FCT - 1 Flashcards
Principal Goals of FCT
识别威胁, 采取行动
- identify possible threats to the financial condition of insurer
- take corrective management actions to address these threats
goals/purpose of stress testing
CCRL (cc Rickly Liang, she is stressed)
- complement: provide a complement to other risk management tools and simulate shocks
- capital: support capital management
- risk: identify &control risk
- liquidity: improve liquidity management
describe complement to other risk management tools
- stress testing can provide insights about the validity of models used to determine VaR
- stress testing can simulate shocks to test model robustness to economic changes
describe supporting capital management
stress testing identify severe events and/or compounding events that impact capital requirements
describe risk identification and control
- risk identification: identify concentrations and interactions of risks
- risk control: adjust individual portfolios or overall business strategy
describe improving liquidity management
assess liquidity profile and adequacy of buffers for institutional and market wide stresses
identify and describe key elements of FCT
BACRO
- Base scenario: development of base scenario (usually the insurer’s current business plan)
- Adverse scenario: must develop multiple adverse scenarios (COVID, climate change)
- Corrective action: identification and analysis of corrective management actions to mitigate risks 识别和分析纠正管理措施的有效性以减轻风险
- Report: submit recommendations to management and the BoDs
- Opinion: AA signs an opinion regarding the financial condition of the insurer
key metrics to understand when performing FCT
- regulatory capital minimums
- insurer’s internal target capital ratios
identify the preliminary step and the extra step in additional to BACRO when performing FCT
Prelim: review financial position at year end for each year in historical period
Extra: identify possible regulatory action
what is a review of operations and financial position?
- review BS, statement of income, and source of earnings for an appropriate number of years
- analyze any trends in these numbers
what is the forecast period of FCT?
forecast period should be long enough to capture (FCRR) ~fucker (long enough to recognize a fucker)
- financial impacts
- corrective action
- risk emergence
- ripple effects
generally 3-5 years although there is no minimum. should be consistent with ORSA.
how do you determine the materiality standard for FCT
FCT sets materiality standard with management inputs and by specifically considering
- size of insurer
- financial position
- nature of 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
define the term “adverse scenario”
a scenario developed by stress testing assumptions used in the business plan, looking 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)
- should fall above the 95th percentile on the loss distribution
- possibly as high as the 99th percentile and beyond depending on the circumstances
define the term “on going scenario”
an adverse scenario that is more likely and less severe than a solvency scenario 比solvency scen出现频率更高,但是严重程度更低
- should fall above the 90th percentile on the loss distribution
- could include risks not considered in solvency scenarios
what is ripple effect?
- an event that occurs when an adverse scenario triggers a change in one or more inter dependent assumptions
- can include PH actions, routine management actions, regulatory actions, rating agency actions
e.g.: a ripple effect of an earthquake may be loss of reinsurance
what is corrective management action?
an action management takes to mitigate adverse ripple effects
what is an integrated scenario for FCT?
a scenario created by combining two or more risk factors to produce a new plausible adverse scenario
e.g.: combine a low prob scenario with a higher prob adverse scenario
identify considerations in the development of a climate change integrated adverse scenario
consider these climate related risks (TPL, flood third party liability)
- Transition risk: due to economic shift to greener technologies
- Physical risk: frequency and severity of wildfires, floods, wind events, rising sea levels
- Liability risk: exposure to climate related litigation
identify examples of IFRS17 measurement features to consider for FCT scenarios
IFRS17 liabilities
- make no provision for default/reinvestment/asset related risk
- donot reflect the benefit of discounting arising from deferred tax assets (assets on company BS to deduct taxable income)
- include CSM when evaluating solvency scenarios
identify key elements FCT model should reproduce
BIRDS without the D (BIRS) FCT model
- BS: assets, liabilities, retained earnings
- income statement: revenue & expenses
- regulatory measures of capital adequacy: MCT ratio, BCAR, MSA ratios…
- sources of earnings
what is the recommended loss distribution percentile for a going-concern scenario?
