ACTL 4001 Syllabus Dotpoints PDF

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Contents Week 1: Actuarial Control Cycle, Professionalism............................................................................... Problem)..................................................................................................................................................... Week ...

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Contents Week 1: Actuarial Control Cycle, Professionalism...............................................................................2 Week 2: Professionalism and General Environment (All this comes into is Context- Define the Problem).....................................................................................................................................................5 Week 3: Risk management and Product...............................................................................................8 Week 4: Product Design........................................................................................................................11 Week 5: Pricing....................................................................................................................................... 14 Week 7: Need for Financial Products...................................................................................................18 Week 8: Regulation................................................................................................................................ 21 Week 9: Banking & Capital....................................................................................................................23 Week 10: Superannuation.....................................................................................................................27

ACTL4001 Syllabus Dot Points Week 1: Actuarial Control Cycle, Professionalism 1. Discuss and apply an Actuarial Control Cycle in a variety of situations. 1.1 Identify the elements of the Control Cycle and how the elements interrelate in an actuarial context. The Actuarial Control Cycle provides a framework which facilitates the efficient management of a financial business, product or service through addressing relevant actuarial issues such as uncertain future cash flows. The ACC is a problem solving algorithm used to perform various forms of work. 

About identifying variables



Modelling interactions



Monitoring results



Making recommendations



Modifying models

Elements of the Control Cycle 

Define Problem: Understand the background, fully identifying all issues and specifying them clearly to ensure that the client and the actuary agree on the work to be done



o

Subgroup analysis

o

Whole system analysis

o

Experience and external factor changes

o

Modification of modelling for subgroup and whole system

o

Identify variables

o

Establish reasonable assumptions

Design Solution: predominantly involves modelling using a variety of statistical learning methods. o

Product specifications

o

Forecast future likely cashflows

o

Analyse data and shape models

o

Consider regulations and tax incentives



Monitor Results: review the result to rebuild a more effective solution. Monitor results, make recommendation and modify models. o

Check for reasonableness

o

Allow in the determination of capital

o

Long term liability the company is taking on

o

Ensure solvency (ability to pay debts)

o

Pricing

o

Design

o

Communicate the variability surrounding that answer

o

Review mortality, morbidity assumptions

This makes a loop and this interrelates with external factors. Changes in the context generate new problems and challenges for actuaries. Such changes can bring upside or downside risk. They can generate new kinds of risk requiring new approaches to analysis. quantification and management. 

External Forces o

Cultural/social values 

o

o

o

o

Demographics 

Ageing population



Age group and family composition

Government influences 

Valuation and Accounting Standards- IFRS amendment example



Competition policies affect mergers and acquisitions



Policies may limit business methods ( e.g ban on commissions)

Economic and business environment 

Unemployment and different lifestyle choices



Increases to house prices means less affordability to other products

Competition 

o

o

Asians high saving mentality

New competition enters market

Technology changes 

automation may reduce marketing and manufacturing costs



medical advances



new sources of energy.

Physical environment 

Global warming



Population growth

1.2 Recognise the various stakeholders involved in a variety of situations involving medium and long-term commercial decisions and demonstrate how the use of the Control Cycle can add value in resolving issues between the stakeholders Various Stakeholders 

Customers



Government



Regulators



Shareholders



Employees



Control cycle can used to manage risk: o

Reducing/avoiding

o

Providing for it (capital)

o

Absorb it

Resolving Issues between Stakeholders



Actuarial Control Cycle can be implemented to constantly refine outcomes to ensure all stakeholders are considered i.e., sort of a negative feedback mechanism adjustment process



In doing so, it adds value in resolving issues between stakeholders as the outcomes increasingly benefit a greater number of stakeholders

1.3 Demonstrate how the Control Cycle can be applied in a variety of situations. 

The control cycle framework can be applied to the management of an entire financial institution.



Apply whenever future cashflows are uncertain of value or losses that can cause harm



It can also be applied to subdivisions of the whole, such as subsidiary companies (eg a reinsurance subsidiary or an overseas company), business units (eg funds management), operational functions (eg claims handling), product groups (eg retail banking products) and, of course, individual products (eg disability income insurance).



Can be applied to be keeping a financial institution from failure.



They can need actuarial advice for designing products, pricing, setting capital requirements, what assets should be held etc, reserving.



Insurance premiums.



