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75 Cards in this Set
- Front
- Back
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0) ACC Framework: |
GDP MS General Commercial and Economic Environment Developing the Solution Professionalism Monitor the Experience Specify the Problem |
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0) ACC Framework: |
Set Objective Identify risks/mitigation options Build model Assumptions of model Uncertainty with assumptions Sensitivity Testing Actual vs Expected Characteristics of Professional Competition State of the economy |
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1) Being a Professional: |
Vicar TR Valid Views: respects others Integrity Communicates Well Actuarial Advice: maintains competence Reliable Trustworthy: good relationship with client Responsible: for decisions taken |
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1) Professionalism:
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ACID GROCERS Awareness Competence Integrity Diplomacy Good Communication Reliability Objectivity Confidence, ability to maintain Environment, sensitivity to changes Relevance Sensitivity |
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3) External Environment: |
CREATE GREAT LISTS Competition and Underwriting Cycle Regulation and Legislation: compulsory insurance Environmental Issues Accounting Standards Tax: influence cover amount Economic Outlook Governance: managerial decisions Risk Management: identify/analyse/manage Experience from overseas: replicate products Adequacy of Capital: Basel 2/Solvency 2 Trends: demographic e.g. ageing population Lifestyle: young vs old Institutional Structure: mutual/proprietary Social Trends Technology: e.g. online banking State & Employee Benefit |
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Role of Actuary:
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PRIMES Punish people who fail to meet standards Researching issues important to public Influencing those in power Maintain high standards of competence Educating the public on financial matters Setting guidance notes |
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4) Aims of Regulation:
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CCCCC Consumer protection Crime Reduction Confidence in the system Consumer education Correct market inefficiencies |
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4) Costs of Regulation: |
RR PUMAC Direct: Regulator administering cost Regulated complying cost Indirect: Product innovation reduced: due to additional costs Undermining of intermediaries/advisors Market reduces own protection mechanism Alteration in consumer behaviour: false sense of security Competition reduced: due to additional constraints |
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4) Need for regulation in financial system:
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CALC Asymmetries of information: complex products Long in nature: big impact on individual wealth Complex products |
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4) Ensuring confidence in financial system: |
MEEM Monitor institutions solvency Ensure fit and proper practitioners with integrity Establish industry compensation schemes Make market transparent |
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4) Reducing asymmetries on informations |
SPIDER CC Selling practices restricted Price controls imposed Insider tranding prevented Disclosure of understandable info Educating consumers Restricting knowledge to publicly available Consumer cooling off period Chinese walls established |
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4) Functions of a Regulator:
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SERVICE Setting sanctions Enforcing Regulation Reviewing and influencing government policy Vetting and registering firms and individuals Investigating breaches Checking capital adequacy Educating consumers and the public |
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6) States roll in retirement benefits: |
GREED Government securities: supply investment securities Regulate bodies providing benefits to ensure expectations met Educate public about retirement provisions Encourage/compel private provision Direct provision of benefits to all |
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8) General Insurance Risks: |
OCEAN PIC Operational risk: e.g. fraud, system failure Credit risk: failure of counterparts e.g. reinsurer Expenses being higher than expected Accumulations of risk: e.g catastrophes New business strain Poor persistency Investment risk Claim frequency |
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10) Contract design factors: |
