Mnemonics V2 Flashcards
Reasons for calculating provisions
BAD MEDICS
Benefit improvements for 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
Possible reasons for ART
DESCARTES
Diversification Exploits risk as an opportunity Solvency improves / sources of capital Cheaper cover than reinsurance Available when reinsurance is not available Results smoothed Tax advantages Efficient risk management tool Security of payments improved
Inappropriate advise
CRIMES
Complicated products
Rubbish (I.e incompetence) advice
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
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 capacity Trends - demographics
Lifestyle considerations Institute structures Social trends Technology State benefits
Expenses incurred by a service provider
COST RAID
Commission
Overheads
Sales / advertising
Terminal expenses
Renewal administration (e.g. premium/ contribution collection)
Asset management
Initial administration, bringing in new policies into the books
Design of the contract
Practical problems with overseas involvement
MTV CATERPILLAR
Mismatch of domestic liabilities
Tax (may not be able to recover withholding taxes paid)
Volatile
Custodian needs Additional admin required Time delays Expenses incurred / expertise needed Regulation poor Political instability Information harder to obtain Liquidity problems Accounting differences Restrictions on foreign ownership / repatriation issues
Characteristics of prime property
CALL ST
Comparability
Age / condition and flexibility
Location
Lease structure
Size
Tenant quality
Consideration when using past data to set future assumptions
BEST ARCHER
Balance of homogeneous group underlying the data may have changed
Economic situation might have changed
Social conditions may have changed
Trends over time, eg medical, demographic
Abnormal fluctuations
Random fluctuations
Changes in regulation
Heterogeneity within the groups to which the assumptions will apply
Errors in data
Recording differences (eg in categorisation of smokers)
Contract design factors
AMPLE DIRECT FACTORS
Administration Marketability Profitability Level and form of benefit Early leaver benefits
Discretionary benefit Interest and needs of customers Risk appetite of parties involved Expenses vs charges Competition Terms and conditions
Financial (capital requirement) Accounting requirements Consistency with other products Timing of contributions or premium Options and guarantees Regulatory requirement Subsidies (cross)
Benefit scheme to disclose in accounts
DIM CLAIMS
Director’s benefit cost
Investment return over the year
Membership movements
Change in surplus / deficit over year Liabilities accruing over year Assumptions Increase in past service liabilities Method Surplus / deficit
Reasons for analysis of surplus
DIVERGENCE
Divergence of actual vs expected results
Information to management and accounts
Variance of whole equals to sum of variance of individual levers
Executive remuneration of executives
Reconciliation of results of successive years
Group into one- off or recurring sources of surplus or deficits
Experience monitoring to feed back into the ACC
New business strain (show effect of)
Check on valuation assumptions and calculation
Extra check on valuation process and data
Problems with industry data
DR DONE Q
Detail insufficient
Risk factors recorded differently
Differences in target market
Out-dated
Not everyone participate
Errors
Quality of data is as good as that of participants
Consideration in assessing different models
FENCED
Fit for purpose Expertise available in-house Need for flexibility Cost of all options Expected number of times to be used Desires accuracy
Types of actuarial advice
FIR
Factual advice
Indicative indicative advice
Recommendations
Importance of risk reporting
FRAUD CRIME
Financing (appropriate price, reserves and capital requirements)
Rating agencies
Attractiveness to investors
Understand risk better (risks and their financial impact)
Determine appropriate control systems
Changes over time Regulator Interaction Monitor effectiveness of risk controls Emerging risks identified
Economic situations which cash is attractive
GRID
General economic uncertainty
Recession expected
Interest rates expected to increase
Depreciation of domestic currency
Types of selection
STATIC
Spurious selection Time selection Adverse selection Initial Class
Cannons of lending
CRAP SR
Character and ability of borrower
Repayment ability of borrower
Amount borrowed
Purpose of loan
Security of loan
Risk vs reward
Reasons for investing in passive funds
HELIPORT
Happy with past performance of fun or historic performance of fund
Efficient market hypothesis hold
Lack of time/ expertise for active management
Investment management fees lowers as no specialists needed
Portfolio too small to justify active management
Other similar institutions invest in passive funds
Risks of active management considered too high
Transaction cost lower as far less frequent investment changes
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
Sources of data
TRAINERS
Tables Reinsurance Academic papers Industry National statistics Experience investigations in the existing contracts Regulatory reports and company accounts Similar contracts
Regulatory influence on assets held
TECH SCAM
Types of assets that an investor can invest in
Extent to which mismatching is allowed
Currency matching requirement
Hold certain assets, eg government bonds
Single counter-party maximum exposure
Custodianship of assets
Admissible assets - amount of any asset held that can used to demo solvency may be restricted
Mismatch reserve
Investment and risk characteristics of assets
SYSTEM T
Security (default or other risk)
Yield (real or nominal, running yield, expected returns, compare with other assets)
Spread (volatility of market values, diversification)
Term
Expenses/ exchange rate
