Chapter 1: Professionalism

Question 1

Jobs that actuaries do

Answer 1

1. Actuaries LOOK AT RISKS.
   They assess, quantify, manage and monitor them.
2. Actuaries BUILD AND TEST MODELS that project and discount cashflows.
   To do this actuaries need to be able to
   … handle data,
   … use economic and demographic analyses to estimate assumptions
   … and decide on margins.
3. Actuaries MANAGE FUTURE LIABILITIES.
   They advise on contribution rates,
   … premium rates and
   … on investment strategy.
4. Actuaries MONITOR EXPERIENCE.
   They compare actual with expected experience,
   … analyse any variation and
   … manage the variation over time.
5. Actuaries WORK WITH OTHER PROFESSIONALS and understand when to refer to others.
   They should:
   - communicate well,
   - avoid conflicts of interest and
   - encourage transparency in the disclosure of information.

Actuaries may work with the government to shape legislation and protect the public interest.

Question 2

Statutory roles reserved only for actuaries

Answer 2

• Actuary must ensure that PROPER RECORDS have been kept
• and that PROPER PROVISION for the liabilities have been made.
• The liabilities must be valued in the context of the assets and in accordance with legislation and professional guidance.
• A statement of surplus must be produced.

The actuary must confirm that (in his view):
… premiums or contributions are adequate
… given reasonable assumptions and free assets
… to meet the liabilities

Question 3

Responsibility of the government actuary

Answer 3

the government actuary is primarily concerned with

• occupational pension schemes
• public sector pensions arrangements
• pensions policy and regulation in general.

It is also concerned with

• social security
• regulation and supervision of insurance companies.

Question 4

What does being “a professional” mean?

Answer 4

• taking personal responsibility for actions
• acting with integrity and detachment from personal circumstances
• developing a trusting relationship with the client
• recognising that others have valid views
• achieving, demonstrating and maintaining competence in specialist field
• being reliable, i.e. producing good quality work on time.

Question 5

What does an actuary need to know about a client before undertaking a professional task?

Answer 5

• for whom they are working in the company
• background information on the client
• whether there are any conflicts of interest
• be aware of what complaints procedures are in place

Question 6

How can conflicts of interest be avoided?

Answer 6

• keep detailed records of assignments
  if possible, decline one of the assignments causing the conflict.

However, it may be difficult to avoid a conflict of interest. In such cases:

• disclose the conflict of interest to the parties concerned
• establish chinese walls to seperate data and staff

Question 7

Frequent conflict of interest

Answer 7

Between a client and a client’s customers.
In the financial world, there may be legislation to ensure that providers of financial products consider the interests of their customers.

Question 8

When carrying out an actuarial task, what are the 10 broad areas that any actuary should consider?

Answer 8

• Exactly who the client is, and whether there are any conflicts
• Exactly what the problem is, and how it can be broken down
• Agreeing the scope of the problem with the client
• The understanding and competence of the actuary
• The data, assumptions and the methodology used
• checking the results produced
• how to report and communicate the results
• the implications of the results
• the implementation of the results
• professionalism

Question 9

What things should the actuary bear in mind when communicating results?

Answer 9

Make sure that the CLIENT UNDERSTANDS the results and listens. 
So present the results clearly and
- pitch them at the right level.
Include background information such as 
- data issues, 
- assumptions, 
- methodologies
-  and risks (but don't let it dominate)

Demonstrate how the results can be used to give an optimal solution.
It may be necessary to state where the clients initial brief ends, or to issue a health warning to say that the advice is only fit for a specific purpose and is not appropriate in other circumstances.

Ensure that relevant professional guidance should be complied with

Question 10

What are the 5 stages of the Actuarial control cycle?

Answer 10

• specifying the problem
• developing the solution
• monitoring the experience
• the general economic and commercial environment
• professionalism

Question 11

“Specifying the problem”

Answer 11

You should specify an example objective,

• identify various risks and
• suggest possible courses of action for handling these risks.

Question 12

“Develop the solution”

Answer 12

Talk about models.

• Suggest an APPROPRIATE MODEL to use and give examples of the assumptions needed.
• You would need to consider the IMPLICATIONS of the model results on all stakeholders.
• You may want to suggest ALTERNATIVE SOLUTIONS

Question 13

“Monitor the experience”

Answer 13

This involves making the model dynamic:

analyse the differences between actual and expected experience
—–and whether such differences are one-off or recurring

FEEDBACK into the actuarial control cycle, e.g. updating the assumptions or respecifying the problem.

