Sep 2017 P1

Question 1

List the main factors in the external environment, that have an effect on the provision of financial products?

Answer 1

CREATE GREAT LISTS
Competition and underwriting cycle 
Regulation and legislation 
Environmental Issues 
Accounting standards 
Tax 
Economic outlook 
Governance (Corporate governance)

Question 2

Discuss the disadvantages of managing risk at the business unit level?

Answer 2

1. Lack of consistency in approach
   * The approach taken to risk management may be inconsistent across the subsidiaries.
   * The level of risk taken may be beyond what is acceptable to the shareholder…
   …and may lead to volatile or reduced profits.
   * The lack of high-level risk management may lead to an increased risk of failure of the business.
2. Allowance for different types of risk
   * Assessing risk at the business unit level ignores any diversification benefits across the group…
   … which would reduce the amount of capital that needs to be held, enhancing shareholder returns.
   * There could be a range of different risks across different business units, many of these risk may be negatively correlated.

Question 3

What are the advantages of managing risk at the enterprise level, ie Enterprise risk management?

Answer 3

1. Consistency in approach
   * ERM involves a holistic approach to risk management across the group…
   … imposing one common set of standards across the group.
2. Cost of managing risk
   * Efficiencies can be achieved by having one centralized team, rather than duplication of effort within each subsidiary.
3. Allowance for different types of risk
   * ERM gives insight into areas of the business with unmitigated risk exposures…
   … so appropriate action can be taken in terms of risk mitigation and capital allocation.
   * Given there is a greater understanding of risk…
   … opportunities may be identified to enhance shareholder value …
   … ie risk can be exploited as an opportunity to increase returns.
4. Lack of expertise
   * Managers within some subsidiaries may understand their business well, and so are better placed to identify and manage risk than a central team…
   …However this may not be true of all subsidiaries.

Question 4

List the areas of actuarial work where data is required?

Answer 4

SIRMAPEMAP

Statutory returns
Investment management
Risk management

Management information and financial control
Accounting (This is also not actuarial work so it wont score)
Experience statistics and analysis
Marketing
Administration (This will not score as it is not actuarial work)
Provisioning

Can use pricing as well

Question 5

List how problems with data may arise?

Answer 5

1. Poor quality data
2. An insufficient quantity of data
3. The data not being sufficiently detailed
4. Data that is not relevant

Question 6

What constitutes poor quality data?

Answer 6

Poor quality data could be due to: quantity, quality, relevance or detail.

Question 7

Describe how actuaries can mitigate or make allowances for the problems that may arise from poor quality data? (entire question)

Answer 7

Problems with data may arise from:

• Poor quality data
• An insufficient amount of data
• The data not being sufficiently detailed
• Data that is not relevant

Data issues are best resolved by getting to the root of the problem.

Data issues should be fully disclosed to the client

Warning should be given about the extent to which the results can be relied upon.

Mitigation of data problems
Detail
Data can be imporved in terms of detail by ensuring the inputs to the system (eg proposal form) capture all the detail required.

Quality
If data has been supplied by third parties then it will need to be verified.
The proposal form should ask clear unambigious questions to reduce the risk of data error.
Automated data validation should be carried out, eg checking for blank fields or impossible dates
The data should be reconciled with previous years
Checks should be carried out to determine whether the data is consistent and has no obvious errors.
Spot checks should be carried out on records

Quantity
Data can be supplemented with external data, although care needs to be taken to check that the data is relevant.

Relevance
Data needs to be collated into homogeneous groups …t this needs to be balanced against the need for credibility.

Making allowance for poor data
Quality
‘Making allowances’ means that the data has been used to produce a result … where the data may be sub-optimal… and so the results may not be reliable
Risk margins or contingency loadings may need to be included … the size of any margins or loadings will be based on actuarial judgement
Independent checks of the reasonableness of the results should be carried out, which may highlight data issues.
Comparisons may be carried out against the results of competitors to see if the results are consistent.
Sensitivity testing of data quality can be carried out (How do you do this??)

Question 8

Outline the principal reason why groups of individuals may wish to pool risk events that they are exposed to?

Answer 8

Many risk events have low frequency , so few individuals will suffer an event.. but the cost can be too high for an individual to bear if the event does occur.
Pooling enables individuals to pay a much smaller cost than the cost if the risk event arises… and ensures individuals are fully protected if the risk event does occur.

From an insurer to take the risks on, it will need enough similar risks to pool.
Pooling many similar risks also reduces the variability of outcome, from the law of large numbers.
Pooling risk can give individuals access to expertise in the form of actuaries working for insurance companies.