Test 3: 35-43 Flashcards
Reasons for calculating provisions : Need for Individual – for each contract/product BAD MEDICS Need for global provision CARD
Benefit improvements/contribution reductions for a benefit scheme
Accounts and reports (to show liabilities in them) published accounts, internal management
Discontinuance and surrender benefit
Merger and Acquisition value
Excess of assets over liabilities possible discretionary benefits
Disclosure information provided to beneficiaries
Investment strategy
Contributions and premium level setting
Statutory requirement- demonstrating supervisory solvency
Cover financial and non-financial risks - provisions in excess already held
Additional protection against insolvency
Reflect degree of A-L-mismatch
Demonstrate unambiguous solvency
Ways to counter anti-selection:
MES
Modify assumptions used
Eligibility criteria
Set terms that favour one option over another
Reasons for continuous analysis of surplus:
DIVERGENCED
Divergence of the actual experience vs the expected results financial effect
Information given to management and for accounts
Variance in the total financial effect is described by the variance of the individual levers does individual levers add up to total.
Experience monitoring to feed back into the ACC
Reconcile valuations for successive years to check consistency of the assumptions
Group into recurring/once-off sources of surplus enabling appropriate decisions to be made on the distribution of surplus
Executive remuneration scheme data - golden handcuff schemes: bonus of 10m if you stay 5 years. etc
New business strain affects
Check on valuation assumptions and calculations
Extra check on valuation data and process
Determine the assumptions that are the most financially significant
Disclosure is important in a benefit scheme because (SIMMERS):
Sponsor aware of financial significance of benefits
Informed decisions can be made
Miss-selling is avoided
Manages expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor/trustees more accountable
Individual disclosures are often made on (PRICE):
Payment commencement Request Intervals Combination Entry
Information to be disclosed includes (DISCLOSURE SRC):
Director’s pension costs
Investment strategy and performance
Surplus/deficit (last year, accumulated to date)
Calculation method and assumptions
Liabilities (accrued over year, accrued to date)
Options and guarantees
Sponsor’s contributions and members’ contributions
Uncertainties (risks)
Rights on wind-up
Expenses
Strategic report - Key performance indicators shown
Risk report - attitude, management approach, risk based capital requirement calculation
Corporate governance - the management structure of board set out
Levers/sources on surplus/profit
CRIEC CLIM VVACC
Claim likelihood and amount Renewal rates Investment strategy Effective management strategies (Tax and accounting and fraud) Control expenses
Commission
Lapse rates
Inflation (Claim size and expenses)
Mix of business
Volume of business Valuation basis and method Assumptions from formula of product , Demographic and 5CIET Carried forward surplus/defici Change in tax, policies
Carrying out surplus analysis
PCEEA
Project income statement and balance sheet of product into future, starting with initial pricing model and ensuring assumptions are consistent and realistic
Compare three models:
Expected experience and expected volume of business
Expected experience and actual volume of business
Actual experience and actual volume of business
Types of risk: COMBEL
Credit risk: FR Operational risk: NFR Market risk: FR Business risk: FR - CAROLINE MC External risk NFR Liquidity risk: FR
The principles of good lending relate to the: (CASPAR)
“Cannons of good lending”
Character and ability of borrower(known, competent, trustworthy, references?)
Amount (reasonable for purpose?)
Security (nature of transaction, covenant, market circumstances, security available)
Purpose or borrowing (risks associated with where the monies will be used)
Ability to repay (certain source of repayment? Any margins of safety?)
Risk vs. reward (is reward appropriate to risk level, has due diligence been done)
Causes of inappropriate advice (CRIMES)
Complicated products Rubbish/incompetent advisors Integrity of advisor lacking Model/parameter error Errors in data State encouraged, but inappropriate, actions
Investment risks (DRUMOLITE):
Default Reinvestment Uncertainty over timing/amount of return Mismatching of A/L Opportunity cost of capital Lack of appreciation from beneficiaries Inflation (income and capital proceeds) Taxation Expenses
Insurable risk criteria (FIA MUDPIS):
Financial/quantifiable
Interest in the risk being insured (from policyholder perspective)
Amount payable relates to size of loss
Moral hazard eliminated (as far as possible)
Ultimate limit on liability payable
Data available for accurate pricing
Pooling large number of homogeneous risks
Independent risk events
Small probability of occurrence
Risk management helps to (AEIOU PRC D)
ASGrow SPIDO D
Avoid surprises
Effective use of capital to improve growth/returns / Exploit risk opportunities
Improve stability and quality of their business
Opportunities from natural synergies identified
Uncertainty of stakeholders reduced (increase confidence)
Product pricing improved
Reduce variability in employee costs and job security
Cost effective risk transfer
Determine risks earlier and more cheaply
Avoid surprises
Stability and quality of business improved
Growth and returns improved by exploiting risk opportunities
Growth and returns improved by better management and allocation of capital
Stakeholders in business given confidence that business is well managed
Price products to reflect level of risk
Improve job security and reduce variability in employee cost
Detect risk earlier meaning they are cheaper and easier to deal with
Opportunities identified from natural synergies
Determine cost effective means of risk transfer
Risk registers are a way to categorise risks faced by a business or individual. Need to quantify: ICorP
Impact
Correlation
Probability
Assessing capital requirement is difficult because (CRISPS):
Correlation matrix required - reduce stochastic variables. More than 2 stochastic variables are impractical
Risk probability parameters
Interactions between risks -the effect of multiple risk events is greater or less than the sum of individual risks.
Subjectivity of constructing adverse scenarios- such as setting risks such as operational risk
Past data for rare events - be cautious.
Stochastic model duration of the risk is determined (Should ruin prob be expressed over one year or over whole run off of the business
Factors to consider when valuing options DECS CICA
Demographics
Expensive options not always exercised
Cultural bias
State of the economy
Consumer sophistication and needs
Immediate benefit vs. Higher deferred benefit
Cost increases in the valuation
Anti-selection
Mitigating against inappropriate advice:
CARSHoW GRound
Cooling off periods
Advisors: Trusted source, qualifications, fee basis
Research on products done individually
Shop around for quotes
Honesty about needs, health and financial state
Write to regulator or ombudsman if inappropriate advice was given
Government advice questioning
Read fine print
Factors determining the application of surplus for a benefit scheme:
LIST DiSS CEFE
Legislation
Industrial relations
Scheme rules
Tax benefit
Discretionary decision making
Risk exposure carried by the various parties
Source of surplus
Speed of corrective action
Consistency with other funds / employers
Expectations of members
Funding level of the fund
Ease of calculation