SAMPLE DIRECT FACTORS Stakeholders: Client, Actuaries, Lawyers, Accountants, Financial backers, admin Admin Systems: need to be simple Marketability: more complex harder to market Profitability: claims, expenses, investment, withdrawal, NBS Level/form of benefit: client needs/ability to pay, risks involved Early leaver benefits: discontinuing contract, need to be fair Discretionary benefits: surplus shared with client, e.g. with profits, no claims discount Interest/needs of customers: income/assets, risk covered, attitude to risk Risk appetite: structure meets risk needs, wide range, risk appetite of provider Expenses vs charges: initial charge & renewal Competition: selling through intermediaries = more competition Terms & Conditions: no loopholes, small print Financing: NBS, more risk = more capital, PAYG/ provisions in advance Accounting Consistency other products: mo more system development/training Timing of contributions: more flexible = more expensive Options/Guarantees: payment of premium, benefits, contact surplus, consider cost Regulation requirements: capital, design, premium, sales method, level of u/w Cross subsidies: high price for one group, low price for another |
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11) Characteristics of well-run projects: |
PROJECT CRAMPS Planning done fully: changes avoided, documentation Risk analysis thorough Objectives are clear Judging/Monitoring of Development Excellent communication Conflict management: source of ideas Testing at all stages Critical path analysis: one part doesn't delay another Relationship with external suppliers Appropriate pace Milestone review schedule: monitor against objectives Performance is measured Supportive environment |
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12) Contents of a written strategy document: |
PROSE Policies: financial, legal, IT Rules and responsibilities: sponsor, 3rd parties Objectives Schedule (breakdown, milestones) Expected cost plus insurance |
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12) Capital Project Appraisal Initial appraisal: SPURS Evaluating cashflow: NIPD Identifying risks: DR RUB Risks: PNEFCPB Manage risk: FAT SIR Evaluation of risk mitigation options: OFFER Investment submission: FIRM PEN Other considerations: HOLD ON |
Synergies with other projects: sold in conjuncture Political constraints Upside potential Risk/Results expected Scares investment funds used in best way NPV IRR Payback Period DPP Desktop analysis: new risks, further details Risk register Risk analysis: high level Upside risk Brainstorm with project experts Political Natural Economic Financial: raise capital Crime Project: on time/on budget/meets objective Business: competition Further research Avoid: redesign Transfer: sub-contract Share Insure Reduce: frequency, severity, correlation Overall impact on distribution of NPVs Feasibility and cost Further mitigation required in response to secondary risks Effect on frequency / severity / correlation Resulting secondary risks Final results Identify key residual risks Recommendation Mitigation strategy Proposed method of financing Effects on investors Non-monetary issues e.g.synergies/political Hunch Optimism and bias Last minute considerations Doubts over feasibility Omits knowledge owner/manager has Not credible |
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13 - 19) Characteristics of investment: |
I CNUT SYSTEM T Income/Capital: i.e. cashflows Currency Nature Uncertainty Term Security (i.e. default risk): credit rating, fixed/floating charge, income/asset cover, economy, ranking Yield: size, real/nominal, expected vs running Spread (i.e. volatility of market) Term (i.e. short, medium or long) Expenses/ Exchange rate Marketability/Liquidity: depends on size Tax |
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13) Why institutions hold cash: |
POURS Protect monetary values: for high risk-averse and liabilities are nominal Opportunities: take advantage of investments that are only open for short amount of time Uncertain outgo: don't want to sell assets at depressed price Recent cash-flow: large inward income Short-term commitments: ideal match |
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13) Economic situations when cash is attractive: |
GRID General economic uncertainty: cash is very stable, good for risk averse Recession: government debt and supply of bonds increase, equity also falls Interest rates rising: bonds and equity fall Depreciation of domestic currency: make cash investment in foreign currency attractive |
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14) Theories of yield curve:
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LIME Liquidity Preference theory Inflation risk premium theory Market segmentation theory Expectations theory |
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15) Reasons for equity categorisation: |
SIDE RMS Specialisation: analysts can't be experts in all areas Information: e.g. industry data, presented in same way Decision making process more structured Economics: factors affecting one company affect all - see RMS Resources: companies have same input costs Markets: affected same by changes in demand Structure: affected same by changes in interest rate |
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16) Characteristics of prime property: |
Condition Age Location Lease Structure Size Tenant Quality |
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16) Disadvantages of direct property investment: |
Marketability: time/costs to get quote, less liquid Diversification: many properties needed Management expertise: detailed local knowledge needed to make profit Divisibility: not possible Market Values: estimates are expensive Size: properties to big for some investors |
