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3. Exam 3.1 > QA Bank Part 1 > Flashcards

QA Bank Part 1 Flashcards

1
Q

Outline areas of a life insurance company’s operations that an actuary may be required to certify.

A

The role of certification will relate primarily to the demonstration of solvency.

  • proper records kept (liability valuation)
  • proper provision for liabilities
  • liabilities valued in accordance with legislation
  • method & assumptions used for their valuation have been described.
  • assets & liabilities valued consistently
  • that assets were valued in accordance with legislation
  • that in his or her opinion, the future premiums will be sufficient to meet its commitments.
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2
Q

Principle of proportionality

A

Work need only be performed that is proportionate:

  • to the scope of the design
  • or assignment to which it relates
  • and the benefit that users would be expected to obtain from the work.

In other words, the principle of proportionality says that an action should be proportionate to the problem or task at hand and need not go beyond what is necessary to achieve its objective.

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3
Q

Principle of materiality

A

Matters are material if they could, individually or collectively, influence the decisions to be taken by users of the related actuarial information.
Assessing materiality is a matter of reasonable judgement which requires consideration of the users and the context in which the work is performed and reported.
This means that a principle in a TAS can be ignored if it is felt that its inclusion would not have a material effect.

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4
Q

You recently completed an actuarial task.

List the checks that you will carry out on your answers

A

Need to check that:

  • the answers look reasonable
  • the sensitivity testing carried out was appropriate
  • the range of answers produced is consistent with the level of confidence associated with the assumptions made
  • the results are reviewed by a peer.
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5
Q

10 Basic elements common to all actuarial work

A

MONITORING

  • the ongoing monitoring through periodical analysis of the emerging experience
  • modifying models / strategies in the light of this analysis of the emerging experience.

ASSUMPTIONS

  • the use of assumptions based on appropriate historical experience, used to help understand the future
  • the need to allow for the impact of legislation, regulation, taxation, competition

RISK
- recognition of stakeholders’ requirements and an understanding of their risk profiles.

INTERPRETATION
- the interpretation of the results of running a model to help develop practical strategies

ESTIMATION

  • of the financial impact of uncertain future outcomes
  • of the long-term rather than short-term position
  • the making of decisions in the short term in the light of likely future outcomes
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6
Q

3 Types of advice that an actuary may provide

A
  • Factual Advice
  • Indicative Advice
  • Recommendations
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7
Q

Factual advice

A

Giving an opinion based on research of the facts

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8
Q

Indicative advice

A

Giving an opinion without investigating the issues

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9
Q

Recommendations

A

Giving an opinion based on researched and modelled forecasts, with the alternative scenarios considered, and recommendations supplied based on the research of the facts.

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10
Q

List 10 stakeholders that an actuary may advise in relation to a life insurance company

A
  • existing and prospective POLICYHOLDERS
D - board of DIRECTORS
I - investment fund managers
S - SHAREHOLDERS
G - the GOVERNMENT
R - REINSURERS
A - AUDITORS
C - CREDITORS
E - EMPLOYEES
R - REGULATORS
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11
Q

8 stakeholders of a final salary pension scheme

A
  • sponsor, ie contributing employer
  • members (actives, deferred and current pensioners)
  • members’ dependents
  • non-member employees
  • the government
  • regulators
  • auditors
  • tax authorities
  • trustees
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12
Q

State the interests and financial needs of:

- the sponsor

A
  • to provide benefits that meet the needs of the members and their dependents
  • to manage the cost of providing the benefits
  • to control the pace of funding of the scheme
  • to meet legislative requirements
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13
Q

State the interests and financial needs of:

- members

A
  • provision of benefits on events such as death, retirement, illness, withdrawal
  • flexible / optional benefits
  • flexible / optional contributions
  • security of benefits
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14
Q

State the interests and financial needs of:

- members’ dependents

A
  • protection in the event of death of the member
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15
Q

State the interests and financial needs of:

- non-member employees

A
  • to have the option to join the scheme

- to not be unfairly disadvantaged relative to scheme members

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16
Q

State the interests and financial needs of:

- Government

A
  • to set and monitor legislation impacting on private pension provision
  • to fund and monitor State pension provision
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17
Q

