Important Flashcards
ACC
Specifying the problem
- Setting out clearly the problem from the viewpoint of each stakeholder
- Assessing and analyzing the risks for each stakeholder
- Considering the strategic courses of action available to manage, mitigate or transfer the particular risks in question
- Analyzing the options for the design of solutions to the problem that transfer risk from one set of stakeholders to another
Developing the solution
- Selecting Appropriate Actuarial Models
- Appropriate Assumptions
- Implications on the overall results and for for all Stakeholders
- Determine a Proposed Solution and Alternatives
Monitoring the experience
- Analyzing periodically the actual experience against expected
- Identifying causes of departure from expected experience and determining whether each source is one-off or likely to recur
- Feeding back into the specifying the problem and developing the solution stages of the ACC
- Making sure the model is ‘dynamic’ (i.e. assumptions are consistent) and reflects current experience
General Commercial and Economic Environment
- ESPERIA
Principle aims of regulation
to correct perceived market inefficiencies and to promote efficient and orderly markets
to protect consumers of financial products
to maintain confidence in the financial system
to help reduce financial crime
Regulatory Regimes - Forms of regulation
- Prescriptive
- Freedom of Action
- Outcome-based
Outline the five main types of regulatory regime
- Self-regulatory systems, which are organised and operated by the market participants without government intervention (for example a stock-excange)
- Statutory regimes, where the rules are set and policed by the government.
- Voluntary codes of conduct, where there is a choice as to whether to adhere
- Unregulated markets / lines of business, with no regulation
- Mixed regimes, involving a combination of the above, such as professional bodies such as ASSA
Summarize the three main principles of insurance and pensions that impact the design of financial products and the benefits that can be provided from such products
- Insurable interest - in most countries, an insurance contract is only valid if the person taking out the contract has a financial interest in the insured event, to prevent moral hazard, fraud and other crime
- Pre-funding - individuals or corporate bodies put money aside in advance of the occurance a risk event, which is uncertain in terms of whether it will happen, its timing and amount. The amount of money put aside depends on the probability of the risk event occuring, the amount the risk event will cost, and the return that can be earned on the pre-funded money before the risk event occurs
- Pooling of risk - protects a group of individuals who pool their finances, against uncertainty in financial costs, which then leads to more cost-efficient provision than if each individual made their own financial provision
Defined Benefit Scheme
A defined benefits scheme is one where the scheme rules define the benefits independently of the contributions payable, and benefits are not directly related to the investments of the scheme
Benefits will be defined by a set formula, and might be linked to, for example:
- how long the member works for the sponsoring company
- the member’s salary at retirement
The scheme may be funded or unfunded.
The members’ benefits are promised and independent of investment return, longevity, and administration expenses. The risks, therefore, lie with the employer (if the members live longer than expected, the employer needs to pay more money into the scheme)
Defined Contribution Scheme
A defined contribution scheme is one providing benefits where the amount of an individual member’s benefits depends on the contributions paid into the scheme in respect of that member, increased by the investment return earned on those contributions
The risks lie primarily with the members, for example, if investment performance is poor, then each member’s accumulated fund will be smaller than expected and hence the annual pension lower than expected
If an annuity is purchased at retirement, then longevity risk passes to the annuity provider at this time. If an annuity is not purchased, then longevity risk remains with the member
Expenses risk may lie with the employer or the members depending on whether expenses are met separately by the employer or are met from charges taken from the accumulated fund
List the 6 key roles of the State in relation to benefit provision
- Provide benefits to some, or all of the population
- Sponsor the provision of such benefits, perhaps by providing appropriate financial instruments.
- Provide financial incentives, usually through the tax system, either for other providers to establish appropriate provision, or to subsidize the cost of providing such provision to consumers.
- Educate or require education about the importance of providing for the future.
- Regulate to encourage or compel benefit provision by or on behalf of some of the population.
- Regulate bodies providing benefits, and bodies with custody of funds, in an attempt to ensure security of promises made, or expectations created
Income drawdown (Living annuity I think)
Allows an individual to leave their accumulated fund invested and draw an income from it annually. This may be just the income earned on the fund or may also include some of the fund capital
May be limits on how much can be drawn each year and an age limit at which point an annuity must be purchased.
