Chapter 0: CA1

Question 1

5 Nodes of the Actuarial Control Cycle

Answer 1

• General Commercial and Economic Environment
• Specifying the problem
• Monitoring the Experience
• Developing the Solution
• Professionalism

Question 2

Key Topics Under the General Commercial and Economic Environment

Answer 2

• External environment
• Stakeholders
• Providers of benefits
• Economic Influences
• Regulation
• Insurance products
• Asset Classes

Question 3

Key topics when specifying the problem

Answer 3

• Assessment of NEEDS
• Assessment of RISKS
• Core Business Requirements
• Strategic Courses of Action

Question 4

Key topics in developing the solution

Answer 4

• Selecting Appropriate Actuarial Models
• Appropriate Assumptions
• Implications for all Stakeholders
• Determine a Proposed Solution and Alternatives

Question 5

Basic elements incorporated in the actuarial control cycle (that makes it “actuarial”)

Answer 5

• Estimation of the FINANCIAL IMPACT of uncertain future events
• A LONG-TERM rather than short-term horizon
• Recognition of STAKEHOLDERS’ requirements and risk profiles
• Decisions need to be made in the short term in the light of likely future outcomes.
• The use of MODELS to represent future financial outcomes
• The use of ASSUMPTIONS based on appropriate historical experience.
• The need to allow for the impact of legislation, REGULATION, taxation, competition
• Interpretation of the results of modelling to enable practical strategies to be developed
• MONITORING and periodically analysing the emerging experience
• Modifying models/strategies in the light of this analysis of the emerging experience.

Question 6

Specifying the problem

Answer 6

• Analyse the risks of the various stakeholders in detail
  and set out clearly the problem from the point of view
  of each stakeholder.
• Gives an assessment of the risks faced and how they
  can be managed mitigated or transferred.
• Provide an analysis of the options for the design of plans to transfer risk from one set of stakeholders to the next.

Question 7

Developing the solution

Answer 7

MODEL CONSTRUCTION
- An examination of the major actuarial models currently
in use and how they may be adjusted for the
particular problem to be solved
- Selection of the most appropriate model to use for the
problem, or construction of a new model
- Consideration and selection of the assumptions to be
used in the model.

MODEL RESULTS
- Interpretation of the results of the modelling process
- Consideration of the implications of the model results
on the overall problem.
- Consideration of the implications of the results for all
stakeholders

SOLUTION
- determining a proposed solution to the problem
- consideration of alternative solutions and their effects
on the problem
- formalising a proposal

Question 8

Monitoring the experience

Answer 8

• Critical that the models used are dynamic and reflect
  current experience where it is relevant.
• This stage deals with the monitoring of experience
  and its feedback into the previous stages
• Identifying causes of departures and considering the
  recurrence of departures.
• Feedback loops

Question 9

Investment risk

Answer 9

The uncertainty associated with the outcome of making an investment.

Question 10

Credit risk

Answer 10

The risk that a person or an organisation will fail to make a payment that they have promised.

Question 11

Potential stakeholders

Answer 11

• Members of benefit schemes
• Reinsurers
• Financial intermediaries
• Insurers
• Trustees
• Beneficiaries of insurance policies
• Investors
• Lenders/creditors

Question 12

Risks occur when

Answer 12

• The value of assets/proceeds are not as expected
• The value of liabilities/outgoes are not as expected
• Relative value of assets and liabilities or net cashflows
  are not as expected

Question 13

Market risks

Answer 13

Risks related to changes in investment market values.

Question 14

Credit risk

Answer 14

Risk of failure of third parties to repay debts.

Question 15

Risks associated with liability outgoes

Answer 15

• Inflation risk
• Underwriting risk
• Insurance risk
• Exposure risk
• Finance risk
• Operational risk
• External risk

Question 16

Inflation risk

Answer 16

Risk of real liabilities being larger than anticipated due to inflation.

Question 17

Underwriting risk

Answer 17

Risk of failures in underwriting leading the insurer to take on risks at an inadequate price.

Question 18

Insurance risk

Answer 18

Risk of more claims being made than expected.

Question 19

Exposure risk

Answer 19

Risk of more claims arising from a particular event due to the insurer having greater exposure to a particular peril than had been appreciated.
Might be due to inadequate diversification within the portfolio of business written.

Question 20

Finance risk

Answer 20

Risk of not being able to obtain finance when required or not being able to obtain it at the anticipated cost.

Question 21

Operational risk

Answer 21

Risk of loss due to fraud or mismanagement within the organisation.

Question 22

External risk

Answer 22

Risk from external events.

Question 23

Possible solutions to mitigating risks

Answer 23

• avoiding
• accepting and minimising
• sharing
• transferring risk together with ongoing monitoring.

Question 24

Key topics in monitoring experience

Answer 24

• Monitor actual vs expected results
• Analysis of Surplus/Deficit
• Possible reasons for departures and adjust accordingly

Question 25

Deviations in Cash flows are due to

Answer 25

Changes in: - Amount - Timing

Question 26

Formula for risk and what affects it

Answer 26

Risk = Probability x Impact Affected by risk appetite and objectives