risk identification and classification
Inappropriate advice
CRIMES
Ch. 26 Financial product and benefit scheme risks
- Complicated products
- Rubbish (incompetent) adviser & lacking Integrity
- Model, parameter or data Error
- State encouraged but inappropriate actions
Criteria that should ideally be satisfied
MUD PIS
Ch.27 Accepting risk
Moral hazard should be eliminated as far as possible
* Any moral hazard is very difficult for the insurer to quantify and may lead to anti selection against the insurer
Ultimate limit should be placed on the liability so the insurer can quantify any potential claims
Data available to quantify the extent and likelihood of the risk to be able to price it
Pooling of similar risk
* Reduce variability of potential claim payments
Independent risk events
Small probability of occurring
Reinsurance pros
SAD LIFE
Ch.29 Risk transfer
o Smooth results
Can help reduce volatility of claims (both proportional and non-proportional)
o Avoid single large losses, e.g. a liability claim
o Diversification
o Limit exposure to risk to single risks, accumulations
May also be limiting exposure to certain aspects of a contract design, for example, reducing the exposure to guarantees within a product
o Increase capacity to accept risk (singly, cumulatively)
o Financial assistance (solvency, new business strain)
Financial reinsurance can help improve solvency position
Or through reinsurance commissions paid from the reinsurer to the insurer to help cover the insurance companies initial expenses and so reduce new business strain
o Expertise, e.g. data, pricing, underwriting, design, admin, for new risks, unusual risks and new territories
In particular for risks for which the insurance company has little experience, such as new or unusual risks
Reasons for using ART (Alternative risk transfer)
DESCARTES
Ch.29 Risk transfer
o Diversification
Allowing the provider to cover different risks or a great number of risks
o Exploit risks as an opportunity
Allow providers to take on risks they would otherwise be unable to
o Solvency improves / source of capital
o Cheaper cover than reinsurance
o Available when reinsurance may not be
Reinsurance market is fairly small and so may not have the capacity to take on all the risks that providers wish to transfer
o Results smoothed
Particularly important if the provider is a proprietary company
o Tax advantages
Depends on specific products and territory which it is used
o Efficient risk management tool
o Security of payments to policyholder is improved
Reasons for underwriting
SAFARI
Ch. 30 Other risk controls
o Suitable special terms
Higher premium
Lower benefit
Exclusions
Defer coverage
Decline
o Avoid anti-selection
Arises when potential policyholders believe that their risk is higher than the insurance company has allowed for in its premiums
o Financial underwriting (reduce risk form over-insurance)
o Actual experience in line with that assumed in pricing
o Risk classification / Rated fairly
Ensure correct premium is charged
o Identify substandard risks