One of the main drivers behind the income drawdown approach is that, should the member die before having to secure an annuity, the member’s heirs can inherit the balance of the fund
Describe the principle of mutuality in healthcare
A pooled fund is created and premiums are paid into the fund by policyholders.
The premium paid by the policyholders is determined by the RISK presented by the policyholder at the time of taking out the contract.
Claims are paid out of the pooled funds in accordance with the policyholder agreement.
Disadvantage:
While the risk pool is not sensitive to policyholders entering and leaving since each is contributing to their risk, high-risk lives will not be able to access cover due to affordability and this could have adverse social implications
Describe the principle of solidarity in healthcare
Solidarity is similar to mutuality in that they both involve the concept of sharing losses.
However, the main differences are:
- Under solidarity principles, the premiums are not based on risk, but rather on the ability to pay, or are set equally.
- Under solidarity principles, losses are paid according to need.
reimbursement mechanics for healthcare providers
Fee-for-service
Providers are reimbursed for each service provided.
No restrictions apply on the cost of the service.
Negotiated fee-for-service
The tariff or remuneration rate for each type of service is defined through negotiations or being defined in advance.
This may lead to policyholders having to cover part of the costs through out-of-pocket payments.
Global fee
There is a fixed tariff/fee per episode of care with the service provider assuming some risk for the level of services required per patient (eg maternity or a knee replacement)
Capitation
A fixed amount is paid per policyholder/beneficiary who has the option to use the service.
The fee is paid regardless of whether the service is used or not.
This transfers the risk from the insurer to the provider of services
Aspects of healthcare markets that distinguish it from other markets
- Public good characteristics and universal access (in many communities access to some form of healthcare service is regarded as a basic human right)
- Information asymmetry, over-supply and demand
- Information about the range and quality of healthcare services relative to cost is difficult, if not impossible, for consumers to obtain.
- Rapidly increasing costs of healthcare services
- Importance of health insurance:
A
There is a high level of uncertainty surrounding future health, and thus uncertainty around the timing and nature of services needed.
Healthcare needs increase with age.
Individuals can provide for these costs through savings and insurance products. They are likely to underestimate the need to plan financially.
This adds extra pressure to employer-funded or state-funded systems.
List the four generic groups of general insurance products
- Liability
- Employers’
- Motor third party
- Public
- Product
- Professional indemnity - Property damage
- Residential buildings
- Commercial buildings
- Movable products
- Land vehicles
- Marine craft
- Aircraft - Financial loss
- Pecuniary loss
- Fidelity guarantee
- Business interruption
- Cyber security - Fixed benefit
- Personal accident
- Health
- Unemployment
Outline the seven features of liability insurance
- Provides indemnity where the insured, due to some form of negligence, is legally liable to pay compensation to some third party
- The legal fees associated with the claim are usually also covered
- Illegal acts of negligence will invalidate the claim and no payment will be made by the insurer
- There may be an upper limit (per claim or aggregate per year) and/or excess amount applied to the claim
- On the occurrence of a claim the cover may be cancelled, or a reinstatement premium or higher premium might be required for the cover to continue
- The claims are usually medium to long tailed and are likely to be real in nature
- International or national laws apply, depending on the type of cover
List the different types of reserves/provisions for general insurance contracts
- Outstanding reported claims reserve.
- IBNR reserve.
- Unexpired risk reserve.
- Catastrophe reserve.
- Claims handling expense reserve.