Question 14

List Stakeholders in Insurance Company

Answer 14

Competitors
Auditors
Pension scheme (Potential/Existing)
Employees
Regulator
Existing/potential Policyholders
Directors
Potential purchasers
Intermediaries
Creditors
Shareholders

Question 15

List Stakeholders in DB Scheme

Answer 15

Accountants
Taxpayers
Auditors
Creditors 
Trustees 
Sponsors 
Government
Administrators
Members
Employees

Question 16

List the External Environment Factors

Answer 16

Commercial Issues
Regulation and Legislation
Environmental issues
Accounting Standards
Tax
Economic Issues (e.g. inflation/int rates)

Governance
Risk management requirements
Experience from overseas
Adequacy of capital
Trends - demographic

Lifestyle Considerations
Institutional Structure (mutual/proprietary)
Social trends
Tech
State benefits

Question 17

3 Types of Advice from Actuary

Answer 17

Indicative - Giving opinion without fully investigating the issue

Factual - Based on research of facts e.g. legislation

Recommendations - Consistent with requirements after doing research/modelling

Question 18

Potential Conflicts of Interest

Answer 18

Regulatory authority (notify them if client if acting in way that would prejudice customers)
Independence (should be independent from each side)
Specialists (if their company is specialists they may be working both sides)
TCF (customer/client interests)

Question 19

Professional jobs require what?

Answer 19

Professional Manner
Reliability
Others views are valid
Familiarity with clients and needs
Engender trusting - direct and personal relationship
Competence
Conflicts of
Interest - 
No jargon, clear communication

Question 20

How do you manage C of I

Answer 20

Disclosure to both parties
Records of work assignments
Avoid them
Whistle blowing if TCF ignored
Chinese
Walls

Question 21

3 Parts of Actuarial Control Cycle

Answer 21

Specify Problem
Monitor
Develop Solution

Question 22

What do Statutory roles involve?

Answer 22

Statement of A/L
Compliance with professional guidance
Assets and Liability valn with legisln
Liability valuation in context of assets
Provision for liabilities
Ensuring premiums/contributions sufficient to meet future commitments considering free assets
Records should be accurate and kept for liability valuation

Question 23

Expand on 1st part of ACC

Answer 23

Analyse
Stakeholders (the risks of them)
Set out clearly the problem from each point of view

Risk
Assesment and
Managing (it gives clear assessment of them)

Sub
Cycle to determine price of plans
Alternate
Risk
Tranfer - analysis for design of plans transferring risk from one stakeholder to another

Question 24

Expand on 2nd part of ACC

Answer 24

Interpret results of modelling
Determine proposed solution to problem
Examine if the actuarial models used can be adapted
Select the most appropriate model or new one
Proposal formalise
Alternative solution considerations and effects
Implication of model…
Results on overall problem
Stakeholder implications from results

Question 25

Expand on the 3rd part of the ACC

Answer 25

Feedback into problem spec and soln dev stage Reccurence of departures from target outcome Updating the.. Investigation Departures of the target outcome of models are identified Experience is monitored and investigation updated for that

Question 26

What are the principal aims of regulation?

Answer 26

Inefficiency in markets (correct perceived) Confidence maintaining in financial system Efficient market promotion Maintain confidence in financial system Orderly rake promotion Prevent and reduce financial crime

Question 27

What are the 5 types of regulation?

Answer 27

``` Mixed regimes Unregulated Self regulation Statutory Voluntary cods of conduct ```

Question 28

Advantages of self regulation?

Answer 28

Rapid response to changes in market needs is possible theoretically Implemented by people with greatest knowledge of market who have great incentive for optimal cost benefit ratio Cooperation with self regulator more likely than government bureaucracy

Question 29

Main problems with self regulator

Answer 29

3rd parties views are less likely to be taken into account rather than industry point of view Closeness of regulator to industry Inhibit new entrants is possible Low public confidence even if regime operating efficiently and effectively

Question 30

Advantages of statutory regulation?

Answer 30

Confidence is higher from public Open to less abuse than alternatives Economies of scale may be achieved by grouping activities by function and not type of business

Question 31

Disadvantages of statutory regulation

Answer 31

Costly Inflexible Rules that are unnecessary costly and do t achieve aims may be implemented by outsiders Crap Efficiency, attempts to improve market efficiency by government

Question 32

What ae the 5 type of financial products (contracts)?

Answer 32

``` Derivatives Reinsurance contracts Investment schemes Pension schemes Insurance contracts ```

Question 33

What are the types of needs?

