Part 1 Flashcards
List the 3 requirements for a risk to be insurable.
- The policyholder must have an interest in the risk being insured.
- The risk must be of a financial and reasonably quantifiable nature.
- The amount payable must have some relationship to the financial loss incurred.
List the additional criteria that would ideally be met by an insurable risk event (6 points).
- Risk events must be independent of each other.
- The probability of risk event is relatively small.
- Large number of similar risks should be pooled together to reduce the variance.
- There should be an ultimate limit to the insurer’s liability.
- The insurer should be able to estimate the size of risk.
- Moral hazards should be eliminated as far as possible.
Define rental yield.
(rental income - management expenses) / cost of purchase (gross of all purchase costs)
What are the factors affecting the level of rental yield? How do these factors affect rental yield?
- Type of property: The better the property, the lower the yield.
- Type of tenant: The less risky (lower default risk), the lower the yield.
- Type of lease: Making tenant responsible for repair and insurance will affect yield.
- Marketability: greater marketability => lower yield.
What are the four ways to mitigate risk?
- Avoiding
- Accepting and minimizing
- Sharing
- Transferring
What is the WACC formula?
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What are the aims of regulation of financial regulators?
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What are the Direct and indirect costs of regulation?
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Why is the need for regulation in financial markets greater than other markets?
- Maintenance of confidence in the sector.
- Dealing with information asymmetries.
What are the functions of a regulator?
<img></img><br></br><br></br>SERVICE:<br></br>Setting Sanctions<br></br>Enforcing regulations<br></br>Reviewing and influencing government policy<br></br>Vetting and registering firms and individuals to conduct certain types of business<br></br>Investigating breaches<br></br>Checking prudential management of financial organizations<br></br>Checking conduct of financial organizations<br></br>Educating consumers and public
What are the mitigation tools to address information asymmetries? (5)
<ul><li>Disclosing of information in simple English.</li><li>Preventing and dealing with conflict of interest.</li><ul><li>Chinese wall.</li><li>Separation of functions in firm.</li></ul><li>Cooling periods.</li><li>Customer legislation on TCF and unfair contracts terms.</li><li>Whistleblowing by statutory actuaries if they believe the firm is treating customers unfairly by unfair pricing for example.</li></ul>
What is information asymmetry?
When one or more parties of a transaction have relevant information that the other party does not have.
What is anti-selection?
People who are higher risk will be more likely to take out insurance when they believe that their risk is more than what the insurance premium has allowed in its premium.
What are the mitigation tools for maintenance of confidence? (5)
<ul><li>Checks on capital adequacy of providers.</li><li>Competence and integrity of practitioners.</li><ul><li>Professional bodies ASSA, SAICA.</li></ul><li>Industry compensation schemes.</li><li>Markets that are orderly and transparent.</li><li>Stock Exchange requirements.</li></ul>
What are the main types of Regulator regimes?
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What are the advantages and disadvantages of self-regulation?
Advantages: <br></br>- The regulations are implemented by people with the greatest knowledge of market.<br></br>- These individuals also have the greatest incentive to achieve optimal cost-benefit ratio.<br></br>- May be easier to persuade firms and individuals to co-operate, as opposed to government regulations.<br></br><br></br>Disadvantages: <br></br>- Closeness of regulator to industry being regulated could lead to biasness.<br></br>- The regulations could inhibit new entrants.
What are the forms that regimes could adopt?
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What are the three major financial institutions and what is their roles?
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What does SDG stand for?
Sustainable Development Goals.
What does ESG stand for?
Environmental, Social and Governance Framework used to assess a company’s impact on the ESG practices.
What are the categories for benefits available?
<ul><li><span>Benefits on events that are unpredictable – both whether and when they might occur.</span></li><li><span>Benefits on events certain to occur, but unpredictable in time.</span></li><li><span>Benefits for immediate consumption.</span></li><li><span>Benefits on events predictable in time.</span></li><li><span>Benefits from the accumulation of disposable income and capital.</span></li></ul>
What are the three components that the premium charged should reflect?
<ul><li>The probability of the risk event occurring.</li><li>The amount that the risk event will cost.</li><li>The return that can be earned on the pre-funded money before the risk event occurs.</li></ul>
Logical needs of customer can be analyzed as: (4)
<ul><li><span>Logical needs: (MAAP)</span></li><ol><li><span>Maintaining a current lifestyle.</span></li><li><span>Accumulation for a purpose (retirement income or repayment of a mortgage).</span></li><li><span>Accumulation for a purpose as yet unknown.</span></li><li><span>Protection (against death, ill health, loss, illness or accident).</span></li></ol></ul>
What are current and future needs?
