Tutorial Extras Flashcards
Name 10 stakeholders
s/h p/h lawyers accountants reinsurers members/dependants creditors sales intermediaries investment managers government/regulator
3 types of actuarial advice?
IFR
Indicative (opinion without full investigation)
Factual (based on research of facts like legistlation)
Recommendation (researched, forecasted, alternatives considered)
What are the 4 types of customer needs?
CLEF Fergie is logical and not emotional and signs players for the future Current Logical Emotional Future
Who may provide benefits
I'll get a state pension, company pension, my own portfolio, and am life insured, I also put money in the banks State Employer Individual Financial companies Other companies
Which policies pay out on death, which also pays out on survival
Term, WoL, Endowment Assurance (PE is just survival)
4 aims of regulation
CRIPO Confidence to financial system Reduce financial crime Inefficiency correction Protection of customers of financial products Order in market
What are the 5 types of regulatory regime?
SS VUM Self reg Statutory Voluntary coc Unregulated Mixed
Formula for running yield (income yield) for each of bond, property, equity
coupon rate/current price
rental rate/current price
dividends/current price
Explain an Ivestment trust in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)
S,CE,Inv, discount to NAV, company law
Explain an unit trust in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)
U,oe,man, equal to NAV, trust law, bid/offer spread
Explain an OEIC in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)
S, oe, man, company law, lower charges, 1 buy/sell price
What is the formula for the real WACC?
debt/(debt+eq)Gross cost of debt(1-t) + equity/(debt+equity)*cost of equity
Fractions reflected optimal capital structure
GCoD=return on IL bonds+Corp Bond RP
CoE=return on IL bonds+ERP
t=assumed corporation tax rate
Formula for Required return on asset
RFRY+EI+RP
Expected return on an asset
Initial income yield + expected capital gain
The definition of fair value
The amount that an asset could be exchanged or liability settled, between 2 willing parties in an arms length transaction
Formula for the discounted dividend model and simplified
Value=Sum to infinity D(t)*v(t)
Value = D/i-g where D is the dividend in 1 years time
i is required rate of return
g is the annual growth of dividend
What are the assumptions underlying the discounted dividend model?
D, an annual dividend first paid at time 1
i, constant effective annual required rate of return
g, constant effective annual rate of divdiend growth
i>g
i, g both real or both nominal
taxes and expenses ignored
Dividends are reinvested at rate i
Share held in perpetuity
What’s the required return formula for Gov/Corp/Eq/Prop (slight changes). What risk premium do the bonds have that the other 2 don’t
r+EI+ IRP IRP+CBRP ERP PRP
What is the expected return for Gov/Corp/Eq/Prop
GRY,GRY,d+g,ry+rg
What is the reverse yield gap?
GRY(govt)-d
Gap between yield on government debt and equities
IRP-ERP+g
Where g = EI + “real” g (as you expect growth in your capital just from inflation)
What is the real yield gap?
d-risk free real return
=ERP-real g
What is the property/corp bond yield gap?
ry-GRY(corp)
4 Factors effecting demand for assets
PIA-RRRRRRRRRR Preferences Income Alternatives Risk/Return
Why prefer a lower yield?
TIME Tax Investments deal less frequently, so less cost Matching Expected returns higher, longer DMT
The formula for net liabilities
NL=benefit payments+expense outgo-premiums/contributions
ie. Liability=£800 in benefits paid+£300 expenses - £100 premiums in
3 actuarial techniques in investment strategy
Pure match (A/L cashflows identical) Liability hedging (PV(A) performs same way as PV(L) in all circumstances) Immunisation - PV(A) performs in same way to PV(L) under a small change in interest rates
Conditions for immunisation
PVA=PVL
DMTA=DMTL
CONVA=CONVL
Problems with immunisation
Fixed liabilities Small profits Flat yield curve Constant rebalancing Taxes/dealing costs ignored Suitable assets may not exist If timings of cashflows are unknown we can't do it
3 less important actuarial techniques in investment strategy?
MAR
MVPT inc liabs
ALM
Risk budgeting (active/strat/stuct)
3 non-actuarial investment strategy techniques
PIMS
Peer group benchmark
Index track
MVPT without liabilities
Why might past data be useless?
BEACHES Balance of homogeneous groups changed Experience changes Abnormal fluctuations Changes in how data was recorded Heterogeneity in group we're applying assumptions to Errors in the data Statistically random fluctuations
What is the cost of benefits?
What is the price of benefits?
