Subject SA2. CMP Upgrade 2015/16. CMP Upgrade

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1 SA2: CMP Upgrade 2015/16 Page 1 Subject SA2 CMP Upgrade 2015/16 CMP Upgrade This CMP Upgrade lists the most significant changes to the course material since last year so that you are aware of the differences between the 2015 study material and that for the 2016 exams. There have been a very large number of significant changes to the course, so we strongly recommend that you use the 2016 study materials for the 2016 exams. You can buy a full replacement set of up-to-date Course Notes at a significantly reduced price if you have previously bought the full price Course Notes in this subject. Please see our 2016 Student Brochure for more details. This CMP Upgrade contains: all changes to the Syllabus objectives a brief description of the significant changes to the ActEd Course Notes, Series X Assignments and Question and Answer Bank. The Actuarial Education Company IFE: 2016 Examinations

2 Page 2 SA2: CMP Upgrade 2015/16 1 Changes to the Syllabus objectives The syllabus aim has been updated so that it now reads: The aim of the Life Insurance Specialist Applications subject is to instil in successful candidates the ability to apply knowledge of the United Kingdom life insurance environment and the principles of actuarial practice to the management of life insurance business in the United Kingdom. In Objective (c) operational risk and securitisation have been deleted from the bullet point list. In Objective (e), point (3) about the Solvency II regime has been deleted, the analysis of surplus and analysis of embedded value points have been combined and the final point now refers to statutory roles rather than Actuarial Function Holder, With-Profits Actuary etc. Objective (e) therefore now reads: (e) Describe, in terms of the following, the regulatory environment for UK life insurance companies, and how this environment affects the way these companies carry out their business in practice, including the related analyses and investigations: 1. The taxation of the UK business of life insurance companies and the effect of taxation on the benefits and premiums paid under UK life insurance contracts. 2. The supervision of the UK business of life insurance companies under the relevant regulatory handbooks with regard to: the valuation of assets, liabilities and solvency capital requirements the supervisory reports to be submitted transfers of surplus, including the requirements of surplus distribution systems 3. The transfer of liabilities from one life insurance company to another. 4. The capital management of a life insurance company, including determining and improving available capital, projecting future solvency, the principles of asset-liability management and the use of derivatives. 5. Profit and value reporting under the Companies Act legislation, EU approved IFRS, and embedded values, including market consistent embedded values. IFE: 2016 Examinations The Actuarial Education Company

3 SA2: CMP Upgrade 2015/16 Page 3 6. The analysis of supervisory surplus and, for a proprietary life insurance company, analysis of the change in embedded value. 7. The Conduct of Business rules with regard to Treating Customers Fairly, disclosure and, for with profits business, the Principles and Practices of Financial Management ( PPFM ), including the Consumer Friendly PPFM. 8. The management and controls to be exercised by a life insurance company in order to conduct its affairs responsibly and effectively with adequate risk management systems. 9. The principles underlying the requirements of the professional standards and guidance relevant to actuaries practising in or advising UK life insurance companies. 10. The statutory roles that are relevant to life insurance actuaries. The Actuarial Education Company IFE: 2016 Examinations

4 Page 4 SA2: CMP Upgrade 2015/16 2 Changes to the Core Reading and ActEd Course Notes This section contains a brief outline of the most significant changes to the Core Reading and ActEd Course Notes. However, there have been many other changes so that it would be impractical to list them all. If you wish to have all the changes to the ActEd Course Notes you will need to buy a full replacement set of the up-to-date version (which you can do at a significantly reduced price if you have previously bought the full price Course Notes in this subject). Chapter 0 Many of the weblinks have changed, including those of all the SIAS papers. Some new items of suggested reading have been added to the Core Reading: Heavy models, light models and proxy models The Proxy model Working Party Institute and Faculty of Actuaries, Stress testing and scenario analysis in life insurance and beyond The Stress and Scenario Testing Working Party SIAS, The management of with-profits funds in run-off Working Party report Institute and Faculty of Actuaries, Model risk: daring to open up the black box Model Risk Working Party Institute and Faculty of Actuaries, IFE: 2016 Examinations The Actuarial Education Company

