Mnemonics v1 Flashcards
Reasons for calculating provisions:
BAD MEDICS
Benefit improvements for a benefit scheme
Accounts and reports / published and internal
Discontinuance/ surrender benefits
Mergers and acquisitions Excess of assets over liabilities and so whether discretionary benefits can be awarded Disclosure information for beneficiaries Investment strategy Contribution / premium setting Statutory solvency reports
Contract design factors:
AMPLE DIRECT FACTORS
Administration Marketability Profitability Level and form of benefits Early leaver benefits
Discretionary benefits Interests and needs of customers Risk appetite of the parties involved Expenses vs charges Competition Terms and conditions of contract
Financing (capital requirements) Accounting implications Consistency with other products Timing of contributions or premiums Options and guarantees Regulatory requirements Subsidies (cross)
Considerations when using past data to set future assumptions:
BEST ARCHER
Balance of homogeneous groups underlying the data may have changed
Economic situation may have changed
Social conditions may have changed
Trends over time, eg medical, demographic
Abnormal fluctuations
Random fluctuations
Changes in regulation
Heterogeneity within the group to which assumptions will apply
Errors in data
Recording differences (eg in categorisation of smoker)
Characteristics of a prime property:
CALL ST
Comparable properties for rent reviews and valuations
Age, condition and flexibility
Location
Lease structure
Size
Tenant quality
Practical problems with overseas investment:
MTV CATERPILLAR
Mismatching domestic liabilities
Taxation (may not be able to recover withholding taxes paid)
Volatility of currency
Custodian needed Additional admin required Time delays Expenses incurred / expertise needed Regulation poor Political instability Information harder to obtain (and less of it) Language difficulties Liquidity problems Accounting differences Restrictions on foreign ownership/ repatriation problems
Expenses incurred by a product provider:
COST RAID
Commission
Overheads
Sales / advertising
Terminal, eg paying benefits
Renewal administration, eg collection premiums / contributions
Asset management
Initial administration, eg setting up new client records
Design of the contract
External environment factors:
CREATE GREAT LISTS
Competition and the underwriting cycle Regulation and legislation Economic outlook Accounting standards Tax Environmental issues
Governance Risk management requirements Expertise from overseas Adequacy of capital Trends - demographics
Lifestyle considerations Institution structure Social trends Technology State benefits
Inappropriate advice:
CRIMES
Complicated products
Rubbish (ie incompetent) advisor
Integrity of advisor lacking, eg due to sales related payments
Model or Parameter errors
Errors in data relating to members
State-encouraged but inappropriate actions
Possible reasons for ART:
DESCARTES
Diversification Exploits risk as an opportunity Solvency improves/ source of capital Cheaper cover than reinsurance Available when reinsurance may not be Results smoothed Tax advantages Efficient risk management tool Security of payments improved
Benefit scheme info to disclose in accounts:
DIM CLAIMS
Directors’ benefit costs
Investment return over year
Membership movements
Change in surplus / deficit over year Liabilities accruing over year Assumptions Increase in past service liabilities Method Surplus / deficit
Reasons for analysing surplus:
DIVERGENCE
Divergence of actual vs expected (show financial effect / significance of)
Information to management and for accounts
Variance of whole is equal to the sum of variance from individual levers
Experience monitoring to feedback into ACC
Reconcile values for successive years
Group into one-off / recurring sources of surplus
Executive remuneration schemes (data for)
New business strain (show effects)
Check on valuation assumptions and calculations
Extra check on valuation data and process
Problems with industry data:
DR DONE Q
Detail insufficient
Risk factors coded in different way
Differences in target markets Out of date Not everyone contributes Errors Quality only as good as that of contributors
Consideration in assessing different models:
FENCED
Fit for purpose Expertise available in house Need for flexibility Cost of each option Expected number of times used Desired accuracy
Types of Actuarial advice:
FIR
Factual advice
Indicative advice
Recommendations
Importance of risk reporting:
FRAUD CRIME
Financing (appropriate price, reserves, capital requirements)
Rating agencies
Attractiveness to investors
Understand better (risks and their financial impact)
Determine appropriate control systems
Changes over time Regulator Interactions Monitor effectiveness of controls Emerging risk identification
Economic situations in which cash is attractive:
GRID
General economic uncertainty
Recession expected
Interest rates expected to rise
Depreciation of domestic currency expected
Aims of regulation:
GRIP
Give confidence in the system
Reduce financial crime
Inefficiencies in the market corrected (and efficient and orderly markets promoted)
Protect consumers
Economic factors:
IS FIERCE
Inflation
Short-term interest rates
Fiscal deficit Imports / exports Employment rate Returns on alternative investment Currency Economic growth
Theories of the yield curve:
LIME
Liquidity preference
Inflation risk premium
Market segmentation
Expectations
Factors to consider when setting assumptions:
LUNCH
Legislation/ regulation Use of the dat Needs of the client Consistency between assumptions How financially significant is/are the assumptions
Criteria for an insurance risk:
FIA MUD PIS
Financial/ quantitative nature
Interest in risk being insured
Amount payable relates to size of loss
Moral hazard eliminated as far as possible
Ultimate limit on liability undertaken
Data exists with which to price risk
Pooling a large number of similar risks
Independent risk events
