CP1: Acronyms Acronyms – Parts 1 and 2 Health warning relating to acronyms Please be very careful about using acronyms when answering exam questions. Whilst they are useful for remembering lists and structuring an answer, the examiners are expecting application of the material to the specifics of the question. Simply remembering and regurgitating acronyms will not result in a pass. Types of actuarial advice External environment factors Factual advice Corporate structure Indicative advice Regulation and legislation Recommendations Environmental issues and climate change Accounting standards Aims of a regulator Tax Give confidence in the system Economic outlook (eg interest rates, inflation, growth and exchange rates) Reduce financial crime Inefficiencies in the market corrected (and efficient and orderly markets promoted) Governance Protect consumers Adequacy of capital and solvency Risk management requirements New business environment Functions of a regulator Demographic trends Setting sanctions Lifestyle considerations Enforcing regulations International practice Reviewing and influencing government policy State benefits Vetting and registering firms and individuals Technology Investigating breaches Social and cultural trends Checking management and conduct of providers Educating consumers and the public The Actuarial Education Company © IFE: 2021 Examinations All study material produced by ActEd is copyright and is sold for the exclusive use of the purchaser. The copyright is owned by Institute and Faculty Education Limited, a subsidiary of the Institute and Faculty of Actuaries. Unless prior authority is granted by ActEd, you may not hire out, lend, give out, sell, store or transmit electronically or photocopy any part of the study material. You must take care of your study material to ensure that it is not used or copied by anybody else. Legal action will be taken if these terms are infringed. In addition, we may seek to take disciplinary action through the profession or through your employer. These conditions remain in force after you have finished using the course. © IFE: 2021 Examinations The Actuarial Education Company CP1: Acronyms Acronyms – Parts 3 and 4 Health warning relating to acronyms Please be very careful about using acronyms when answering exam questions. Whilst they are useful for remembering lists and structuring an answer, the examiners are expecting application of the material to the specifics of the question. Simply remembering and regurgitating acronyms will not result in a pass. Investment and risk characteristics of assets Security (default risk) Economic situations in which cash is attractive Yield (real or nominal, expected return) General economic uncertainty Spread (volatility of market values) Recession expected Term Interest rates expected to rise Expenses or Exchange rate Depreciation of domestic currency expected Marketability Tax Characteristics of investors Characteristics of a prime property Comparable properties for rent reviews / valuation Age, condition and flexibility of use Tax position Location Regulation on investor Lease structure Assets already held Income / cashflow considerations Tastes (liabilities, education, fashion) Other assets and other investors Risk appetite Size Tenant quality Theories of the yield curve Liquidity preference General reasons for holding cash Protect monetary values Opportunities (to take advantage of) Inflation risk premium Market segmentation Expectations Uncertain liabilities Recently received cashflow Short-term liabilities The Actuarial Education Company © IFE: 2021 Examinations CP1: Acronyms Main difficulties of overseas investment Regulatory influences on assets held Mismatching domestic liabilities Types of assets that a provider can invest in Taxation (may not be able to recover withholding taxes paid) Extent to which mismatching is allowed Volatility of currency Hold certain assets, eg government bonds Other, more practical problems with overseas investment Single counterparty maximum exposure Custodian needed Additional admin required Amount of any one asset used to demonstrate solvency may be restricted Time delays Mismatching reserve Currency matching requirement Custodianship of assets Expenses incurred / expertise needed Regulation poor Political instability Factors affecting investment strategy Accounting regulations Information harder to obtain (and less of it) Language difficulties Size of the assets (absolute / relative) Liquidity problems Accrual of liabilities in the future Accounting differences Diversification Restrictions on foreign ownership / repatriation problems Currency of the liabilities Uncertainty of the liabilities Ways of valuing assets Tax treatment of the assets / investor Smoothed market value Environmental / social / governance issues Historic book value Risk appetite Adjusted book value Market value Institution’s objectives Nature of the liabilities Fair value Voluntary and legal restrictions Arbitrage value Existing portfolio Discounted cashflow Solvency requirements Stochastic modelling Term of the liabilities Other funds’ strategies (competition) Return (expected long-term) © IFE: 2021 Examinations The Actuarial Education Company CP1: Acronyms Acronyms – Parts 5 and 6 Health warning relating to acronyms Please be very careful about using acronyms when answering exam questions. Whilst they are useful for remembering lists and structuring an answer, the examiners are expecting application of the material to the specifics of the question. Simply remembering and regurgitating acronyms will not result in a pass. Model design: operational issues Sources of data Simple but retains key features Tables eg actuarial mortality tables Clear results Reinsurers Adequately documented Abroad (data from overseas contracts) Range of implementation methods Industry data Communicable workings and outputs National statistics Easy to understand Experience investigations on existing contract Refineable & developable Regulatory reports and company accounts Frequency of cashflows – balance accuracy vs practicality Similar contracts Independent verification of outputs Potential issues when using data Length of run not too long Quantity (credibility) Expense not too high Up-to-date? Sensible joint behaviour of variables Errors Relevance (heterogeneity) Considerations in assessing different models Incomplete? Fit for purpose Detail & format Exceptionals Expertise available in-house Need for flexibility Factors to consider when setting assumptions Cost of each option Legislation / regulation Expected number of times used Use of the assumptions Desired level of accuracy Needs of the client Consistency between assumptions How financially significant is/are the assumption(s) The Actuarial Education Company © IFE: 2021 Examinations CP1: Acronyms Considerations when using past data to set future assumptions Contract design factors Balance of homogenous groups underlying the data may have changed Marketability Economic situation may have changed Social conditions may have changed Trends over time, eg