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Aims of a regulator

GRIP

Give confidence

Reduce financial crime

Inefficiencies corrected

Protect consumers

Functions of a regulator

SERVICE

Setting sanctions

Enforcement

Review and influence policies

Vetting and registering individuals and businesses

Investigate breach

Checking for prudential management and conduct of providers

Education

External environmental factors

PESTLE CS BATS

Political

Economic

Social

Technological

Legislative and regulatory constraints

Environment

Demographic trends

Corporate structure

Underwriting cycle

State benefits

Business environment

Accounting standards

Taxes

Solvency requirements

Investment and risk characteristics

SYSTEM T

Security

Yield

Spread

Tax

Exchange rate and expenses

Marketability

Term

Characteristics of an investor

TRAITOR

Tax

Regulation

Assets held

Income / CF

Taste

Other asset

Risk appetite

General reasons + economic situations for holding cash

POURS GRID

Protect monetary value

Opportunities

Uncertain liabilities

Recently received CF

Short term liabilities

General economic uncertainty

Recession expected

Interest rates rising

Depreciation of domestic currency

Main difficulty of overseas investments + other practical problems

TVM CATERPILLAR

Taxes irrecoverable (withholding tax)

Volatility of currency

Mismatching liabilities

Custodian required

Additional admin required

Time delay

Expenses incurred (currency exchange fees)

Regulation poor

Political instability

Info is harder to obtain

Language issues

Liquidity issues

Accounting differences

Restrictions on foreign ownership

Characteristics of prime property

ST CALL

Size

Tenant quality

Comparable properties for rent / review

Age of property

Location

Lease structure

Theories of the yield curve

LIME

Liquidity theory

Inflation risk premium theory

Market segmentation theory

Expectations theory

Regulatory influences on assets held

TECH SCAM

Type of asset allowed to invest in

Extent to which mismatching is allowed

Currency matching

Holding certain assets e.g. govt bonds

Single counterparty max exposure

Custodianship of asset

Amt of single asset used to demonstrate liquidity is restricted

Mismatching reserve

Factors affecting investment strategy

L SAD CUTER INVESTOR

Legislation or regulatory constraints e.g. accounting standards

Size of assets

Amount of liabilities

Diversification

Currency of liabilities

Uncertainty of timing of liabilities

Tax

Existing portfolio

Risk appetite

Institutions objectives

Nature of liabilities

Voluntary restrictions

ESG issues

Solvency requirements

Term of liabilities

Other funds strategies

Return

Ways of valuing assets

SMH SAD AF

Smoothed market value

Market value

Historical book value

Stochastic Modelling

Adjusted book value

Discounted CF

Arbitrage

Fair value

Model design: operational issues

SCARCER FILES

Simple but retains key features

Clear results

Adequately documented

Range of implementation methods

Communicable workings and outputs

Easy to understand

Refundable and developable

Frequency of CF

Independent verification of outputs

Length of run not too long

Expense not too high

Sensible joint behaviour of variables

Considerations in assessing different models

FENCED

Fit for purpose

Expertise in house available

Need for flexibility

Cost of each option

Expected number of times used

Desired level of accuracy

Sources of data

TRAINERS

Tables: mortality investigation

Reinsurers

Abroad

Industry tables: joint info from insurers

National statistics

Experience studies

Regulatory reports and company accounts

Similar contracts

Potential issues with using data

CARTS F

Completeness: all age groups have sufficient data

Accurate: erroneous data

Relevant: too homogeneous/ prod feat, uw, claims, target market, sales are diff

Timely: outdated

Sufficiency: credible?

Format: change in the way it was recorded which is not apparent

Considerations when using past data to set future assumptions

BEST ARCHER

Balance of homogeneous groups have changed

Economic situation changed

Social conditions

Trends overtime

Abnormal fluctuations

Random fluctuations

Change in regulation

Heterogeneity within group to which assumptions apply

Errors in data

Recording differences

Factors to consider when setting assumptions

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Legislation and regulatory constraints

Use of assumptions

Needs of customer

Consistency of assumptions

How significant the assumptions are

Documentation

Sensitivity

Macroeconomic indicators

Contract design factors

AMPLE DIRECT FACTORS

Administrative systems

Marketability

Profitability

Level and form of benefits

Early leaver benefits

Discretionary benefits

Interests and needs of customers

Risk appetite

Expenses vs charges

Competition

Terms and conditions of contract

Financing

Accounting implications

Consistency with other products

Timing of contributions or premiums

Options and guarantees

Regulatory requirements

Subsidies (cross-)