Small probability of occurrence
Risk responses:
PIRATE
Partially transfer Ignore Reduce Accept (retain all) Transfer Evade (avoid)
Identification of causes of risk in projects:
BCPPENF
Business risks Crime Political risks Project risks Economic risks Natural risks Financial risks
General reasons for holding cash:
POURS
Project monetary values Opportunities (to take advantage of) Uncertain liabilities Recently received cashflow Short-term liabilities
Problems with industry data:
QUERIED
Quantity (credibility) Up-to-date? Errors Relevance (heterogeneity) Incomplete? Exceptionals (anomalies) Detail and format
Why financial providers need capital:
REG CUSHION
Regulatory requirement to demonstrate solvency
Expenses of launching a new product / starting a new operation
Guarantees can be offered
Cashflow timing management
Unexpected events cushion, eg adverse experience
Smooth profit
Help demonstrate financial strength
Investment freedom to mismatch in pursuit of higher returns
Opportunities, eg mergers and acquisitions
New business strain financing
Reasons for using reinsurance:
SAD LIFE
Smooth results
Avoid large losses
Diversification
Limit exposure to risk (single event, accumulations)
Increase capacity to accept risk
Financial assistance
Expertise
Reasons for underwriting:
SAFER
Substandard risks - identify and offer special terms to substandard risks while aiming to accept as many lives as possible on standard premium rates
Avoid anti-selection
Financial underwriting against over-insurance
Ensure that claims experience follows that expected in pricing basis
Risk classification to ensure that all risks are treated fairly
Benefits of a good risk management system:
SAMOSAS
Stability / quality of business improved Avoid surprises Management is capital improved Opportunities exploited for profit Synergies identified Arbitrage identified Stakeholders given confidence
Features of a good model:
CLERICAL ADVISORS
Capable of refinement Length/expense of run not too long/ high Easy to understand Rigorous Independent verification of outputs Clear results Adequately documented Large range of implementation methods
All significant features allowed for Developable Valid Inputs to parameter values appropriate Sensible joint behaviour of variables Output workings are communicable Reflects risk profile Simple whilst retaining key features
Info to disclosure to benefit scheme members:
SCRIBE
Strategy of investment Contribution obligations Risks involved Insolvency entitlement Benefit entitlements Expense charges
Function of a regulator:
SERVICE
Setting sanctions
Enforcing regulations
Reviewing and influencing government policy
Vetting and registering firms and individuals
Investigating breaches
Checking management and conduct of providers
Educating consumers and public
Ways of valuing assets:
SHAM FADS
Smoothed market value
Historic book value
Adjusted book value
Market value
Fair value
Arbitrage value
Discounted cashflow
Stochastic modelling
Reasons why disclosure is important:
SIMMERS
Sponsor is aware of financial significance of benefits
Informed decisions can be made
Mis-selling is avoided
Manages the expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor / trustees are made more accountable
Factors affecting investment
SOUNDER TRACTORS
Size of the assets (absolute / relative) Objectives Uncertainty of the liabilities Nature of the liabilities Diversification Existing portfolio Return (expected long-term)
Tax treatment of the assets / investor Restrictions / statutory / legal / voluntary Accrual of liabilities Currency of the existing liabilities Term of the existing liabilities Other funds’s strategies (competition) Risk appetite Solvency and accounting requirements
Types of selection:
STATIC
Spurious Time Adverse selection Temporary Initial Class
Investment and risk characteristics of assets:
SYSTEM T
Security (default and other risks)
Yield (real or nominal, running yield, expected return, compare with other assets)
Spread (volatility of market values, diversification)
Term
Expenses or Exchange rate
Marketability
Tax
Regulatory influences on assets held:
TECH SCAM
Types of assets that a provider can invest in
Extent to which mismatching requirement is allowed
Currency matching requirement
Hold certain assets, eg government bonds
Single counterparty maximum exposure
Custodianship of assets
Amount of any one asset used to demo solvency may be restricted
Mismatch reserve
Sources of data:
TRAINERS
Tables eg actuarial mortality tables Reinsurers Abroad (data from overseas contracts) Industry data National statistics Experience investigations in the existing contract Regulatory reports and company accounts Similar contracts
Characteristics of investors:
TRAITOR
Tax position Regulation on investor Assets already held Income / cashflow requirements Tastes (liabilities, education, fashion) Other assets and other investors Risk appetite
Reasons for investing in Passive Funds:
HELIPORT
Happy with historic returns of passive fund
Efficient market hypothesis holds
Lack of time/ expertise for active management
Investment management fees lower as no specialists needed
Portfolio too small to justify active management
Other similar institutions in passive funds
Risks of active management considered too high
Transaction costs lower as far less frequent
Cannons of lending:
CRAP SR
Character and ability of borrower
Repayment ability of borrower
Amount of the loan
Purpose of the loan
Security of the loan
Risk vs reward
Benefits on Integrated Risk Management
CD PIE
Capital efficiency as capital can be better targeted
Diversification, including being able to identify in diversified areas of risk
Pooling of risk
Insight into risk in different parts of the business
Economies of scale in terms of the risk management process
Uses of data
AIRSPAMMER
Accounts Investment monitoring Risk management Statutory returns Pricing Administration Marketing Management information Marketing Experience analysis and statistics Reserving / provisioning