95th-99th percentile
or beyond 99th percentile in some cases
how does an actuary validate a FCT model on an accounting basis?
verify: statement of income = CF + change in BS items
how does an actuary validate a FCT model in a static environment?
base scenario should show continuity of results from year to year (cash, liabs, surplus…)
how does an actuary validate a new FCT model or model update?
- new model: run with data at (t-1) and compare to actual data at t (should be close)
- model update: do a retrospective test (compare prior base scenario projection to current data)
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 and direction of change should be consistent with assumptions)
when is a stochastic FCT model appropriate? (2)
- when risk distributions are easily inferred (e.g. CATS)
- capital market risks
when is a deterministic FCT model appropriate? (2)
- when risk distributions are not easily inferred
- actuaries then selected scenarios based on historical experience, credibility of data
what is a combination of stochastic and deterministic model?
when results of a stochastic model are used to derive a deterministic scenario that reproduces the stochastic results
how are ripple effects in a FCT analysis modeled? (2)
- automatically: by computer model
- manually: by actuary based on knowledge of situation
what are some considerations in FCT model segmentation?
IPM
- management: segment around management structure
- product: smallest subdivision of business considered- may combine similar products
- investment: defined based on asset categories
identify an important IFRS17 concept to consider when creating a FCT scenario
CSM for GMA and VFA approaches
does PAA have a CSM component? explain
No, but PAA requires a LC for onerous contracts and LC cannot be offset by future profits so level of aggregation is an important consideration
identify aspects of IFRS17 that should be considered when creating FCT scenarios
- impacts of adverse scenarios on onerous groups is not absorbed by the CSM - it will be reflected in earning immediately
- modelling will need to capture the behavior 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
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
who are the audiences of FCT report?
BoD: prefers and interpretive summary (versus a detailed statistical report)
Management: receives a more detailed report
Regulator: focuses on solvency issues
identify three types of opinions could be included in a FCT report
- satisfactory
- satisfactory subject to appropriate corrective action
- not satisfactory
when can you report that the financial condition of an insurer is satisfactory?
the following conditions must be hold throughout the forecast period:
- under the base scenario: insurer meets internal target capital ratios as determined by ORSA
- under the on going concern scenarios: insurer meets the regulatory minimum capital ratios
- under solvency scenarios: must have assets > liabilities
how many adverse scenarios should a FCT report include?
- at least 3m including 1 going concern and 2 solvency
- they should be chosen from multiple risk categories
identify the P&C risk categories
F-PIP-REAGOR-C^2
- Frequency and severity risk
- Policy Liabilities
- Inflation
- Premiums
- Reinsurance
- Expense and asset risk
- Government risk
- Off BS risk
- Related company risk
- Climate & Cyber risk
identify common ripple effects
- higher LR due to higher losses or operating costs
- loss of reinsurance
- post event inflation
- forced sale or liquidation
- mix shift
- policyholder actions
- regulatory action
identify common corrective management actions
- tighten UW guidelines
- raise rates
- review reinsurance
- sell assets
- review mix of business
identify two 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)
identify a ripple effect and management action for the cyber risk adverse scenario
ripple effect: data breach
management action: invest in cybersecurity and IT infrastructure
identify methods for selecting adverse scenarios
- percentile if loss distribution is available
- reverse stress testing
what is reverse stress testing
determine how far risk factors need to change in order to drive the insurer below scenario thresholds and evaluate if the degree of change is plausible. It helps insurers to better understand impact of business vulnerabilities
identify steps of reverse stress testing
- assume a specific outcome occurs (i.e. surplus becomes negative)
- 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 a solvency scenario
should the actuary integrate the FCT report with ORSA report or keep them separate?
- actuary should use judgement
- may produce 2 independent reports or 1 integrated report
identify considerations supporting integration of FCT and ORSA
- FCT uses internal target capital ratios from ORSA
- ORSA is useful in assessing 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 reported may be better for end users
identify challenges regarding integration of FCT and ORSA
OMO (challenges…Oh My Oh)
- Oversight: AA is responsible for FCT whereas the board and senior management is responsible for ORSA
- Methodology: FCT follows a prescribed regulatory basis while ORSA reflects own models and assumptions
- Organization: staff responsible for FCT VS. ORSA may be different, coordination might be costly