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16) Advantage of direct property over property shares: |
Darth Vadar Can Fight Evil Diversification: away from equities Volatility: less volatile in short term, however not able to gear returns Control: more of it Forced sales: forced to sell prop shares at bottom Exposure: less risk exposure e.g. to development |
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18) Advantages of collective investment schemes: |
MEDIC GD Marketability advantages: smaller share Expertise: in specific industry Diversification/Divisibility: for investors with small fund/limited time Index tracker fund: e.g. replicates performance of FTSE 100 Costs: some direct costs are avoided e.g. transaction Gearing: mainly with ITCs so higher expected returns Discount to NAV can vary: ability to make profit |
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18) Disadvantages of collective investment schemes: |
Last Minute Travel Loss of control: over individual investments Management charges incurred Tax disadvantages: e.g. withholding tax that can't be reclaimed |
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19) Attractions/Problems with overseas investment |
MID MTV CATERPILLAR Match overseas liabilities: reduce currency risk Increase expected return: compensation for higher risk/ inefficiencies in market Diversification: red risk - less vulnerable to downturn Mismatch domestic liabilities Tax Volatility due to exchange rate Custodian needed Admin requirements Time delays Expenses Incurred Repatriation of funds Political problems/poor regulation Information poorer Language difficulties Liquidity poorer Accounting differences Restrictions on foreign ownership |
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19) Attractions/Problems with emerging markets |
RIDE RREEV Riskiness: perceived to be higher so lower demand/prices Inefficient markets: buy cheaply due to anomalies Diversification: through different economies/markets Economic growth: higher than developed country Regulation: lose out due to insider trading/fraud Repatriation: might be taken away (political risk) Easier said than done: e.g. info not available Entry problems: higher controls on foreign ownership Volatility: small economies affected by small changes |
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20) Factors affecting short term interest rates: |
(PIE)^2 Policy objectives: government may set bank objective, which controls interest rates to achieve it Inflation - demand pull inflation Economic Growth - low IR = more investment Pure Supply and Demand: economic activity low, demand for borrowing low Inflation - investor want compensation i.e. positive real interest rate Exchanges Rates - cosh push inflation |
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20) Factors affecting bond yields: |
FIASCOES Fiscal deficit & corporate debt issues: supply factor Inflation & inflation risk premium: investors require compensation for both Alternative investments: especial US gov bonds Short term IR: fixes the short end of yield curve, uncertain effect on long end (expectations of investors e.g. inflation rises) Cashflows of institutions: save more = more demand e.g. from change in legislation Other: e.g. any economic news affecting above Exchange Rate: can change overseas demand Economy: change credit risk on default bonds - increase yield margin over give bonds Supply and Demand: anything that affects them |
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20) Factors affecting the level of the equity market: |
PRICE GIO TACOS Risk Premium for equity: fluctuates depending on investors level of confidence/ views on risk Inflation: many different effect but overall indifferent Currency movements: affect demand for equity and profitability of exporters/importers Expected future corporate profitability Growth: economic growth = dividend growth Interest Rates (real): low stimulates the economy & PV of future dividend higher Other influences: see below Tories: uncertain political climate Alternative instruments: affect demand Cashflows: more funds available = more demand Overseas equity markets: significant correlation Supply factors: spate of new issues |
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20) Economic factors on occupational property market: |
GLUTS REGS Government Controls: restrict supply Location inflexibility: only so much in one location Usage inflexibility: building has only one use e.g. office Transaction costs are high Supply lags behind demand Real interest rates: high yields tend to push up property investment yields Employment: unemployment = low demand for offices Growth (economic): higher wages = more demand Structural demand: e.g. working from home |
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20) Economic influences on the investment property market: |
COPE PAIR Cashflows: more people saving = more demand Occupancy market: use GLUT REGS Property companies' demand Exchange Rate: affect overseas demand Political Climate: uncertainty = price drop Alternative Investments Inflation: hedge against unexpected inflation as rent should increase in line with it Real Interest rates: low IR means PV of future rents is higher so higher capital value and lower property investment yield |
