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CA1 Final Revision > Tutorial Extras > Flashcards

Tutorial Extras Flashcards

1
Q

Name 10 stakeholders

A 
s/h
p/h
lawyers
accountants
reinsurers
members/dependants
creditors
sales intermediaries
investment managers
government/regulator
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2
Q

3 types of actuarial advice?

A

IFR
Indicative (opinion without full investigation)
Factual (based on research of facts like legistlation)
Recommendation (researched, forecasted, alternatives considered)

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3
Q

What are the 4 types of customer needs?

A 
CLEF
Fergie is logical and not emotional and signs players for the future
Current
Logical
Emotional
Future
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4
Q

Who may provide benefits

A 
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
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5
Q

Which policies pay out on death, which also pays out on survival

A

Term, WoL, Endowment Assurance (PE is just survival)

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6
Q

4 aims of regulation

A 
CRIPO
Confidence to financial system
Reduce financial crime
Inefficiency correction
Protection of customers of financial products
Order in market
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7
Q

What are the 5 types of regulatory regime?

A 
SS VUM
Self reg
Statutory
Voluntary coc
Unregulated
Mixed
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8
Q

Formula for running yield (income yield) for each of bond, property, equity

A

coupon rate/current price
rental rate/current price
dividends/current price

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9
Q

Explain an Ivestment trust in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)

A

S,CE,Inv, discount to NAV, company law

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10
Q

Explain an unit trust in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)

A

U,oe,man, equal to NAV, trust law, bid/offer spread

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11
Q

Explain an OEIC in 3 points (shares or units, closed ended or open, buy/sell from investor or manager)

A

S, oe, man, company law, lower charges, 1 buy/sell price

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12
Q

What is the formula for the real WACC?

A

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

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13
Q

Formula for Required return on asset

A

RFRY+EI+RP

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14
Q

Expected return on an asset

A

Initial income yield + expected capital gain

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15
Q

The definition of fair value

A

The amount that an asset could be exchanged or liability settled, between 2 willing parties in an arms length transaction

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16
Q

Formula for the discounted dividend model and simplified

A

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

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17
Q

What are the assumptions underlying the discounted dividend model?

A

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

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18
Q

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

A 
r+EI+
IRP
IRP+CBRP
ERP
PRP
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19
Q

What is the expected return for Gov/Corp/Eq/Prop

A

GRY,GRY,d+g,ry+rg

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20
Q

What is the reverse yield gap?

A

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)

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21
Q

What is the real yield gap?

A

d-risk free real return

=ERP-real g

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22
Q

What is the property/corp bond yield gap?

A

ry-GRY(corp)

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23
Q

4 Factors effecting demand for assets

A 
PIA-RRRRRRRRRR
Preferences
Income
Alternatives
Risk/Return
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24
Q

Why prefer a lower yield?

A 
TIME
Tax
Investments deal less frequently, so less cost
Matching
Expected returns higher, longer DMT
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25
Q

The formula for net liabilities

A

NL=benefit payments+expense outgo-premiums/contributions

ie. Liability=£800 in benefits paid+£300 expenses - £100 premiums in

26
Q

3 actuarial techniques in investment strategy

A 
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
27
Q

Conditions for immunisation

A

PVA=PVL
DMTA=DMTL
CONVA=CONVL

28
Q

Problems with immunisation

A 
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
29
Q

3 less important actuarial techniques in investment strategy?

A

MAR
MVPT inc liabs
ALM
Risk budgeting (active/strat/stuct)

30
Q

3 non-actuarial investment strategy techniques

A

PIMS
Peer group benchmark
Index track
MVPT without liabilities

31
Q

Why might past data be useless?

A 
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
32
Q

What is the cost of benefits?

What is the price of benefits?

A

The amount that could theoreticall be charged for them

The amount that can actually be charged to provide the benefits given market conditions

33
Q

6 methods of financing a benefit scheme?

