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) General commercial and economic environment (b) Actuarial Control Cycle
(c) Statutory roles of actuaries (d) 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 (e) 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)
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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
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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) Reinsurance
f1. Facultative and treaty
f2. Proportional and non-proportional f3. Main purpose of reinsurance
f4. Determine the required level and amount of reinsurance (g) Alternative risk transfer (ART)
g1. Integrated risk covers g2. Securitization
g3. Post loss funding g4. Insurance derivatives g5. swaps
(h) 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 (i) External environment
i1. State benefits i2. State influence
i3. Corporate governance i4. Corporate structure i5. Insurance cycle i6. Supply and demand (j) 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 (k) 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
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(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) Modelling
n1. Model requirements n2. Deterministic or stochastic n3. Cash flow model
n4. Model points
n5. Use of actuarial models n6. Sensitivity analysis (o) 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
(p) Expenses
p1. Types of expenses p2. Expense allocation
p3. Expense loadings for premium rating (q) 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
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