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21) Demand for asset changes when there is a change in: |
PRIOR Preference: e.g. change in liability/regulation/tax regime, uncertain political climate, fashion/marketing/better education of new investments Risk Income: i.e. from institutional investors Other investment prices: as investments are substitute goods Return |
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23) Valuation of individual investments: |
SHAM FADS Smoothed market values - take average Historic book value: price originally paid Adjusted book value: to reflect movements in value Market Value: varies constantly, objective Fair Value: knowledgeable Arbitrage Value: replicating investment with combination of other investments Discounted Cashflows: future dividend stream - need discount rate Stochastic Models: distribution |
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25) Factors influencing investment strategy: |
SOUNDER TRACTORS Size of assets (absolute/relative) : extent of mismatching Objectives Uncertainty of liabilities: need to hold more cash Nature of liabilities: if real what type of inflation Diversification: if small, invest in CIS Existing Portfolio: cost/difficult in rebalancing it Return (expected in long-term) Tax treatment of assets/investor Regulation: see TECH SCAM Accrual of liabilities in the future Currency of existing liabilities Term of existing liabilities Other funds strategies (competition) Risk appetite: depends on provider |
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26) Factors influencing investment strategy (individuals): |
DRILLED Diversification: reduce specific risk Risk Averse: don't like volatility Income to live on vs growth for future Low free assets: constrains ability to mismatch and take risk Level of information/expertise is low Expenses are higher when investing small amounts Direct investment not possible in some asset classes |
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27) Regulatory limit on investments: |
TECH SCAM Types of asset that can be invested in Extent of mismatch allowed Currency match assets and liabilities Hold certain assets e.g. Gilts Single counter-party maximum exposure Custodian of assets Amount of any one asset used to demonstrate solvency Mismatch reserve |
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28) Problems with Pure Matching/ Immunisation: |
TIT FURRIES Timing/Amount of liabilities may not be known Initial income from the asset is too large Term of asset not long enough Flat yield curve assumed Upside risk Real/Uncertain liabilities not allowed for Rearrangement/adjustments costs Indefinite timing of asset proceeds and liability outgo Existence of assets with suitable durations Small changes in IR assumed |
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29) Factors in assessing different models: |
FENCED Fit for purpose Expertise available in-house Need flexibility Cost of each option Expected number of times used: if just once, build in-house Desired accuracy |
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29) Requirements of a good model: |
VARIABLE CRISPS CARD Valid Adequately documented Robust Input parameters appropriate Arbitrage free Behaviour reasonable Length/expense of run not too high/low Easy to understand Communicable workings and outputs Reflects risk profile of contracts modeled Independent verification of outputs Sensible joint behavior of variables Parameters allow for all significant features Simple but retains key features Clear results A range of implementation methods Refineable Developable |
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29) Advantages of deterministic/stochastic: |
SEC FOCUS Scenarios: easy to see what ones have been tested Easy to design, build and run: cheaper and quicker Communicable: to non-technical audience Financial guarantees/options: better for modelling these: take up rates and guarantees biting Outliers/extremes - e.g. can see 1 in 200 Correlation allowed for between variables Uncertain allowed for in variables: identify risks Scenarios: wide range tested - see which ones are profitable |
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30) Design factor for data systems: |
Quality and quantity of data: good mango control, consistency between proposal and system to reduce errors Users of data and their requirements should be considered: e.g. actuaries, management, u/w; single integrated system Other: costs of system, training of staff, flexibility of system Checks on data: see STAMPED |
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30) Uses of data: |
SIR MAPEMAP Statutory returns Investments Risk Management Management information Accounts Pricing Experience analysis/statistics Marketing Administration Provisions |
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30) Sources of data: |
TRAINERS Tables: need to make adjustments for own exposure and trends Reinsurers: good for new products Abroad Industry: e.g. for mortality although adjustments need to be made National statistics: economic forecasts Existing products: business volume and mix e.g. age, sex; withdrawal info, not good for mortality Regulators returns and accounts Similar products |