<ul><li><span>Current needs - these that have an immediate impact in an individual's life (illness or death).</span></li><li><span>Future needs - relating to future aspirations.</span></li></ul>
What is a vulnerable consumer according to the FCA?
It is a consumer who, due to their personal circumstances, is especially more susceptible to detriment when a firm is not acting with appropriate level of care.
What is fact find?
The process of analyzing and prioritizing financial needs. Can defs be linked to regulations of TCF - treating customers fairly - making customer’s need a priority.
How can benefits be taxed?
<ul><li>Benefits can be free of tax.</li><li>Excess of benefits received over contribution can be taxed as capital gains vs income.</li><li>Full benefit taxed.</li></ul>
What does corporate governance refer to?
Corporate Governance refers to the high-level framework within which a company’s managerial decisions are made. Important to note this leads to management making decisions that are in the best interests of the stakeholders. Managers are incentivized by being given shares or salary increases linked to the performance of the company.
What report in SA addresses Corporate governance? What does it focus on?
KING IV Report. It is outcome-based and it focuses on practices that drive good corporate governance.
What is the difference between contributory and non-contributory schemes?
Contributory schemes are schemes where both the employer and employee contribute to the scheme. Non-contributory is when only the employer contributes.
What are the major roles played by the State with regards to benefits?
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What are 2 ways that insurance companies use to set premiums?
- Profit testing.
- A formula.
What is a new business strain? Give all components.
It is when there is a new insurance contract and the outgo (expenses associated with new business) is greater than that income. More detailed: 1. Insurance company has new business. 2. New business pays premium at end of month. 3. Premium used to pay for: - Pay commission - initiation fees - underwriting fees - setting up provisions and any other required solvency ratios.
Suggest additional reasons, besides for reserving and capital adequacy, why an insurance company might need capital.
- For growth opportunities - mergers and acquisitions.
- For development expenses - product development, marketing and advertising.
- To show financial strength - could attract potential policyholders to choose them and credit rating agencies to give them a good rating.
- Investment freedom - could allow them to mismatch assets more to allow for more investment returns.
- To smooth out dividends.
What will trustees of a benefit scheme likely require advice on?
<ul><li>Maintaining solvency.</li><li>Managing the assets of the scheme.</li><li>Paying the benefits under the scheme as they fall due.</li></ul>
What advice can actuaries provide to the sponsors of the scheme?
<ul><li>Ensuring sponsor is providing retirement benefits that meet the needs of the members.</li><li>Ensuring sponsor is providing protection benefits that meet the needs of the members (and their dependants).</li><li>Meeting legislative requirements.</li><li>Managing the cost of providing these benefits.</li></ul>
What can actuaries advise the government on?
<ul><li>Setting of legislation that impact financial products.</li><li>Monitoring of such legislation.</li><li>Funding of state benefits.</li><li>Monitoring the funding of the state benefit.</li></ul>
Give some key examples of risk that an insurance company will highlight.
MECIO
Market risk - currency risk, liquidity risk, adverse changes in prices of assets risk.
External risk - catastrophes, legislation and regulation, tax, inflation.
Credit risk - risk.
What are some key examples of risk that an insurance company will highlight?
Market risk, external risk, credit risk, insurance risk, operational risk.
What are the three types of advice?
Indicative, factual advice, recommendations.
What are the six principles that the Actuarial code in the UK is structured around?
Integrity, impartiality, competence and care, compliance, communication, speaking up.
What is South Africa’s equivalent of the Actuarial code of IFOA?
ASSA’s Code of Professional Conduct.
What is the intention of the Actuarial Quality Framework?
To be complementary to professional regulations affecting actuaries and promote actuarial quality.
What are the drivers of actuarial quality the Actuarial Quality Framework aims to promote?
Methods, actuaries, communication, environment.
What do you meet the requirements of?
You meet the requirements of regulations and comply with legislation.
Outline the underwriting cycle.
- Companies are profitable 2. New entrants to the market 3. More competition 4. Lower premium rates 5. Reduced profits 6. Some insurers leave the market 7. Remaining insurers increase premium rates 8. Companies are profitable again.
What are the two main sources of demographic changes?
Increasing life expectancy, falling birth rates.
What would be the results of an aging population?
Less spending and more saving, strain on social welfare benefits, increased healthcare costs.
What is the aim of good corporate governance?
To manage a company efficiently in a way that meets the requirements of all stakeholders.