The amount that could theoreticall be charged for them
The amount that can actually be charged to provide the benefits given market conditions
6 methods of financing a benefit scheme?
PAST JUGULAR PAYG Smoother PAYG Terminal Just in time ReGULAR Lums sum in advance
How do you appraise a financing method?
DR FLOSS Durability Realism Flexibility Liquidty Opportunity cost Stability Security
Reasons to calculate liabilities
IP MAD DOGS Investment strategy Premium setting MandA's Accounts (published and internal) Discretionary beenfits Discontinuance benefits Option terms Gtee costs Statury valn
What are the sources of surplus?
CAMBODIA Changes in assumptions/legislation A reclaculation Modified conribution rate Bulk transfer of liabilities Options taken up Discretionary benefits Interest on surplus Actual not equal to expected Errors
4 types of financial risk, 2 non-financial
credit market liquid business ops external
What 4 types of ops risk are there?
Inadequate or failed ppl/processes/systems
Dominant individuals
Reliance on 3rd parties
Imapct of external events
Giver 4 examples of external events
change in tax/regs
competition
natural disasters
war
Give 4 types of business risk
U/w
Ins
Finance
Exposure
What 3 things must you have to be insurable
P/h has interest in the risk
Financial and quantifiable nature
Amount paid by insurer relates to the financial loss incurred
What 6 other things would you like in an insurable risk
MUDPIS Moral hazard avoided Ultimate limit to liability Data to price the risk Pooling of similar risks Independant risk events Small probability of occuring
What are the risk managemnt tools?
MURDA Management and control systems Underwriting and claims control Reinsurance Diversification ART
What management control systems are there?
Special DAMS Data checks Accounting/audit Monitor liabilities Special care on Options/Gtees
3 types of underwriting
MILF
Medical
Lifestyle
Financial
4 possible stages of underwriting?
Proposal form
Dr report
Medical exam
Specilist tests
4 types of claims control
CLEO Claim form Loss adjust Estimates Ongoing checks
3 headings of reinsurance, split first into 2, second into 4 and the last explain
Proportional, NP, Financial Proportional: Quota share Surplus NP Risk XL Agg XL CAT XL Stop loss Financial - reinsurance to improve solvency position, regulatory arbing
Reasons to reinsure
SAD LIFE Smoothing Avoid large losses Diversify Limit exposure to single risks/accumulations Increase NB capictiy Financial assistance (NB, solv) Expertise e.g. data/pricing
Types of ART
DIPSIS Disc cover Integrated risk cover Post loss funding Securitisation Insurance deriv Swaps
What can you do when MV not available, give an example, explain
Shareholder value
e.g. EVA
Used for exec compensation schemes
Get underlying value rather than accounting
Get 1 years results - costs of servicing capital
Key factors
e.g. Their company is like ours and is worth £2m
Where company not making profit
Where NAV not appropriate
Determine relevant, measurable key factor of another company
Look at the key factors versus valuation of that company
4 tests of values of Asset Class A vs Asset Class B
1) Yield…
Gaps
Norms - As long as not fundamental shift
Ratios - use care if other analysis accepted
2) Technical Analysis - index levels, price charts
Assumptions of Required Return = Expected Return
Investors want real rate of retun
Time horizon
Tax same
Reinvestment rate equal to expected total return of asset
Which mnemonic to use when deciding which type of asset to buy?
SOUNDER TRACTORS
What is true if expected return not equal to required return
If Eret>RRet
Asset not valued fairly
Market is inefficient
Buy asset, as it’s ‘cheap’
What is a risk premium?
The return required by investors over the return on a risk free asset, to invest in it
Compensates investors for the extra risk
e.g. default risk
How do you make an asset valuation more stable than Market Value
Smoothed MV
Disc cashflow using relatively constant long term interest rate
Notional portfolio
What is a notional portfolio
To make asset valuation more stable
Eliminates risk valuation process at conflict with investment policy
Reduces amount of calculation required
Characteristics are broadly that of the liabilities
What 2 reasons may there be volatility in the asset portfolio valuation?
Shot term volatility of prices in market value valuation
Major change in portfolio make up e.g. equities to bonds
What is the main disadvantage of MV of assets valuation, why shouldn’t it be like that?What problems can it cause?
Volatility of asset value
Shouldn’t be volatile as long term assets and fund
Results difficult to communicate
Results difficult to interpret
May not be possible for a consistent liability valuation if unstable
Why shouldn’t volatility of asset values be a problem in MV valuation of assets?
Consistency should override stability