Used for data-analysis and monitoring financial situations

Professionalism Notes:        

Being professional means knowledge, create value for society and part of an organisation They offer solution that society considers important and cannot easily be assesses or delivered by applying standard set of rules. Professional body serves as channel between government and profession. Actuaries have a code of conduct or code of ethics-> protect client, actuaries, useful checklist and also for regulators to check quality of work. Fundamental is that they should only take in work that they are competent to do. Actuaries monitor by self-assessment of compliance or peer reviews/ formal peer reviews. Actuaries have regulator role mainly in life but have moved to other places as well. They may be given regulatory role to protect the customers from unfair treatment.



Being professional means behaving integrity and respect for other, ensure confidentiality, put client ahead of yourself, refer to code of conduct for conflict of interest and also take into account materiality.



Three steps to be professional:



Define the Task: understand the problem and know why your clients want Collect the information needed- important because data is expensive. Check for reasonableness Communicate results- by the variability of the answer should be communicated and also outline relevant information about the data. Courage, Justice, Self-control and Wisdom o o o o

Week 2: Professionalism and General Environment (All this comes into is Context- Define the Problem) 2 Relate the main features within the general environment to medium and long-term commercial decisions 2.1 Interpret how economic conditions and the social, demographic, and economic trends within a community can affect medium and long-term commercial decisions

Physical Environment 

Climate and natural perils: catastrophic events that generate huge claim costs for insurers



Pandemics: Health insurance companies can expect much higher claim costs. Life insurance companies may experience greater numbers of deaths as well as more and higher disability claims. Lenders may find repayment defaults increasing. Operational risks from sick staff



Man-made disasters: Acts of terrorism and war cause loss of life, injury. disability and extensive property damage

Economic and Social Environment: To forecast future cash flows arising from the business, assumptions are needed for a range of factors including economic variables like investment earning rates and inflation rates.



Economic Conditions and Trends: investment returns for investment and savings products, salary inflation for defined benefit retirement plans and expense inflation for long-term fixed premium insurance policies. Economic crisis can influence wages and thus lapse rates and demand for financial products



Economic structure: of a nation - better income equality (Gini coefficient) allows for more demand for wider range of financial products. Also, upward mobility leads to greater demand for it too



Demographic Structure and Trends: Ageing population, lower fertility and mortality rates, fewer workers and more retirees. Increasing costs of age pension, healthcare, aged care and decreasing tax revenue



Work and Employment Patterns: working women (more flexible retirement saving schemes), university entry and delay to work



Social Factors: retiring workers preferring lump sum benefit instead of income benefit. Level of criminal activity, demographics, cultural beliefs.



Industrial Issues: labour unions pressuring increase wage/salary levels can increase cost of retirement benefit plans

2.2 Examine the implications of the main features of the legislative and regulatory framework which can affect medium and long-term commercial decisions. 

Government: Being aware of government policy as it evolves and understanding the forces shaping it can help an actuary to advise clients or employers on possible future legislative , regulatory and other changes and their likely impact. Regulation changes in reserving can impact profitability and sustainability



Taxation: Taxation can affect product pricing, valuing policy or scheme liabilities, determining profit analysing expenses and projecting likely future cash flows. Taxation considerations can be important for product design. The customer, or even the provider, may benefit from a tax break (e.g., by paying or incurring less tax) if a product is designed in a certain way. For example, in the US there are adverse tax consequences for a universal life policyholder if contributions (premiums) are too large.



Social Assistance and Social Insurance: If benefits are reduced, individuals tend to tum to financial service providers to enhance their personal financial security programs. If benefits are raised the opposite effect may result.



Judicial Decisions: Judges' (or juries') decisions on the amount of damages payable often have a large impact on insurers, affecting the amounts of claim payable. Levels of claim payments on public liability, product liability, professional indemnity and employer's liability or workers compensation) are particularly impacted by judicial decisions.

2.3 Discuss the impact of technological changes on the economic environment 

Technological change can have a major effect on mortality and morbidity. The development of new drugs can significantly reduce risks of sickness. disability and death from particular causes



Improving diagnosis, treatment and medication means increasing longevity which means reducing life insurance claims and greater annuity costs.



However, for medical and hospital expenses insurance the overall impact is less clear. Newer technologies tend to be more expensive and can lead to increases in claim costs but improved treatment may lead to reduced need for treatment.



Technology has reduced marketing costs, through direct marketing



Greater information of customer behaviours and actions can be understood improving underwriting process



Products more tailored to customer needs and wants.