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30) Problems with industry data: |
DR DONEQ Detail insufficient Risk factors coded in different ways Differences from company to company: e.g target market, u/w, terms, geography, sales channel Out-of-date Not everyone contributes: lack of credibility Errors Quality: depends on that of contributors |
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30) Checks on data: |
VACHE Value of assets and liabilities is appropriate Accounting period: correct for any event's associate income/expenditure Complete: no unrecorded assets/liabilities Held: asset/liability held on given date Exists: asset/liability exists on given date |
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30) Checking assertions made by data: |
STAMPED Spot checks: blanks, unusual/invalid entries Third parties: investment managers hold same record Averages: sensible compared to last valuation Sum assured: goes up by inflation Premiums: depends on inflation, target market, level of cover Membership data vs accounts Investment: asset data vs accounts, check investment income Pension: membership data vs accounts, check contributions and benefits Previous data + movements = new data Check #policies/members, premiums, benefits Deed audits |
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31) Factors to consider when setting assumptions |
FRANC Financial significance: i.e. how each one will affect profitability Regulatory constraints Application: is it to price or reserve Needs of client Consistency between various assumptions |
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31) Using past data to set future assumptions: |
QQ BEST ARCHER Quantity of data insufficient: if provider small, new, recent design changes Quality: not at correct level, data systems poor/unreliable, mngt control system poor Balance of homogenous groups underlying data may be different: distribution channels, geography, target market Economic situation may have changed Social conditions may have changed Trends over time: medical, demographic Abnormal fluctuations Random fluctuations Changes in regulation Heterogeneity within the group to which the assumptions will apply Errors in data/ out-of date/not appropriate: excess, waiting/deferred period, exclusion clause, max level benefit, additional benefits Recording differences: e.g. categorisation of smoker |
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35) Reasons for calculating provisions:
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BAD MEDIC
Benefit improvements for a benefit scheme Accounts and reports – published and internal Discontinuance / surrender benefits
Mergers and acquisitions Excess of assets over liabilities and so whether discretionary benefits can be awarded Disclosure information for beneficiaries Investment strategy Contribution / premium setting Statutory solvency reports
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37) Information to be disclosed:
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DISCLOSURE
Director's pension costs Investment strategy and performance Surplus/deficit arising in last year/accrued to date Calculation methods and assumptions Liabilities accrued over year/to date Options and guarantees Sponser's /members contribution obligation Uncertainties: risks Rights on wind up Expenses |
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37) Reasons why disclosure is important:
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SIMMERS
Sponsor is aware of financial significance of benefits Informed decisions can be made 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
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38) Reasons for analysing surplus: |
DIVERGENCE Divergence of actual vs expected (show financial effect/significance of) Information to management/accounts Variance of whole = sum of variance from individual levers Experience monitoring to feedback in 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) Check on valuation assumptions and calculations Extra check on valuation data and process |
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39) Cannons of lending: |
Character: competent, trustworthy, look at references Ability to pay back Security: credit rating, margin built into assumptions Purpose: what project, is it ethical Amount Risk vs reward: alternative investments |
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40) Inappropriate Advice: |
CRIMES Complicated products: not understood policy wording/cover Rubbish/incompetent advisor: e.g. from no training Integrity of advisor: e.g. on commission Models/parameters wrong Errors in data relating to customer State encouraged but inappropriate: e.g. covering something already provided by state |
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41) Criteria for insurability:
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MUD PIS Moral Hazard Ultimate limit on liability Data - so loss can be estimated Probability(event) is small Independent risks Similar risks can be pooled so the variance is reduced |
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42) Benefits of good risk mngt process: |