Money Market Instruments
Treasury Bill:
Issuer: Central Government
Typical Term: 91 or 182 days
Tradable: Yes
Local Authority Bill:
Issuer: Local Government
Typical Term: 91 or 182 days
Tradable: Yes
Bill of Exchange:
Issuer: Companies
Typical Term: Up to 1 year
Tradable: Yes
Commercial Paper:
Issuer: Large, listed companies
Typical Term: Up to one year
Tradable: Yes
Certificate of Deposit:
Issuer: Banks
Typical Term: 28 days to 6 months
Tradable: Yes
Policy objectives of Central Banks
Inflation
- Demand-pull inflation is the increase in aggregate demand which pull prices upward
- Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
Economic growth
Exchange rate
- Implement foreign exchange laws
Stability of financial sector
Monetary policy / Money market operations of the central bank to manage liquidity and inflation rates (ie the money supply)
- Set (overnight) repo rate and use repo and reverse repo arrangements
- Sale and purchase of treasury bills (and possibly other instruments)
- Commercial bank reserve requirements (‘reserve ratio’)
- Printing money and quantitative easing
Quantity Theory of Money
MV=PY
Where M=quantity of money, V=velocity of money, P=price level, Y=no. of transactions
(i.e. money supply matches the value of transactions or GDP)
In the short term, V and Y are constant.
Hence an increase in M leads to an increase in P
Why do institutional investors not normally invest a large proportion of funds in money market instruments?
I. Money market instruments give a lower expected return than other, riskier assets
II. Money market instruments are not a good match for long-term liabilities.
III. There is reinvestment risk – Proceeds will have to be reinvested on unknown terms
IV. Short term interest rates will move broadly in line with price inflation. However, money market instruments are not a good match if the investor has real liabilities linked to some other index
V. Too large a proportion would result in a lack of diversification
VI. There may be a limited supply of money market instruments available
Bonds
An alternative term for a fixed-interest or index-linked security
Nominal GRY (required return) on Bonds
Nominal GRY (required return) =
Risk-free real yield + expected future inflation + bond risk premium
Where bond risk premium = inflation risk premium
+ default / credit risk premium
+ marketability / illiquidity premium
3 Types of corporate bonds
- Debentures (medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest)
- Unsecured loan stock
- Subordinated debt
Gross redemption yield
The return an investor would expect to get on a bond if they held it until redemption
This assumes they could reinvest the coupons at the same rate, and ignores expenses, tax and default risk
Define the term ordinary share and describe the features of ordinary shares
Ordinary shares are securities held by the owners of an organization
Features
● Shareholders have a right to receive all distributable profits after debtholders and preference shareholders.
● Dividends are related to profits and hence unknown in advance
● Dividends are variable but expect to generally increase over time
● Companies try not to reduce dividends (dividend cover ratio or payout ratio can be volatile)
● They rank behind all creditors for repayment on winding up.
● Ordinary shares have no final redemption date.
● They carry voting rights.
Suggest reasons why a company might want to buy back some of its shares
- Excess cash that cannot be used profitably and is
returned to shareholders - Excess cash may only earn deposit rate of interest,
thus disposing the cash improves earning per share for remaining shares - May be more tax-efficient way of returning cash to shareholders than dividends
- Company may wish to change capital structure from
equity financing to debt financing
Features of Preference Shares
● The dividend on a preference share is usually a fixed percentage of the par
value
…and is always paid before any distribution to ordinary shareholders.
● The dividends do not have to be paid if profits are insufficient.
● They are generally cumulative so that if a dividend is unpaid, the arrears must also be paid off before any payment is made to ordinary shareholders.
● They usually rank before ordinary shares for repayment on winding up.
● Most preference shares have no final redemption date.
● They do not normally carry voting rights.
What are the advantages of listed shares over unlisted shares to the investor
- Greater marketability
- Greater divisibility
- More information is available, due to disclosure requirements
- Greater security, from stock exchange regulations
- Easier to value
PROBLEMS with direct property investment:
Size usually too large for most investors
Diversification within property is difficult due to large unit size
Lack of marketability (time taken, costs)
Valuation is unknown and/or costly (surveyor needed)
Specialised expertise (property, local conditions) needed to invest and manage direct property
Types of indirect property investment
Pooled property funds
- include open-ended unitised funds (unlisted: price = NAV) and closed-ended property investment trusts (listed: price < NAV normally)
- normally have constitutions that specify the type of property that can be invested in
- these are trust REIT’s (Real estate investment trusts)
Property shares
- companies that manage, operate, and own a real estate portfolio consisting of income-producing property)
- these are company REIT’s