Answer 33

Future, relate to future aspirations Logical, determined by analysis and prioritisation Emotional, what customer thinks/wants to be necessary rather than needs Current, has an immediate effect on circumstances

Question 34

How can we summarise a consumers logical needs?

Answer 34

Protection eg. Against death Unknown, accumulation for unknown purpose out of remaining income or capital eg. Take advantage of tax regime Known, accumulation for known purpose eg. Retirement income

Question 35

Which people can provide benefits for individuals?

Answer 35

Financial institutions or other corporations Individuals State Employers or groups of them

Question 36

What ways can the state play a role in benefit provision, which of them are financial?

Answer 36

Regulate to encourage/compel provision by or on behalf of some of population, Educate/require education about importance of providing for the future, Direct provision Regulation of provision from other providers Encourage provision Security, ensure promises made are kept to through regulation of bodies providing benefits, Some or all of the population provided with benefits,

Question 37

Give examples of the state providing benefits?

Answer 37

``` Pensions Statutory sick pay Protection for dependants on death Savings plans eg NSandI State bank Gilts ```

Question 38

Why would an employers provide benefits?

Answer 38

Pooling of expenses and expertise Encouragement or compulsion from state Retain and attract good staff Dependants, desire to look after employee and dependants above state benefits level

Question 39

How can employers play a role In providing benefits?

Answer 39

Educate Compel or encourage Orderly financing of benefits for employees Schemes, like pension schemes, provide facility for provision of benefits

Question 40

How does a flexible benefit system meet needs of different employees?

Answer 40

Groups, different groups of people select benefits relevant to them Menu of different benefits offered Changing benefits is possible as circumstances change Cost of changes and new benefits is small to the employer

Question 41

What 3 ways can an employer finance a flexi benefit scheme?

Answer 41

Employer alone Employer and employee, subject to legislation Employers grouped together,usually same industry, be careful about defined benefits due to problems in bankruptcy

Question 42

What ways can an individual provide benefit provision?

Answer 42

``` Savings, for example salary Pooling finances with a group e.g. Religious organisations Accumulation of property Continuing care retirement communities Equity release schemes ```

Question 43

Being a Professional

Answer 43

* Need to be reliable – in particular delivering the work that meets the clients requirements in terms of detail, quality and timeliness * What level of detail/information is required? * Does the timescales look reasonable – when does client want the info? * Need to also recognise other stakeholders and what is in the public interest

Question 44

Know your client

Answer 44

Need to have sufficient background about client • What products does it sell • What is it looking to buy • What expertise does it have

Question 45

Conflicts of Interest

Answer 45

* Need to consider whether consultancy advises any of the possible counterparties * It is important that there are different advisors who are independent particularly if they are analysing the same data * Consider whether “Chinese walls” or other procedures could reduce the possible conflicts * Need to ensure that any price sensitive information is correctly protected * Also need to consider the incentives for the consultancy – i.e. is commission based on selling the targets, leading to them suggesting the targets that could generate the most revenue for the consultancy

Question 46

The Task

Answer 46

* Need to consider how recommendations will be presented back to the insurance company (i.e. formal presentation of possible actions in a report) * What resources are required to assess counterparties/variables? * What will the implications of the results be and for whom – will this lead to impacts on the customers and/or job losses

Question 47

What is the problem?

Answer 47

The consultant needs to understand the scope of the task: constraints, definitions.

Question 48

Answering the Questions

Answer 48

* The consultant needs to have access to all the relevant factors. * Where sufficient facts are not available – will need to mention to client when giving recommendations * Also needs to understand who will review the work – will suitable client team review internally?

Question 49

Assumptions

Answer 49

Any assumptions made on the possible targets need to be determined and explained to the client (e.g. growth expectations)

Question 50

Methodology

Answer 50

The methodology will need to be determined

Question 51

Communication of the answers

Answer 51

* Client needs to understand the recommendations, hence the results need to be clear * Assumptions, areas of risk and uncertainty should also be clearly presented * Need to consider any professional guidance and regulation * Need to ensure that they are answering questions within their expertise * And seek guidance from others if required * Ensure that adequate documentation is kept on the work being done

Question 52

Checking the answers

Answer 52

* Answers will need to be reviewed to ensure the decisions look reasonable. * Will a range of possible solutions be offered with differing sensitivity analysis attached