DISCO RAGE Determine cost-effective means of risk transfer Improve job security and reduce variability in pay Stability and quality of business improved Confidence to stakeholders that business is managed well Opportunities arising from natural synergies Reflect the inherent level of risk in product prices Avoid surprises Growth improved by exploiting risk opportunities Earlier risk detection means they're cheaper and easier to deal with |
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43) Reasons for underwriting: |
SAFER Substandard lives: identify and offer terms - increase premium, decrease benefit, excess, exclusion clause, decline cover Anti-selection avoided Financial u/w to reduce risk of overinsurance on large policies Experience does not depart too far from expected in pricing basis Risk classification to ensure that all risks are treated fairly |
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44) Reasons for using reinsurance: |
SAD LIFE Smooths results Avoid large losses Diversification Limit exposure to risk: single event/aggregation Increase capacity to accept risk Financial assistance Expertise |
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44) Possible reasons for using ART: |
DESCARTES Diversification Exploits risk as an opportunity Solvency improves / source of capital Cheaper cover than reinsurance Available when reinsurance may not be Results smoothed Tax advantages Efficient risk management tool Security of payments improved |
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46) Needs of Capital |
REG CUSHION Regulatory solvency purposes Expenses of developing new business: setting up admin/IT, collecting premiums Guarantees and options Cashflow mismatching Unexpected events and adverse experience Smooth results Help demonstrate financial strength and attract business Investment freedom Opportunities New business strain |
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Why insurers reinsure: DEFLATORS
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Diversification Expertise (underwriting + data) Financial assistance Limitation of large losses Accumulations Tax Benefit Opportunity to write more/larger risks Rates may be low Smoothing of results |
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Costs in setting up and managing: RAPID COST |
Renewal admin e.g. collecting premiums Asset management Profits Initial cost i.e. setting up a new record Design Commission Overheads Sales & advertising Terminal e.g. paying benefits |
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Ways of mitigating risk: STAIRS |
Share the risk with party with better control Transfer Avoid Insure Redesign product/ reduce profitability Study risk further |
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Contents of investment submission: CRAMPS FRADDS |
Cat risk and how proposed to manage them Residual risk and how be managed Alternative projects Mitigation methods of key risks Political factors that might affect the decision Synergies with other projects Financial methods Results (financial projections) Assumptions Distribution of NPVs Definitions & Scope of project |
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Reason shares categorized by industry: FIES |
Information (same source, industry statistics) Expert Structure (decision making) |
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Reason why institutions don't invest in residential property: Q SPITTLE
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Quality of tenant (poor) Size of investment (too small) Political interference (rent controls) Image (poor public image of landlord) Tax disadvantage Turnover of tenants (regular) Legislation (rights of way) Expenses (relatively high per unit) |
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Use of Indices: HEM BINDS
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Estimating future market movements Measure of short term movements Benchmark against: investment performance Index-tracker funds Notional portfolio valuation Derivative instruments Sub-sectors analysis |
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Use of govt bond indices: CASS
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Approx valuation of fixed-interest portfolio Structures - picture of general yields structures Standards against which yields on other investments can be assessed |
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Reasons why property indices are rare:
SHUT VICE |
Subjective Valuations
Heterogeneity makes it more difficult to get price data Uniqueness of each property Time between valuations Value only known when property is sold Infrequent sales Confidential prices Expensive valuations |
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Dividend discount model - assumptions: GAP TIE |
Growth rate: annual Annual dividends Perpetuity Taxes ignored I independent of when return is actually earned Expenses ignored |
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Property DCF valuation - things to consider: DRIVE GT |
Depreciation: allow for refurbishment costs Running cost: maintenance Interest rate for valuation: reflect riskiness Voids: assess current tenants Expiry of lease - residual value on expiry Growth in rack rents Tax |
