1
Q
What are the 3 steps of the ACC
A
- Define the problem
- Design the solution
- Monitor
2
Q
What are the 3 additional steps of the ACC? (Commercial & Economic Environment)
A
- Regulation
- Competitive position
- Professionalism
3
Q
Name the 3 methods in allowing for risk in calculations (BCD)
A
- BE + margin
- Contingency load
- Discounting at risk premium
4
Q
Name the 3 main assumptions underlying a premium calculation (CCC)
A
- Cost of Benefits
- Cost of Expenses
- Contribution to Profit
5
Q
Name the 5 areas of an expense loading (Pursuit)
A
Product development cost
Renewal cost
Sales cost
Underwriting cost
Termination cost
6
Q
Name the 3 steps of expense analysis (FAC)
A
- Fixed vs variable
- Allocate to function/class
- Convert to expense loadings based on appropriate driver (e.g. policies in-force)
7
Q
Name the 5 areas of risk management (DUMMC)
A
- Diversification
- Underwriting
- Management controls
- Mitigation
- Claims control systems
8
Q
List the 4 types of capital management solutions
A
- Subordinated debt
- Contingent capital
- Liquidity facilities
- Senior unsecured finance
9
Q
Name 8 types of insurance a university would require
A
- Public liability
- Employer liability
- Buildings Property Damage
- Contents
- Fidelity insurance
- Business interruption
- Professional indemnity
- Cyber insurance
10
Q
What is the name of the insurance product which protects against employee fraud/malpractise
A
Fidelity
11
Q
Name the 4 steps to risk identification & analysis
A
- High level preliminary analysis - ensure risk isn’t too high to continue
- Brainstorm with internal & external experts
- Set out all risks & mitigations
- Construct Risk-Register including all interdependencies
12
Q
Name 3 merits of a deterministic model
A
- Easier to use/explain
- Cheaper & quicker to build
- Quicker to run
13
Q
Name 3 merits of a Stochastic model
A
- Greater quality of results
- Can better test economic scenarios
- Good for assessing guarantees
14
Q
Name the 5 functions of a Data Governance policy
A
- Set specific roles & responsibilities of individuals
- Detail how data is captured, analysed & processed
- Sets out privacy & security issues & how to meet these
- How the adequacy of controls will be monitored
- Detail how regulatory requirements are met
15
Q
Name the 4 aspects which can be matched when asset-liability matching
A
- Currency
- Uncertainty
- Nature
- Term
16
Q
Name the 5 types of selection
A
- Anti-selection
- Temporary-initial selection
- Class selection
- Spurious selection
- Time selection
17
Q
Name the 7 main considerations when designing a financial product/contract
A
Capital requirements
Competition
Regulation
Risk appetite
Admin systems
Market for product
Premium/charges
18
Q
Give an example of decrements having a selective effect
A
Those who withdraw from life insurance policies generally have lighter mortality
19
Q
How does heterogeneity allow for pricing based on homogenous groups?
A
By pooling independent, homogenous risks, as a result of the Central Limit Theorem, profit per policy will be a normal distribution with known mean and SD, allowing the insurer to set premium which ensures the probability of loss on a portfolio is at an acceptable level
20
Q
Why is it not appropriate to model all risks individually?
A
Prohibitively expensive so only appropriate where risks are large and tough to group
21
Q
Why is it necessary to have different mortality tables for different classes of lives?
A
If a life table existed for a heterogenous group, it would depend on the mix of lives
22
Q
Name the 6 principal factors in variation to mortality & morbidity
A
Housing
Occupation
Genetics
Geography
Education
Nutrition
23
Q
Name the 6 other factors in setting premium (aside from cost of benefits & expenses + profit contribution)
A
Tax
Investment income
Commission
Cost of Capital
Contingency margin
Cost of options/guarantees
24
Q
When might a firm not use asset-liability matching in their investment strategy?
A
- If it’s prohibitively expensive
- If they have free assets
25
What is tactical asset allocation?
Departing from the standard investment structure in search of greater returns
26
What is risk budgeting?
An investment style where asset allocations are based on an asset’s risk contribution to the portfolio as well as on the asset’s expected return
27
Name the 5 subheadings of 'Sales & Marketing costs' under PURSUIT
Marketing
Admin systems - setting up contracts
Commission
Investment costs
Share of overheads
28
Name the 4 additional points in the Premium Calculation
Cost of Benefits + Cost of Expenses + Profit reqt
Tax
Cost of capital
Cot of options/guarantees
Contingency margin
29
What is professional indemnity insurance?
