Context of Actuarial Work

What?
1. External forces influencing the problem
  1. Actuary, Client, Institution can't control
  2. Can change over time
2. E.g.
  1. life office valuation
    1. Data
      1. Policyholder data
      2. Policy details (t&c, declared bonuses)
      3. Asset data
    2. Valuation model and assumption
      1. mortality rates and changes
      2. interest rates (past and present)
      3. inflation rates (past and present)
      4. valuation regulations
  2. develop new life assurance product
    1. company information
      1. strategic plan & existing product portfolio
      2. distribution methods (direct sales, broker, etc)
      3. ability to raise capital
      4. competitive advantages
      5. ability to mitigate the risks of the product
    2. context to develop
      1. mortality, interest, inflation rates
      2. competitors and competing products
      3. taxation
      4. marketing regulations
      5. income and wealth of potential policyholders
  3. valuing defined benefit pension scheme
    1. pension shceme
      1. membership data
      2. assets data
      3. scheme rules defining all of the benefits
    2. models and assumption
      1. interest rates
      2. inflation rates
      3. decrement rates
        mortality
        early leavers
        illness
Why?
1. Way to understand the problem
2. Use model that depends on context
  1. Assumptions of context
    1. interest rate
    2. mortality rate
    3. surrender rate
    4. inflation
  2. Compare Past vs present
    1. See how assumption differs and change
  3. Simplification of real world
    1. e.g. Pension valuation
      1. one rate of interest
      2. one future rate of salary increase (pension salary index)
      3. all retire age 65
Actuarial Control Cycle
1. Variable Context
  1. Allow simple assumption
    1. Result different from model projection
      1. Change model assumption
2. How it fit
  1. Know Context
    1. to Designing the solution
    2. monitor result
      1. check model accuracy
      2. assess effect of changing context and particular circumstances of the client
  2. Not static
    1. Context change over time
Component
1. Professionalism
  1. Code of conduct
  2. Practice standards
    1. Valuation to comply practice standards
2. Regulatory environment
  1. Laws and regulations of the country
    1. valuation comply UK regulation, Solvency II
    2. val. report is checked by UK FSA
    3. e.g.
      1. fin. reporting
      2. competition
      3. sales of financial product
      4. business conduct at point of sale and in force business conduct
      5. content of insurance contract
      6. compulsory insurance. e.g. sell motor business to have GI license
  2. Supervisory authorities
3. Government and Judicial context
  1. Government policy
    1. Policy propose new regulation
    2. parliament debate of possible new regulation
    3. experts on policy discussions
    4. impact to financial institutions
  2. Taxation
    1. interest allow for UK tax
    2. encourage/discourage investment in product
    3. affects
      1. product design e.g. max capital gains vs div.
      2. pricing
      3. valuations
      4. cash flows
      5. EBITDA as performance measure instead
      6. expense analysis
    4. Low tax on ISA
    5. retirement contribution tax free
  3. Social assistance and social insurance
    1. Means- testing
    2. subsidize insurance very basic cover
    3. dependend state provision
    4. e.g. EPF
  4. Judicial decisions
    1. Claims assumption allow award decisions behavior
    2. interpretation of legislation
      1. judicial attitude towards interpreting Policy wording
    3. affect liability claims
4. Physical environment
  1. Climate and natural perils
    1. E.g.
      1. floods
      2. drought
      3. hurricane
      4. tsunami
      5. earthquake
      6. typhoon
    2. Large insurance claim at once
    3. Expensive premium in area-prone
    4. Govt provide assistance to encourage insurance coverage
      1. Reinsurance programme
    5. CAT model
      1. Expert inputs
      2. Pricing
  2. Pandemics
    1. E.g.
      1. SARS
      2. HIV virus
      3. H5N1
      4. H1N1
    2. Impact
      1. health claim rates
      2. key staff absences
      3. Mortality rates
      4. defaults by debtors or payment delay
      5. Asset price, index price
  3. Man made disasters
    1. sometimes difficult to quantify
    2. terrorist, oil spill, mines, nuclear reactor explosion
  4. Technological developments
    1. impact to claims expense (low cost transaction system vs manual labor)
    2. impact to claim rate
    3. Medical technology
    4. new business: insure phone, laptop
    5. Admin/selling cost
5. Economic and Social Environment
  1. Economic conditions and trends
    1. interest rates and inflation assumptions
    2. recession affects claim rates
  2. Demographic structure and trends
    1. majority population at what age?
      1. affects pension liabilities
  3. Work and employment patterns
    1. retirement age
    2. wage inflation
    3. mobile work force:jump to different job
    4. M&A and Rationalisation
    5. flexibility in pension scheme
  4. Social factors and trends
    1. theft rates affect claim frequencies
    2. fraudulent claim trend
    3. trends in propensity of claim based on geographic area
    4. legislation against discrimination gender, race and age
    5. development of micro-finance, micro-insurance, takaful, islamic banking and sukuk to cater lower income markets and muslim market
  5. Industrial and labour union issues
    1. E.g. surplus allocation in a DB pension shceme
    2. union negotiate salary--> affect cost of employee benefit
6. Industry and business environment
  1. Range of products and services offered
  2. Convergence of financial institutions
    1. Banccasurance
  3. Product distribution and intermediaries
  4. Accounting standards and practices
    1. Affect assumption for published valuation
      1. earned premium UPR
  5. Competition
  6. Industry associations
    1. Provide claims information
    2. assumptions benchmark
  7. Stakeholders
  8. Corporate culture
    1. Conservative business approach
  9. Globalisation
    1. Multinational

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Context of Actuarial Work

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	Created by Ayfiq Syazwan over 9 years ago