ARA syllabus Actuarial Risk Management Aim: To provide the technical skills to apply the principles and methodologies studied under actuarial technical subjects for the identification, quantification and management of risks. (a) (b) (c) (d) (e) General commercial and economic environment Actuarial Control Cycle Statutory roles of actuaries Stakeholders d1. Financial products d2. Occupational pension schemes - Defined benefit pension scheme - Defined contribution pension scheme - Hybrid pension scheme - Providers of benefit - Risks involved d3. Life insurance - Endowment assurance - Whole life assurance - Term assurance - Immediate annuity - Deferred annuity - Sickness insurance - Critical illness insurance - Long-term care cover - Unit-linked contracts d4. Non-life insurance - Classification(s) - Pricing - Reserving - Sources of risk - Products o Liability insurance o Property insurance o Financial loss insurance o Fixed benefits insurance Risk environment e1. Risk management - Risks identification, their causes and implications - Risk measurement - Risk control - Risk financing - Cost of risk - Risk monitoring ST9 elements e2. ERM concept and framework e3. The role of the ERM concepts like: holistic approach, downside and upside risks, measurement of risk, unquantifiable risks, responses to risk e4. Benefits of ERM e5. Appropriate framework for an organisation s ERM e6. Best practice in ERM in compliance and corporate governance e7. Governance issues (market conduct, audit and legal risks) e8. Risk frameworks in regulatory environments The role of regulators in ERM and effective management of the supervisor relationship Basel Accord and Solvency II frameworks (underlying principles and approaches to risk measurement)
e9. The role of credit agencies in the evaluation of risk management functions and the grading criteria used. e10. ERM process Relevance of ERM to the stakeholders Risk appetite, risk capacity and risk objectives of a company ERM roles and responsibilities of the people within an organisation Application of the risk management control cycle and relevance of external influences and emerging risks e11. Risk Categories and Classification Market risk Economic risk Interest rate risk Foreign exchange risk Basis risk Credit risk Counterparty risk Liquidity risk Insurance risk Operational risk Legal risk Regulatory risk Political risk Agency risk Reputational risk Project risk Strategic risk Demographic risk Moral hazard e12. Risks faced by life insurance companies e13. Risks faced by general insurance companies e14. Additional risks for pensions e15. Risk process planning (RPP) e16. Risk scoring ST9 elements e17. The extent to which the risks from e11 can be approached using quantitative analysis e18. Risk aggregation and correlation Risk aggregation techniques incorporating the use of correlation Correlation measures and their merits for modelling purposes Scenario analysis and stress testing in the risk measurement process and their advantages and disadvantages Modelling multivariate risks and the use of appropriate copula Distribution tails, tail correlation and low frequency / high severity events Use of models in the overall ERM decision-making process. Risk Measurement and Assessment e19. Properties and limitations of: Value at Risk (VaR) Tail Value at Risk (TVaR) Probability of ruin Expected shortfall e20. Suitable time horizon and risk discount rate e21. Assessment of different types of market risk. e22. Evaluate credit risk: Credit spread and its components Modelling credit risk Risk Management Tools and Techniques e23. Risk optimisation and responses to risk Page 2 of 5
e24. Reducing risk: by transferring it without transferring it. e25. Residual risks and new risks arising following risk mitigation actions e26. The management of operational, liquidity, insurance and other key risks Capital Management e27. Economic measures of value and capital and their use in the decision-making process e28. How to develop a capital model for a financial firm e29. How to allocate capital across an organisation. (f) (g) (h) (i) (j) (k) Reinsurance f1. Facultative and treaty f2. Proportional and non-proportional f3. Main purpose of reinsurance f4. Determine the required level and amount of reinsurance Alternative risk transfer (ART) g1. Integrated risk covers g2. Securitization g3. Post loss funding g4. Insurance derivatives g5. swaps Regulation h1. Aims of regulation h2. Cost of regulation h3. Globalisation h4. Need for regulation h5. Functions of a regulator h6. Targets of regulation h7. Types of regulatory regime External environment i1. State benefits i2. State influence i3. Corporate governance i4. Corporate structure i5. Insurance cycle i6. Supply and demand Investment environment j1. Government bonds j2. Corporate bonds j3. Cash instruments j4. Equity analysis j5. Real estate investment j6. Overseas investment j7. Collective investment vehicles Capital requirements k1. Capital k2. Determinants of economic capital k3. Regulatory capital k4. Determinants of regulatory capital k5. Sources of capital k6. Need for capital k7. Modeling capital requirements k8. Regulatory environments Page 3 of 5
(l) Contract design l1. Profitability l2. Marketability l3. Competitiveness l4. Capital requirements l5. Cross subsidies l6. Sensitivity of profits l7. Risk characteristics l8. Options and guarantees l9. Limitations caused by administration systems l10. Consistency with existing products l11. Pension scheme design (m) Data m1. Types of data m2. Data checking m3. Using external data m4. Risk classification to obtain homogeneous classes of data (n) (o) (p) (q) Modelling n1. Model requirements n2. Deterministic or stochastic n3. Cash flow model n4. Model points n5. Use of actuarial models n6. Sensitivity analysis Assumptions setting o1. Information sources o2. Using historic data o3. Factors to consider o4. Assumptions for pricing - Demographic assumptions - Investment return - Expenses and commission - Withdrawals - Pension schemes and non-life insurance - margins Expenses p1. Types of expenses p2. Expense allocation p3. Expense loadings for premium rating Developing the cost and the price q1. Formula based approach / discounted cash flow approach q2. Factors to consider - Taxation - Cost of capital - Margins for adverse future experience - Cost of options and guarantees - Valuation basis for statutory reserves - Experience-rating adjustment of premiums q3. Testing for robustness q4. Market premium q5. Financing pension scheme benefits - Lump sum in advance - Terminal funding - Regular contributions - Smoothed PAYG Page 4 of 5
(r) (s) (t) (u) (v) q6. Determining the level of contributions Valuing liabilities r1. Reserves r2. Purpose of reserving r3. Setting the reserving basis r4. Valuation approaches r5. Discounted cash flow valuation r6. Market related valuation r7. State price deflators r8. Allowing for risk in cash flows r9. Methods of calculating reserves in non-life insurance Investment management and relationship between assets and liabilities s1. Asset allocation s2. Investment risk s3. Characteristics of matching asset and liability s4. Matching by term s5. Matching by currency s6. Diversification s7. Risk and return s8. Conventional bonds s9. Index-linked bonds s10. Cash s11. Real estate s12. Domestic equities s13. International equities s14. Asset performance s15. Institutional issues s16. Investment by pension funds s17. Investment by life insurance companies s18. Investment by non-life insurance companies s19. Asset/liability management - Absolute matching - Immunization - Traditional mean-variance models s20. ALM process scheme Surplus management t1. Actual vs. expected experience t2. Defining the surplus arising t3. Analysis of surplus t4. Surplus distribution Reporting the results u1. Basic accounting concepts u2. Interpreting insurance company accounts u3. Reporting results for pension schemes Monitoring experience v1. Data requirements v2. Analysis process v3. Using the results Page 5 of 5