Insurance against claims arising from negligent advice or services, covering legal costs and potential compensation for financial losses suffered by clients
30
Name the 3 additional Capital Management tools
- Diversification
- Derivatives
- Internal restructuring
31
Name 5 potential issues with overseas investments
Currency stability
Communication
Restrictions
Availability/quality of data
Political stability
32
Name 5 operational rules with respect to a model
Documented
Ease of communication of results
Sensible joint behaviour of variables
Not overly complex
Range of methods should be available
33
Name the 3 risks faced in a defined contribution scheme and who faces them
(risk during accrual & at retirement)
Investment risk - member
Longevity risk at retirement - member
Reputational risk - sponsor (if employees are left with a small fund)
34
Name the 2 risks faced in a defined benefits scheme and who faces them
Investment risk - sponsor
Default risk of sponsor - member
35
When presenting model results to a client, what should be made clear?
Made clear that there is uncertainty in underlying assumptions
36
Name the 3 characterisations of 'Big Data'
Very large datasets
Compiling multiple sources
Which can be analysed very quickly
37
How can data be transformed to be held to less strict data protection laws
Anonymisation
38
What's the main criticism of big data?
That it's excessive, parts are irrelevant and goes against the data protection guidance of data minimisation
39
The ... will not be an acceptable excuse for failing to obtain consent where it is required
complexity of big data
40
Name 5 reasons historical data may not be a good reflection of future experience?
- Different recording methods
- Significant random fluctuation
- Events distorting
- Changes in homogenous groups
- Medical advancements
41
When placing a value on liabilities, for healthcare, life and general insurers, the prime information source will be ... so it needs to produce relevant and reliable information
the proposal form
42
Underwriting questions should be
unambiguous & well-designed
43
What's the main data concern wrt a benefit scheme?
That the data is not in the provider's control - it is collected by the sponsor
44
Name 4 potential drivers of heterogeneity in a working-party data source
Operate in different geographical or socio-economic sections of the market
Unidentical sales methods
Different practices, eg underwriting
Nature of the data stored will not always be the same
45
Name the 5 main things to consider when setting an assumption
Consistency with other assumptions
Client needs
Use
Materiality
Regulatory restraints
46
Why may census tables not be as useful for an insurer?
Includes all lives an is not restricted to those that would buy insurance
47
What is a profit criterion?
A single figure designed to measure which contracts make the most efficient use of a company’s capital.
48
Name the 7 methods of asset valuation (HMS FEDS)
Historic book value
Market value
Smoothed market value
Fair value
Equivalent portfolio
Discounted cashflow model
Stochastic model
49
Name the 3 methods for financing future benefits
- Pay as you go
- Holding full provisions in advance
- Just-in-time
50
Define diversifiable risk
Risk that arises from an individual component of a financial market or system
51
Name the 3 benefits of enterprise risk management
- Full appreciation of concentration risk
- Allowance for diversification
- Better understanding of risk drives more efficient capital allocation
52
Why may a firm not perfectly asset-liability match?
- Can be prohibitively expensive
- Limited assets available
- Liabilities may be uncertain
- Liabilities may include options
53
Name the 3 types of risk within climate change risk
- Physical risk
- Transition risk
- Liability risk
54
Why may beneficiary needs not be met by their pension, even when the benefit is defined?
- Failure to recognise this when benefit promise was made
- Inflation eroding value
- Circumstances changing
55
Although published statements of risk appetite may be unquantified, ...
providers should have a quantifiable risk appetite which can be included in management information packs
56
What can an insurer do in the underwriting process where a particular rating factor is not practical to obtain?
Use a proxy which is correlated with the ideal rating factor e.g. driver speed can be proxied by considering type of car/engine size
57
Name the 3 criteria for a risk to be insurable
- Policyholder having an interest in risk being insured
- Risk must be financial & quantifiable
- Amount payable must have relationship with financial loss incurred
58
What is the principle of pooling risk?
Risks can be pooled, meaning there's greater certainty in future payments made on occurrence of insured events
59
Name the 5 criteria for risks to be pooled
Independent risk events
Probability of event being small
Ultimate limit on liability
Moral hazard should be eliminated
Should be sufficient data to estimate likelihood of occurrence
60
Scenario analysis & stress testing can only be used on...
Deterministic models
61
Name the 4 steps to scenario analysis
1. Group risk events into broad categories (e.g. system errors)
2. For each risk, a plausible adverse scenario should be chosen to represent the whole group
3. Scenario should be translated into parameters
62
What is the main limitation with scenario analysis & stress testing?
Limited to quantifying the severity of the scenario, not probability
63
What is stress testing?
Projection of financial conditions under a specific extreme adverse event
64
What is reverse stress testing?