5 SA2: CMP Upgrade 2015/16 Page 5 Chapters 1 and 2 There have been a number of minor changes to the Core Reading, mainly to improve readability rather than significantly change the content. Chapter 2 Section 3, on personal pensions, has been more significantly changed, to reflect the introduction of retirement benefit flexibility. Section 6, on annuities, has also been updated to reflect these changes. Chapter 3 A new section on Simple Financial Products has been added to Section 1.1. Section 1.8 about Industry bodies now mentions the retirement benefit Guidance Guarantee. Section 6 (Operational risk) and Section 8 (Securitisation) have been deleted. Chapter 4 There have been a large number of minor changes to the Core Reading, mainly to improve readability rather than significantly change the content. Chapter 5 In Section 4, there are changes in the taxation of pension contributions and benefits. Chapter 6 & 7 These changes refer to the corporation tax rate being 20% from 1 April 2015, ie the same as the policyholder rate. In Chapter 7, Section 3.2, the description of minimum profit has been amended: The minimum profit is effectively the accounting profit arising from BLAGAB (including BLAGAB share of non-taxable dividends), after a deduction for policyholder bonuses and adjustment for current and deferred tax on policyholder I E items. Chapter 9 There have been lots of changes to this chapter. The material on the annual Returns to the PRA ( the forms ) has been removed. The PRA s Fundamental Rules and the FCA s Principles of Business have been added to the Core Reading. References to the Regulatory Handbooks have been updated and the PRA Rulebook added. The section on Part VII transfers has been extended. The Actuarial Education Company IFE: 2016 Examinations

6 Page 6 SA2: CMP Upgrade 2015/16 Chapter 11 This chapter is now significantly shorter, giving only an overview of the UK Solvency I regime and not the previous level of detail. Chapters 12 and 13 Chapters 12 and 13 have been removed from the course. They contained details of the UK Solvency I regime which are no longer required for SA2. Chapters 14 and 15 These chapters contain updates and more details on the Solvency II regime. In particular, there is more description of with-profits BEL, risk-free rates and the matching adjustment in Chapter 15. Chapter 16 There are minor changes, including the addition of TAS 100, APS X2 (Review of Actuarial Work), APS X3 (The Actuary as an Expert in Legal Proceedings) and data controller responsibilities. The material on APS Q1 and the IAN The Actuary as an Expert Witness has been removed. Chapter 18 There have been major changes to this chapter. There is a new Section 4.4 on capital modelling including the use of proxy models. Section 6 has been extensively changed to reflect the impact of the Solvency II regime. Chapter 20 The analysis of surplus chapter has been rewritten to describe the analysis of the Solvency II balance sheet. For example, there is no longer a formula approach to performing the analysis. Chapter 21 The profit reporting chapter has been rewritten, with a clearer description of the development of UK accounting requirements over time and their relationship with the solvency regime. IFE: 2016 Examinations The Actuarial Education Company

7 SA2: CMP Upgrade 2015/16 Page 7 Chapter 22 There have been major changes to this chapter. Much of the material on traditional embedded values and the Achieved Profits Method (APM) has been removed and a new section on Solvency II has been added. Chapter 23 The analysis of embedded value chapter has been rewritten and is much shorter, reflecting the convergence between this analysis and the analysis of Solvency II surplus. Chapter 25 Section 5 (Coping with the different sources of surplus) has been deleted, with the key principles now appearing in Section 4. Chapter 27 Section 5 (Operational risk) has significant new material, in particular a section on model risk. Section 6.4 (Longevity risk and mortality projections) is shorter as some of the material has been moved to Subject ST2. Chapter 29 The discussion of surrender of bonus has been removed from Sections 3.2 and Sections 4.1 and 4.2. Chapter 30 Only the methods of proportionate paid-up values and equating policy values are now included. Therefore Sections 3.3, 3.4 and 3.5 have been deleted. Glossary There have been a significant number of additions, deletions and changes of definitions, mainly driven by the move from Solvency I to Solvency II regime. The Actuarial Education Company IFE: 2016 Examinations

8 Page 8 SA2: CMP Upgrade 2015/16 3 Changes to the Q&A Bank The most significant changes to the Q&A Bank questions and solutions are listed below. Where there are too many changes to cover individually in this upgrade, the nature of the changes are outlined here: if you wish to see the fully amended versions, you will need to buy a new CMP (at a significantly reduced price), as indicated at the start of this upgrade. Q&A Bank Part 1 Part (i) of Question 1.4 has been deleted as it describes the pre-solvency II position. A new Question 1.5 has been added about distribution via price comparison websites. Q&A Bank Part 2 Questions 2.3, 2.4, 2.6 and 2.8 have been deleted The mark allocation for Question 2.5 has been reduced to 4 marks, reflecting the removal of most of the detail of the old Solvency regime. For a similar reason, the mark allocation for Question 2.11 is now 28 and for Question 2.12 is now 11. Q&A Bank Part 3 Question 3.1 has been deleted as surplus relief and virtual capital are no longer in the course. The solutions have been updated throughout to tie in with the new Solvency II regime. IFE: 2016 Examinations The Actuarial Education Company