Week 3: R isk management and Product

Identifying Risk 

Enterprise-wide risks: business risks (related to products sold) and non-business risk



Insurer Risk o

Underwriting risk: pricing, product design, claims, economic environment, net retention, policyholder behaviour, reserving risk

o

Credit Risk: the risk of default of counterparties and intermediaries i.e., business credit, invested asset credit, political and sovereign risk.

o

Market Risk: g movements in share prices, interest rates, exchange rates or commodity prices. i.e., basis risk, reinvestment risk, concentration risk, asset/liability risk, off balance sheet risk

o

Operational Risk: fraud, systems failure, litigation or regulatory breach

o

Liquidity Risk: cannot meet short term obligations

o

Event Risk: legal, reputation, disaster, regulatory, political risk.

o

Distribution Risk: covers the risk to which distribution channels expose the business. i.e., volume of business sold, nature of business sold and reputation/compliance







Life Insurance Risk o

Interest Rate Risk

o

Mortality/longevity Risk

o

Reinvestment risk

o

Catastrophe risk (pandemic)

Health Insurance Risk o

Adverse Selection

o

Medicare, changing consumer perceptions of healthcare, types of procedures

General Insurance Risk o

Volatility risk: the total amount of claims will differ from its expected value. This is caused by the randomness of frequency, severity and time to payment of claims

o

Uncertainty Risk: parametric error, model error

o

Extreme Events: occurring with a low frequency and a high severity. Insurer usually relies on reinsurance coverage however exposers insurer to counterparty risk.

o

Super-imposed inflation: long tail claims that take a long time to settle which include asbestosis and medical indemnity claims.



Superannuation Risk o

Defined Benefit Funds: assess whether the combination of current assets, future rates of contribution (from both the fund sponsor and the members) and future plan experience (including investment performance and expense levels) will be sufficient

o

Defined Contribution Schemes: investment options provided to fund members represent an appropriate range of choices with acceptable rates of investment performance



Banking Risks 

Domestic Banking: Credit risk



International banking: currency risk, operational risk, regulatory risks



Capital markets (corporate loans, derivatives and investment banking): warehousing risk (risk of loss from securities it has created but cannot be sold to investors) and underwriting risk

6.3 Risk Assessment 

Objective: assess exposure to loss from key risks and understand risk dependencies



Methodology: quantitative and qualitative models



Deliverables: understanding of gross and net risk exposures & development of risk models for scenario testing

Quantification Methods 

Time Horizons: time horizon is typically established based on regulatory or accepted reporting practice and reflects some reasonable time frame during which management and/or supervisory action is expected.



Risk Measure: a numeric evaluator that can be used to help determine the financial impact of the risk. tail value at risk (TVaR), conditional tail expectation (CTE), policyholders' expected shortfall, RAROC, ROE



Confidence Level: A challenge in the use of higher confidence levels is that, there may be little experience data or knowledge of risk dependencies under extreme circumstances.



Terminal Provision: must be calculated whenever the time horizon is shorter than the full lifetime of the insurer's obligations.



Other Methods: stress tests, reverse stress tests, stochastic models, reference to standard measures, hybrid models.

Qualitative Methods 

Risk Maps (potential size, likelihood of loss by ranking)



Brainstorming, interviewing, Delphi technique. Historical data. Strength, weakness, opportunity, and threats analysis (SWOT analysis)

6.4 Risk Treatment 

Objective: Execute the optimal risk management strategy



Methodology: Project implementation best practises



Deliverables: Action steps for executing strategy including goals, responsibilities, resources, reporting, scope, schedule



Strategies for managing risk fall into the following major categories:  Avoid: eliminate, stop, prohibit or sell the risk exposure  Retain: accept and self-insure the risk exposure e.g., diversifying risks.  Reduce: mitigate or cap portions of the risk exposure  Transfer: insure, hedge, securitise or outsource the risk exposure  Exploit: expand and diversify the risk exposure.  Reinsurance: refers to insurance purchased by an insurer to provide protection against some or all of certain risks of the insurance policies issued by the insurer. 

Increases new business capacity



Limits catastrophic claims



Limits total claims



Transfers investment risk



Gain product expertise and underwriting advice



Divesting a product line

6.5 Recent Lessons Learned 

Systemic connections were more extensive than expected: GFC



Misaligned incentives worsened the turmoil: agency costs between shareholders and managers



Insufficient consideration of extreme events:



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