The construction of a scenario which just allows the firm to continue to operate under its business plan. BP failure should be pre-defined by the firm
65
Name the 2 methods of allowing for independence between risks
- Correlation matrices
- Copulas
66
Name the 3 methods of XoL RI
- Risk (individual losses)
- Aggregate
- Cat
67
Name the 5 types of ART
Post-loss funding
Integrated risk cover
Insurance derivatives
Securitisation
Swaps
68
Name the 3 main types of underwriting
- Lifestyle
- Medical
- Financial
69
Name 2 methods of mitigating low likelihood, high severity risks
Reinsurance - cat RI or aggregate XoL
Management Control Procedure - disaster recovery planning
70
Name the 2 types of accounting bases
Going concern
Break up
71
What is meant by fair value basis of valuation?
The amount for which an asset sold or a liability settled between knowledgeable, willing parties or would need to pay a 3rd party to take over the liability
72
Why is it extremely difficult to value an option?
Policyholders don't always take the financially optimal decision
73
Options are generally valued in a cautious way by...
Assuming that the highest cost option is always exercised
74
With guarantees, it's generally too cautious to assume the worst-case for all guarantees so instead should be valued using
A stochastic model
75
Name the 4 methods of calculating provisons
- Statistical analysis
- Individual claims modelling
- Proportionate approach
- Equalisation reserves
76
What is a proportionate approach to provisioning?
Set provisions on the basis that the premium charged is a fair assessment of the cost of the risk, expenses & profit
77
Why might it be difficult to interpret non-domestic accounting reports?
Accounting principles vary from country to country
78
Published financial statements are designed to give...
A true & fair value of financial position
79
In financial accounts, if there is a change of valuation basis, the provider should...
Restate the prior year figures alongside the new results for fair comparison
80
Name the 4 things covered in the reports which accompany published accounts
Performance against objectives
Investment strategy/performance
Risk appetite
Governance arrangements
81
Can insurers add some margin onto the provisions they report?
Yes
82
Name the 3 reasons for poor data quality
Lack of data
Lack of detail
Missing entries/errors
83
Why do insurers not commonly become insolvent?
They need to hold their SCR
84
In the short term, how does an insurer closed to new business manage to pay outstanding liabilities?
Release capital tied up in financing the new business strain
85
Where an insurer can't meet its liabilities & a buyer cannot be found, what happens?
There's generally a statutory scheme funded by a levy on all providers
86
If a benefit scheme is being discontinued, what are the options for the outstanding benefit payment?
- Continuation of scheme with no accrual
- Transfer scheme
- Transfer funds to beneficiary (generally legislation stops this)
- Transfer to insurer to invest or to guarantee the benefit
87
What is capital required for?
1. Start-up costs
2. Deal with the financial consequences of adverse events
88
What is new business strain?
Initial financial loss a company incurs when writing new policies, stemming from high initial expenses (like commissions and reserves) exceeding the premiums received in the first year
89
Name the 2 non-contract issuing areas of risk
Investment mismatching
Options/Guarantees
90
Name the 3 areas a financial product provider needs to provision for
- Liabilities Incurred but not yet paid
- Claims incurred but not yet paid
- Future periods of insurance where premium has already been collected
91
What's included in the Economic Balance Sheet?
MVA (Market Value Assets)
MVL
Available Capital = MVA - MVL
92
How is investment profit defined?
Investment return on the assets not required for the provision of future liabilities less tax, investment expenses
93
What is meant by the cost of capital?
Needing to put capital aside to support capital requirements is likely to mean that it will earn a lower return than if it could be invested more freely and used for other purposes
94
What are the 4 reasons for performing an analysis of surplus?
- Determine the most significant assumptions
- Show financial impact of writing new business
- Provide management information
- Show financial effect of divergence between assumptions & actual experience
95
Name the 6 levers on surplus
Reducing likelihood of claims
Reducing cost of claims
Controlling expenses
Reducing lapse rates
Increasing investment returns
Tax efficiency
96
How is a surplus distributed in the instance of with-profit contracts?
Some or all of the distributable surplus is allocated to policyholders in the form of bonuses
97
Name the 3 reasons for monitoring experience
Provide management information
Adjust modelling to reflect expectation of future experience
Monitor adverse trends to take corrective action
98
Why may it be difficult to monitor experience on a benefit scheme with only young members?
Few deaths in service so analysis of mortality rates would lack credibility
99
100
What is a benefit scheme trustee?
The company appointed to hold the schemes assets separately from the sponsor e.g. AEGON
IFoA CP1
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Decks in class (11)
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