State the interests and financial needs of:

- regulators

A
  • to ensure that regulatory requirements are met
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18
Q

State the interests and financial needs of:

- auditors

A
  • to assess the extent of the future liability to pay benefits.
  • to fund and monitor State pension provision
19
Q

State the interests and financial needs of:

- regulators

A
  • to ensure that regulatory requirements are met
20
Q

State the interests and financial needs of:

- auditors

A
  • to assess the extent of the future liability to pay benefits
  • to verify that the accounts are true and fair.
21
Q

State the interests and financial needs of:

- tax authority

A
  • to ensure that the pension scheme is not used for tax evation
22
Q

State the interests and financial needs of:

- trustees

A
  • to manage the assets of the scheme
  • to ensure security of benefits for members
  • maintaining solvency in the scheme
23
Q

Corporate governance

A

The high level framework within which managerial decisions are made within a company

24
Q

Explain the phrase

“Good corporate governance”

A

Corporate governance is deemed “good” if it ensures that the company is managed in a way that best meets the appropriate requirements of all of its stakeholders

25
Q

Outline the basic regulatory requirements that a stock exchange ought to satisfy in order to obtain authorisation to act as an exchange

A

Must demonstrate tot he regulator that:

  • it has adequate financial resources to provide the requisite exchange services
  • proper conduct of business rules exist
  • it operates proper, transparent and sufficiently liquid markets in the securities traded
  • appropriate procedures for recording transactions exist
  • appropriate procedures exist for admitting new listings
26
Q

“proper conduct of business rules”

A
  • all parties should be aware of the rules and understand them
  • the rules are monitored to ensure they are enforced
  • to prevent insider trading and fraud.
27
Q

Actuarial Profession Standards framework comprises (5)

A
  • ethical standards, including the Actuaries’ Code
  • continuing professional development
  • professional skills training
  • Practising Certificates
  • other non-mandatory resource material
28
Q

Main benefits of regulation

A

correct perceived market inefficiencies and promote efficient and orderly markets, in which investors can trade confidently and fairly
- e.g. ensuring investors have adequate information

protect consumers of financial products

  • (against losses due to fraud or mismanagement,
  • not against losses arising purely from market movements)

maintain confidence in the financial system so that it continues to operate effectively for the greater good of society

to help reduce financial crime,

  • by vetting firms and individuals to conduct certain activities
  • and by enforcing regulations
  • investigating suspected breaches and imposing sanctions.
29
Q

3 demographic factors that increase the cost of State provision

A
  • Changes in birth rates
  • Increased life expectancy
  • Changes to employment factors
30
Q

The effect of changes in birth rates

A

This means, there will be an increased number of pensioners relative to the number of people in the working population.

31
Q

The effect of increased life expectancy

A

People are living for longer in retirement, so the retirement pension has to be paid for longer.

32
Q

The effect of Changes to employment patterns

A

people are starting to join the working population later (as an increased number of people choose to pursue higher education)

  • leave the working population earlier through early retirement
  • both reduce the amount of contributions that are paid towards the pension
  • earlier retirement can also lead to the benefit being paid sooner.
33
Q

Flexible benefits system

A

Under a flexible benefits system, employees can trade in some of their existing benefits for other financially equivalent benefits.
Employees have a choice between, for example, salary, additional pension benefits, additional holiday, medical insurance etc.

34
Q

Advantages of a flexible benefits system

A
  • could be more attractive to employees, encouraging take up
  • result in economies of scale
  • recognises that different employees have different needs
  • for example young employees may be keen to flex salary to purchase extra holiday, whilst older employees may wish to purchase extra retirement benefits.
  • It may be seen as paternalistic to offer a flexible benefits system
  • can help the employer to attract and retain good employees
  • flexible benefits systems recognise that employee needs change over time and benefit packages can change accordingly
  • the employer does not have to pay for benefits that employees do not value, so there will be less wastage
  • New benefits can be offered at little or no cost to the employer
  • may be viewed as encouraging employee responsibility for their actions
35
Q

disadvantages of a flexible benefits system

A
  • more complex to operate
  • increased administration costs
  • if the system appears too complicated membership may fall
  • If few employees have chosen these options they may be difficult to withdraw
  • Makes it difficult for the employer to assess future resources, eg if employees are allowed to flex holiday
  • There is a risk of selection, ie certain types of employee are more likely to choose certain benefits
36
Q