What are the strategies for good governance?
Remuneration incentives for managers, appointing non-executive directors.
What is the acronym for the characteristics of an investment?
SYSTEM TL: Security, Yield, Spread, Term, Expenses, Marketability, Tax, Liquidity.
What are the types of cash on deposit?
Call deposit, notice deposit, term deposit.
What are the big players in the money market?
Clearing banks, central banks, other institutions.
What are the characteristics of cash in deposits and money market instruments?
Liquidity, security, yield, marketability.
What are the reasons for a long-term financial institution holding cash on deposit?
Liquidity, economic conditions.
What are the most important distinct types of bond market?
Government bonds, corporate bonds, overseas bonds.
What are the characteristics of fixed term bonds?
Security, fixed yield, lower expected return than equities, market value volatility, low expense cost, low liquidity.
Describe the relative attractiveness of fixed-interest and index-linked bonds.
Investors choose based on inflation expectations and interest rate trends.
What is the formula for nominal yield?
Nominal yield = risk-free real yield + expected future inflation + inflation risk premium.
What is the formula for the lump sum payment at redemption?
X = 100% -> redeemable at par; X < 100% -> redeemable at discount; X > 100% -> redeemable at premium.
What are the three types of bond markets?
Markets in government bonds, corporate bonds, overseas government and corporate bonds.
Name the different areas of external environment.
Legislation, tax, state benefits, corporate governance, accounting standards, capital adequacy, risk management, commercial requirements, competitive advantage, international practice, technological changes, demographic changes, cultural changes, lifestyle considerations, climate change, environmental issues.
What is the formula for dividends cover?
EPS/DPS.
What is payout ratio?
Dividends per share/earnings per share.
What is P/E ratio and what does it indicate?
Market price per share/earnings per share; indicates market belief in the company.
What is the difference between preference and ordinary shares?
Preference shareholders cannot vote and receive dividends before ordinary shareholders; ordinary shareholders can vote and receive dividends after preference shareholders.
What are the characteristics of equities?
Security of dividends depends on the profitability of the company.
What are the characteristics of Equities?
S - Security (of dividends) depends on the profitability of the company.
Y - Real yield in long term.
Y - Higher expected return in the long term than most financial products.
S - Both price and dividends tend to be volatile.
T - Equities can be held in perpetuity.
E - Dealing expenses are linked to marketability, generally greater than that of bonds.
E - Currency risk will occur if you are investing in markets overseas and in their currency.
M - Depends on the size of the company.
T - Capital gains tax and income tax.
What are the 4 reasons why a company might buy back shares?
- Cash that it cannot convert to profit - rather give it to shareholders as return.
- To increase the earnings per share.
- Change capital structure from equity to more debt financing.
- Tax treatment for capital gains tax better than that for income tax.
What are quoted shares generally characterized by?
- Easy to value compared to non-quoted.
- More secure.
- More marketable.
Why are shares categorized by industry sectors?
- Practicality - Companies in the same sector are affected by similar factors.
- Correlation of investment performance - Companies tend to have similar financial structures and resources.
What factors will a prime property score highly in?
- Number of comparable properties for rent review and valuations.
- Age and conditions.
- Location.
- Lease structure.
- Size.
- Quality of tenant.
What are the investment and risk characteristics of properties?
Y - Real returns linked to inflation.
Y - Higher expected return than bonds.
S - Capital values tend to be volatile in the long term.
T - Long term investment.
E - Generally quite expensive.
M - Not marketable due to uniqueness and valuation challenges.
What are the different types of indirect property investments?
- Pulled property funds.
- Buying shares in property companies.
- REIT - Real Estate Investment Trusts.
Why would one choose indirect investments?
- Can buy small units, more affordable than a whole property.
- Expertise provided by property companies or REITs.
- Avoid large expenses associated with directly owning a property.
What is the optimal level of regulation?
The level at which marginal costs of regulation is equal to the marginal benefit of regulation.
What are the general benefits of pooling of risks?
- Cost-effective due to economies of scale in provisions, administration costs, and investment.
- Reduces volatility.
What are the three main principles of insurance?
- Insurable interest.
- Pre-funding.
- Pooling of risk.
What are the three factors that determine how much pre-funding is needed and premium charged?
- The probability of risk event.
- The cost of the risk event.
- The return that can be earned on the pre-funded money.
What can vulnerability arise from?
- Low income.
- Little financial security due to low earnings and low savings.
- Poor health status.
- Low level of education.
- Little knowledge of financial markets and products.
- Limited access to advice.