Marketability / Liquidity
Tax
Factors affecting investment strategy
SOUNDER TrACTORS
Size of assets(relative or absolute) Objective Uncertainty of liabilities Nature of liabilities Diversification Existing portfolio Regulator
Term of current liability Restitution / statutory / legal / voluntary Accrual of future liabilities Currency of existing liabilities Tax treatment of asset or investor Other funds strategies (competition) Risk appetite Solvency and accounting requirements
Reasons why disclosure is important
SIMMERS
Sponsor is aware of financial significance of benefits
Informed decisions can be made
Mis-selling avoided
Manages the expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor / trustee are made more accountable
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
Function of a regulator
SERVICE
Setting sanctions
Enforcing regulation
Reviewing and influencing government policy
Vetting and registering firms and individuals
Investigating breaches
Checking management and conduct of providers
Educating the public and consumers
Info to disclosure to benefit scheme method
SCRIBE
Strategy of investment Contribution obligations Risks involved Insolvency entitlement Benefit entitlement Expense charges
Features of a good model
CLERICAL ADVISORS
Capable of refinements Length/ expense of run not too long or high Easy to understand Rigorous Independent verification of output Clear results Adequately documented Large range of implementation
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
Benefits of a good management risk managent
SAMOSAS
Stability / quality of the company improved Avoid surprises Management of capital improved Opportunities exploited for profit Synergies identified Arbitrage identified Stakeholders given confidence
Reasons for underwriting
SAFER
Substandard risks - identify and offer special terms to substandard lives while aiming to accept as many lives as possible in standard premium rates
Avoid anti-selection
Financial underwriting to avoid over insurance
Ensure that claims experience follows that expected in pricing basis
Risk classification to ensure that all risks are treated fairly
Reasons for using reinsurance
SAD LIFE
Smooth results
Avoid large losses
Diversification
Limit exposure to single risk or accumulation of risks
Increase capacity to accept risk (more business written or write large risk)
Financial reinsurance
Expertise
Why financial providers need capital
REG CUSHION
Regulatory requirements 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 profits
Help demonstrate financial strength
Investment freedom to mismatch in pursuit of higher returns
Opportunities (e.g. mergers and acquisitions)
New business strain (financing of)
General reasons for holding cash
POURS
Protect monetary values Opportunities (to take advantage of) Uncertain liabilities Recently received cash Short-term liabilities
Identification of causes of risk in a project
BCPPENF
Business risk Crime Political risk Project risks Economic risks Natural risks Financial risks
Risk responses
PIRATE
Partially transfer Ignore Reduce Accept (retain all) Transfer Evade (Avoid)
Criteria of insurance risk
FIA MUDPIS
Financial / quantifiable nature
Interest in risk being insured
Amount payable relates to the loss
Moral hazard eliminated as far as possible Ultimate limit on liability undertaken Data exists in which to price risk Pooling a large number of similar risk Independent risk events Small probability of occurrence
Factors to consider when setting assumptions
LUNCH
Legislation/ regulation Use of data Needs of client Consistency between assumptions How financially significant the assumption is/ are
Theories of the yield curve
LIME
Liquidity preference
Inflation risk premium
Market segmentation
Expectations
Economic factors
IS FIERCE
Inflation
Short term interest rate
Fiscal policy Imports/ exports Employment rate Returns on other investments Currency Economic growth
Aims of regulation
GRIP
Give confidence in the system
Reduce crime
Inefficiencies in the market are corrected
Protect consumers
Benefits of Enterprise Risk Management
CD PIE
Capital efficiency as capital can be better targeted
Diversification, including being able to identify undiversified areas of risk
Pooling of risks
Insight into risk in different parts of 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 Experience analysis and statistics Reserving or provisioning
Checks on Data
SCARFACE MVR
Spot checks
Contributions and benefit payments consistent with accounts
Asset income consistent with accounts
Reconciliation of beneficial owner and custodian records where assets are held with a third party
Full deed audit for certain assets (e.g. property)
Average sum assured compared with previous investigation
Consistency at start and end of period (shareholding’s)
Equate member numbers/ Reconcile
Movement data against records
Validity of dates
Reconciliation of benefits and premiums
Factors to consider when comparing options when discontinuance
CRISES
Choice: Does the method give members choice?
Risks: Who takes the risks of experience not being as expected?
Investments: Do investments need to be realised, generating associated costs?
Security: What security and/or guarantees does the method offer?
Expenses: What expenses will be incurred?
Surplus: Will any scheme or deficit be crystallised?
Factors used on choosing correct valuation method for Assets and Liabilities
- Purpose of valuation
- Regulation:
- Going concern/ discontinuance - Client:
- Understandable - Assumptions?
- Realisable value?
- Objective
- Obtainable
- Consistency
- Type of assets being valued
- Marketable?
- Quoted prices
- Volatility - sentiment / fundamentals
- Information available - obtainable? - Time taken
- Easy to:
- Understand
- Calculate
- Explain - Difficulty in carrying out:
- Actuarial judgement
- Time consuming
- Stability