9 SA2: CMP Upgrade 2015/16 Page 9 Q&A Bank Part 4 Questions 4.1, 4.4, 4.5 and 4.9 have been deleted. Question 4.2 has amended to refer only to embedded value profit. Questions 4.6 and 4.7 and 4.8 have been substantially amended to make sense in the light of solvency and embedded value reporting developments. A new question has been added on the development of UK GAAP. Q&A Bank Part 5 Question 5.2 has been deleted as the detailed material on sources of surplus has been removed from the course. A new question (Question 5.4) has been added about model risks. Solution 5.7 has been updated to reflect the Solvency II regulatory capital requirements. Q&A Bank Part 6 Question 6.1 has been deleted. Question 6.8 has been deleted as the accumulation of premium arrears or surplus alteration method is no longer in the course. Question 6.9 has been amended so that there are no longer capital units in the contract design (as actuarial funding is no longer mentioned in either ST2 or SA2 Core Reading). The solution has been updated accordingly. Question 6.12 and its solution have been updated to reflect the Solvency II regime. Q&A Bank Part 7 The wording of Question 7.1(i) has been extended to more clearly indicate the required scope of the answer. The solution has been restructured in line with this change. The most significant changes to Question 7.2 are in the solution to part (iii) which now involves consideration of how different embedded value and solvency reporting regimes are in the country concerned. The Actuarial Education Company IFE: 2016 Examinations

10 Page 10 SA2: CMP Upgrade 2015/16 4 Changes to the X assignments As with the Q&A Bank, we have updated questions and solutions for the changes in the Core Reading and ActEd text. We only accept the current version of assignments for marking, ie those published for the sessions leading to the 2016 exams. If you wish to submit your script for marking but have only an old version, then you can order the current assignments free of charge if you have purchased the same assignments in the same subject the previous year (ie sessions leading to the 2015 exams), and have purchased marking for the 2016 session. The most significant changes to the assignment questions or solutions are listed below: All chapter references have been updated to reflect the deletion of Chapters 12 and 13 on details regarding the valuation of assets and liabilities under Solvency I. X1.1 A number of the ideas worth [1] in the solution to X1.1 have been split into two parts each worth. X1.2 The solution to X1.2(ii)(a) has been updated in line with the Core Reading change to the description of minimum profit and now reads: (a) Definition of minimum profit The minimum profit is effectively the accounting profit arising from BLAGAB (including BLAGAB share of non-taxable dividends) after a deduction for policyholder bonuses and adjustment for current and deferred tax on policyholder I E items. If the result of the above calculation is negative the minimum profit is taken as zero and a loss can be carried forward to the following year. [Maximum 2] A number of the ideas in the solution to X1.2(iii) have been further split into points each worth. IFE: 2016 Examinations The Actuarial Education Company

11 SA2: CMP Upgrade 2015/16 Page 11 X2.1 Part (i) is slightly reworded and in the past tense: (i) List the policy information you would have required in order to perform the twin peaks valuation of liabilities under the Solvency I regime for the nonlinked life and pension business. [7] Part (iii) has been removed, so the question is worth [10] in total. X2.2 The opening sentence of the question now reads: A medium-sized proprietary life insurance company operates in a country that uses solvency regulations that are similar to the UK s Solvency I regime. The mark allocation for part (i) is reduced to [12] and that for part (ii) to [4], so the question is worth [36] in total. The solution has been reduced accordingly. X2.3 The question has had new parts (iii) to (vii) added. Please refer to the 2016 materials. X3.1 The mark allocation for (i) has been reduced to [11]. The middle section of the question has been broken up and a new part (iii) added: The Actuarial Education Company IFE: 2016 Examinations