Issues to consider with TCF at an investment firm

A

PRODUCTS

  • are suitable for target market (in terms of benefits & risk appetite of the customers)
  • fair terms offered between ALL investors (institutional, private, etc)

SALES distribution channels :

  • are appropriate
  • target the identified target market
  • commission offered on the product is not too high

LITERATURE (marketing & post-sale):

  • is clear, understandable, free of jargon
  • not misleading
  • states the risks involved
  • are signed off by a trained individual

COMMUNICATION

  • staff are fully trained, understand the products and communicate them clearly
  • sales process and volume of sales are closely monitored to look for the risk of mis-selling or misleading advice
  • adequate resources in place to service queries/complaints
  • customers get appropriate ongoing performance invormation

TERMINATION
- customers do not face unnecessary barriers if they want to terminate their contract with the company

37
Q

Examples of potential conflicts of interest

A
  • Actuaries in the same consulting firm often advise both the vendor, and possibly a number of prospective purchasers in the case of mergers/takeovers.
  • Actuary with statutory responsibilities often requires notifying the regulatory authorities (against his client)
  • Actuarial consultancy asked to provide advice in the case of bulk transfer of pension scheme liabilities, where the consultancy has acted as scheme manager to both parties
  • Actuary approached to provide advice on a particular issue, when they have already been asked to provide similar advice to another firm.
  • A life insurance actuary who sits on the board, and is therefore directly responsible to shareholders, but needs to set bonus rates to meet policyholders’ expectations.
  • Actuaries within an investment house who may act to advise a client and potential bidders in the case of a share issue.
  • Actuary with more than one role within a pension scheme. (member of scheme & significant shareholder / advisor to the sponsor/trustees)
38
Q

3 Main influences on policyholders’ expectations

A
  • Statements made by the provider, especially those in marketing literature and other communications.
  • Past practice of the provider
  • General practice of other providers in the market
39
Q

Policyholder expectations

A

Discretionary benefits and charges should not be too dissimilar from what customers were led to believe they would receive on entering into the contract or transaction.

In particular,

  • level of benefits, eg on death, maturity, surrender
  • level of charges
  • treatment of one group of policyholders relative to another
  • treatment of policyholders relative to shareholders
40
Q

Actions to ensure good corporate governance

A

G - Clear corporate GOALS and objectives, linked to those of the parent company
O - Realistic short- and long-term OBJECTIVES to meet stakeholder expectations
V - VERIFY actual performance, (through reports) comparing with aims.
E - ESTABLISHMENT of clear operating procedures for all critical processes, an a system that check that such procedures are being implemented
R - performance-linked REMUNERATION SCHEMES
N - appointment of NON-EXECUTIVE DIRECTORS to provide a more impartial view
A - establishment of an audit committee and clear AUDIT TRAILS
N - NOTE (record) job descriptions for management with key accountabilities and limits on authority.
C - regular CIRCULATION of published / audited internal accounts
E - establish of effective PERFORMANCE EVALUATION practices.

41
Q

2 Responsibilities of a scheme actuary for a private pension arrangement

A
  • monitor adherence to LEGISLATION, for example any min/max funding levels
  • ensuring that REGULATORY requirements are met
42
Q

4 Responsiblities of a pensions actuary working for the STATE

A
  • DETERMINING the FUNDING requirement for the State’s retirement benefit scheme
  • MONITORING the FUNDING of the State’s retirement benefit provision on an ongoing basis
  • setting the LEGISLATION to apply to private pension schemes, eg funding reqs, disclosure reqs
  • monitoring whether the set legislation is being applied
43
Q

Why are there different regulations in the retail vs wholesale markets

A

Institutional investors will have access to:

  • a much greater level of information than personal investors
  • more investment expertise.

Hence there is usually a greater regulatory requirement to ensure the provision of appropriate information in the retail market.

3. Exam 3.1 (56 decks)

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