A 
PAST JUGULAR
PAYG
Smoother PAYG
Terminal
Just in time
ReGULAR
Lums sum in advance
34
Q

How do you appraise a financing method?

A 
DR FLOSS
Durability
Realism
Flexibility
Liquidty
Opportunity cost
Stability
Security
35
Q

Reasons to calculate liabilities

A 
IP MAD DOGS
Investment strategy
Premium setting
MandA's
Accounts (published and internal)
Discretionary beenfits 
Discontinuance benefits
Option terms
Gtee costs
Statury valn
36
Q

What are the sources of surplus?

A 
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
37
Q

4 types of financial risk, 2 non-financial

A 
credit
market
liquid
business
ops
external
38
Q

What 4 types of ops risk are there?

A

Inadequate or failed ppl/processes/systems
Dominant individuals
Reliance on 3rd parties
Imapct of external events

39
Q

Giver 4 examples of external events

A

change in tax/regs
competition
natural disasters
war

40
Q

Give 4 types of business risk

A

U/w
Ins
Finance
Exposure

41
Q

What 3 things must you have to be insurable

A

P/h has interest in the risk
Financial and quantifiable nature
Amount paid by insurer relates to the financial loss incurred

42
Q

What 6 other things would you like in an insurable risk

A 
MUDPIS
Moral hazard avoided
Ultimate limit to liability
Data to price the risk
Pooling of similar risks
Independant risk events
Small probability of occuring
43
Q

What are the risk managemnt tools?

A 
MURDA
Management and control systems
Underwriting and claims control
Reinsurance
Diversification
ART
44
Q

What management control systems are there?

A 
Special DAMS
Data checks
Accounting/audit
Monitor liabilities
Special care on Options/Gtees
45
Q

3 types of underwriting

A

MILF
Medical
Lifestyle
Financial

46
Q

4 possible stages of underwriting?

A

Proposal form
Dr report
Medical exam
Specilist tests

47
Q

4 types of claims control

A 
CLEO
Claim form
Loss adjust
Estimates
Ongoing checks
48
Q

3 headings of reinsurance, split first into 2, second into 4 and the last explain

A 
Proportional, NP, Financial
Proportional:
Quota share
Surplus
NP
Risk XL
Agg XL
CAT XL 
Stop loss
Financial - reinsurance to improve solvency position, regulatory arbing
49
Q

Reasons to reinsure

A 
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
50
Q

Types of ART

A 
DIPSIS
Disc cover
Integrated risk cover
Post loss funding
Securitisation
Insurance deriv
Swaps
51
Q

What can you do when MV not available, give an example, explain

A

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

52
Q

4 tests of values of Asset Class A vs Asset Class B

A

1) Yield…
Gaps
Norms - As long as not fundamental shift
Ratios - use care if other analysis accepted
2) Technical Analysis - index levels, price charts

53
Q

Assumptions of Required Return = Expected Return

A

Investors want real rate of retun
Time horizon
Tax same
Reinvestment rate equal to expected total return of asset

54
Q

Which mnemonic to use when deciding which type of asset to buy?

A

SOUNDER TRACTORS

55
Q

What is true if expected return not equal to required return

If Eret>RRet

A

Asset not valued fairly
Market is inefficient
Buy asset, as it’s ‘cheap’

56
Q

What is a risk premium?

A

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

57
Q

How do you make an asset valuation more stable than Market Value

A

Smoothed MV
Disc cashflow using relatively constant long term interest rate
Notional portfolio

58
Q

What is a notional portfolio

A

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

59
Q

What 2 reasons may there be volatility in the asset portfolio valuation?

A

Shot term volatility of prices in market value valuation

Major change in portfolio make up e.g. equities to bonds

60
Q

What is the main disadvantage of MV of assets valuation, why shouldn’t it be like that?What problems can it cause?

A

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

61
Q

Why shouldn’t volatility of asset values be a problem in MV valuation of assets?

A

Consistency should override stability

CA1 Final Revision (7 decks)

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