12 Page 12 SA2: CMP Upgrade 2015/16 A number of years of equity market falls, followed by a period of equity market volatility, has made the company concerned about the ongoing regulatory solvency position of its with-profits fund. (iii) Suggest possible management actions that could be taken in response to this concern and describe any TCF considerations relating to their implementation.[16] The company decides to alter the allocation of the assets backing the with-profits liabilities within its with-profits fund as follows. In the solution to the 2015 part (iii), under Implementing the change in asset mix the following point has been removed: When increasing its cash holdings, the company should bear in mind the admissibility limits on cash. In the solution to the 2015 part (iii) under Communication the following three points have been removed: A press release could be issued, explaining the rationale and benefits of this change, to avoid adverse speculation by journalists. Any active financial advisers or tied agents should be given similar information, but perhaps with more detail. Any relevant information on the company s website should be updated accordingly. The 2015 parts (iv) and (v) have been deleted. X3.2 Product (b) (unitised with-profits personal pensions) have been removed from the question. The mark allocations for the four parts have been reduced to [6], [8], [4] and [17] respectively. In the solution, all points referring to the UWP business have been removed. In part (ii) the Capital to write the business is now identified as: best estimate liabilities risk margin Solvency Capital Requirement (SCR) IFE: 2016 Examinations The Actuarial Education Company

13 SA2: CMP Upgrade 2015/16 Page 13 X3.3 This is a new question about using cashflow projections to recommend an investment mix for a closed with-profits fund. Please refer to the 2016 materials. X4 This entire assignment is new for Please refer to the 2016 materials. X5 This entire assignment is new for Please refer to the 2016 materials. X6.1 The products covered by the question are now just (c) and (e). In the solution, all sections and points referring to the other products have been removed. The wording and mark allocations for parts (ii), (iii) and (iv) have been changed to: (ii) Describe the reasons for offering the guarantees and options. [6] (iii) (iv) Explain the risks to the company inherent in offering the guarantees and options. [4] Discuss the implications of removing the guarantees and options for all new business. [6] The following points have been added to the solution to (iv): For the term assurance, removing the option would make the product easier to price and enable lower premium rates to be offered. If the company did this, existing policyholders might lapse their old policy and effect a new cheaper one. This would increase costs without generating genuine new business. Also, it would be the healthy policyholders that would be most likely to benefit, so the average experience of the remaining policyholders would deteriorate, possibly causing a loss. [1] Part (v) has been deleted and so the total mark allocation for the question is [19]. The Actuarial Education Company IFE: 2016 Examinations

14 Page 14 SA2: CMP Upgrade 2015/16 X6.2 (new for 2016) This is a new question. Please refer to the 2016 materials. X6.2 in 2015 (becomes X6.3 in 2016) The mark allocation for part (i) is reduced to 9 marks. A number of the ideas worth [1] in the solution to part (i) have been split into two parts each worth. Two new points have been added to the solution for part (i): An automated system may be in line with more general changes required in the annuity market in the light of greater pensions freedoms, in particular more underwriting using a wide range of rating factors. Avoiding large upfront systems investment may be particularly wise in the period shortly after the introduction of more pension freedoms and the resultant uncertain outlook for the annuity market. [1] Part (ii) has been changed to: (ii) For each element of the impaired annuity pricing basis, other than mortality, describe how the assumption would be set. [7] The solution has been shortened accordingly. The mark allocations for part (iii) is now [8] and for part (iv) is [14], making the question worth [38] in total. IFE: 2016 Examinations The Actuarial Education Company

15 SA2: CMP Upgrade 2015/16 Page 15 5 Other tuition services In addition to this CMP Upgrade you might find the following services helpful. 5.1 Study material We offer the following study material in Subject SA2: Mock Exam Flashcards Practice Module P2 Multiple-choice Booklets Additional Mock Pack ASET (ActEd Solutions with Exam Technique) and Mini-ASET MyTest. For further details on ActEd s study materials, please refer to the 2016 Student Brochure, which is available from the ActEd website at Tutorials We offer the following tutorials in Subject SA2: a set of Regular Tutorials (lasting three full days) a Block Tutorial (lasting three full days) a Revision Day (lasting one full day). For further details on ActEd s tutorials, please refer to our latest Tuition Bulletin, which is available from the ActEd website at Marking You can have your attempts at any of our assignments or mock exams marked by ActEd. When marking your scripts, we aim to provide specific advice to improve your chances of success in the exam and to return your scripts as quickly as possible. For further details on ActEd s marking services, please refer to the 2016 Student Brochure, which is available from the ActEd website at The Actuarial Education Company IFE: 2016 Examinations

16 Page 16 SA2: CMP Upgrade 2015/16 6 Feedback on the study material ActEd is always pleased to get feedback from students about any aspect of our study programmes. Please let us know if you have any specific comments (eg about certain sections of the notes or particular questions) or general suggestions about how we can improve the study material. We will incorporate as many of your suggestions as we can when we update the course material each year. If you have any comments on this course please send them by to [email protected] or by fax to IFE: 2016 Examinations The Actuarial Education Company