medical, demographic Abnormal fluctuations Random fluctuations Changes in regulation Heterogeneity within the group to which the assumptions will apply Administration systems Profitability Level and form of benefits Early leaver benefits Discretionary benefits Interests and needs of customers Risk appetite of the parties involved Expenses vs charges Competition Terms and conditions of contract Errors in data Financing (capital requirements) Recording differences (eg in categorisation of smoker) Accounting implications Consistency with other products Timing of contributions or premiums Types of selection Options and guarantees Spurious Regulatory requirements Time Subsidies (cross-) Adverse Temporary … Parties involved in contract design initial Actuaries Class Lawyers Providers of benefits Expenses incurred by a product provider Accountants Commission Customers Overheads Administrators Sales / advertising Shareholders / financial backers Terminal, eg paying benefits Renewal administration, eg collecting premiums / contributions Asset management Initial administration, eg setting up new client records Design of the contract © IFE: 2021 Examinations The Actuarial Education Company CP1: Acronyms Acronyms – Parts 7 and 8 Health warning relating to acronyms Please be very careful about using acronyms when answering exam questions. Whilst they are useful for remembering lists and structuring an answer, the examiners are expecting application of the material to the specifics of the question. Simply remembering and regurgitating acronyms will not result in a pass. Benefits of a good risk management process Additional criteria for an insurable risk Stability / quality of business improved Moral hazard eliminated as far as possible Avoid surprises Ultimate limit on liability undertaken Management of capital improved Data exists with which to price risk Opportunities exploited for profit Synergies identified Arbitrage identified Stakeholders given confidence Identification of causes of risk in projects (Preston North End Football Club Plays Brilliantly) Political risks Natural risks Economic risks Financial risks Crime Pooling a large number of similar risks Independent risk events Small probability of occurrence Importance of risk reporting Financing (appropriate price, reserves, capital requirements) Rating agencies Attractiveness to investors Understand better (risks and their financial impact) Determine appropriate control systems Project risks Changes over time Business risks Regulator Interactions Inappropriate advice Complicated products Monitor effectiveness of controls Emerging risk identification Rubbish (ie incompetent) adviser Integrity of adviser lacking, eg due to sales-related payments Model or parameters unsuitable Errors in data relating to beneficiaries State-encouraged but inappropriate actions The Actuarial Education Company © IFE: 2021 Examinations CP1: Acronyms Risk responses Reasons for using ART Partially transfer Diversification Ignore Exploits risk as an opportunity Reduce Solvency improves / source of capital Accept (retain all) Cheaper cover than reinsurance Transfer Available when reinsurance may not be Evade (avoid) Results smoothed Tax advantages Evaluation of risk mitigation options Feasibility and cost Efficient risk management tool Security of payments improved Impact on frequency / severity / expected value Reasons for underwriting Resulting secondary risks Suitable special terms Mitigation required in response to secondary risks Avoid anti-selection Reasons for using reinsurance Actual experience in line with that assumed in pricing Smooth results Avoid large losses Diversification Financial underwriting against over-insurance Risk classification / rated fairly Identify substandard risks Limit exposure to risk (single event, accumulation) Increase capacity to accept risk Financial assistance Expertise © IFE: 2021 Examinations The Actuarial Education Company CP1: Acronyms Acronyms – Parts 9 and 10 Health warning relating to acronyms Please be very careful about using acronyms when answering exam questions. Whilst they are useful for remembering lists and structuring an answer, the examiners are expecting application of the material to the specifics of the question. Simply remembering and regurgitating acronyms will not result in a pass. Reasons for calculating provisions When this information should be disclosed Benefit improvements for a benefit scheme Payment commencement Accounts and reports – published and internal Request Discontinuance / surrender benefits Combination Mergers and acquisitions Entry Excess of A over L and so whether discretionary benefits can be awarded Intervals Disclosure information for beneficiaries Benefit scheme information to be disclosed in accounts Investment strategy Directors’ benefit costs Contribution / premium setting Investment return over year Supervisory solvency reports Membership movements Additional reports accompanying accounts Change in surplus / deficit over year Liabilities accruing over year Chairperson’s / CEO’s statements Assumptions Investment report Increase in past service liabilities Remuneration report Method Corporate governance report Surplus / deficit Uncertainty (risk) report Strategic report Information to be disclosed to benefit scheme members Strategy for investment Contribution obligations Risks involved Insolvency entitlement Benefit entitlements Common aims of accounting standards (in relation to benefit scheme disclosures) Consistency in accounting treatment from year to year Avoiding distortions resulting from contribution fluctuations Recognising the realistic costs of accruing benefits Disclosure of appropriate information Expense charges The Actuarial Education Company © IFE: 2021 Examinations CP1: Acronyms Reasons why disclosure is important Reasons for analysing surplus Sponsor is aware of financial significance of benefits Divergence of actual vs expected (show financial effect / significance of) Informed decisions can be made Information to management and for accounts Mis-selling is avoided Manages the expectations of members Encourages take up Regulatory requirement Security of scheme improved as sponsor / trustees are made more accountable Why financial providers need capital Variance of whole is equal to the sum of the variances from the individual sources Experience monitoring to feedback into ACC Reconcile values for successive years Group into one-off / recurring sources of surplus Executive remuneration schemes (data for) New business strain (show effects of) Regulatory requirement to demonstrate solvency Expenses of launching a new product / starting a new operation Check on valuation assumptions and calculations Extra check on valuation data and process Guarantees can be offered Cashflow timing management Unexpected events cushion, eg adverse experience Smooth profit Help demonstrate financial strength Investment freedom to mismatch in pursuit of higher returns Opportunities, eg mergers and acquisitions New business strain financing © IFE: 2021 Examinations The Actuarial Education Company