Parties involved in contract design

ALPACAS

Actuaries

Lawyers

Providers of benefits (reinsurers)

Accountants

Consumers

Administrative (brokers, underwriters, IT etc)

Shareholders

Types of selection

STATIC

Spurious

Time selection

Adverse selection

Temporary Initial selection

Class selection

Expenses incurred by a product provider

COSTRAID

Commission

Overheads

Sales

Terminal: taxes and claims

Renewal: premium collection

Asset management

Initial: registering policyholder details

Design of contract

Risk responses

Transfer

Reject

Accept fully

Mitigate

Partially transfer

Evaluation of risk mitigation options

FIRM

Feasibility: practicality, ethicality, economic, legality

Impact on frequency, severity and expected value

Resulting secondary risks

Mitigation required in response to secondary risks

Types of risks in projects

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Project risk

Natural (e.g. climate risk)

Economic (5 market risks)

Financial (liquidity)

Crime

Political (affects regulation on the project)

Business risk (life: MMLLE, gi: PC, catastrophe)

Operational: (fraudulent claims, reputational, mis-selling, cyber)

Benefits of good risk management process

SAVIOURS

Strategic decision making improved

Avoid surprises

Volatility reduced

Improve profits

Opportunities exploited

Understand interdependencies

React quickly to emerging risks

Stakeholder confidence

Inappropriate advice

CRIMES

Complicated products

Rubbish adviser

Integrity

Model or parameter error

Error in data

State encouraged but inappropriate actions (just bc govt recc, may not be suitable for client)

Insurable criteria’s

IP MAD LIP

Independent events

Pooling

Moral hazard is low

Adverse selection is low

Data exists to price the risk

Limit on exposure set

Insurable interest

Probability of occurrence is low

Reasons for Underwriting

SAFARI

Suitable Special terms

Align actual and expected experience

Financial underwriting to avoid overinsurance

Avoid antiselection

Risk classification

Identify substandard risk

Reasons for reinsurance

SADLIFE

Smooth results

Avoid large losses

Diversify

Limit exposure

Increase capacity

Financial assistance

Expertise

Reasons for provisions

BAD MEDICS

Benefit improvements for a benefit scheme

Accounts and reports (internal)

Discontinuance and surrender benefits

Merger and acquisition

Excess A over L —> can distribute surplus/discretionary benefit?

Disclose info for beneficiaries

Investment strategy

Contribution

Solvency reports (external)

Why financial providers need capital

REG CUSHION

Regulatory requirement to demonstrate solvency

Expenses of launching a new product

Guarantees can be offered

Cash flow timing management

Unexpected events cushion

Smooth profits

Help demonstrate financial strength

Investment freedom

Opportunities

New business strain financing

Reasons for disclosure

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 

Information to be disclosed for benefit schemes

SCRIBE

Strategy for investment

Contributions obligations

Risks involved

Insolvency entitlement

Benefit entitlements

Expense charges

When this info should be disclosed

PRICE

Payment commencement

Request

Intervals

Combination

Entry

Common aims of accounting standards (in relation to benefit scheme disclosures) 

CARD

Consistency in accounting treatment from year to year 

Avoiding distortions resulting from contribution fluctuations 

Recognising the realistic costs of accruing benefits 

Disclosure of appropriate information 

Additional reports accompanying accounts 

BRISK

Board independence and governance

Risk appetite

Investment strategy and performance

Strategic objectives

Key objectives

Reason for analysing surplus

DVD V RAP TIN

Determine most financially significant assumptions

Valuation calculations and assumptions (validate)

Determine divergence between actual experience and valuation assumptions

Variance of individual sources equals variance of total financial effects (verify for completeness)

Reconcile values for successive years

Accounts: provide info for publication in provider accounts

Provide data for executive remuneration scheme

Trends in assumptions report to acc

Identify non recurring components of surplus for distribution

New business strain financial effects (info for management)

Stochastic versus deterministic model

Cocrest

Correlations

Options and guarantees

Cost

Random nature of events

Expertise required

Scenarios took into consideration

Time (run time and development time)

Reasons for monitoring

Incur

Information to management and other key stakeholders

New business requires scrutiny

Corrective actions for adverse trends

Update assumptions

React more quickly to emerging trends

What happens when a model has an error:

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suspension

Cause of the error.
Materiality of the error

Notify relevant parties

Corrective Actions to fix the error

Implications and remediation 

• Financial statements

• Tax position

• Customers 

Monitor Experience after corrective actions have been taken. 

Reasons why model errors were not caught:

United Emirates MNCs

Uniqueness of model → unique products have no similar models to compare with. 

Establishment of model. → established models are not changed for several years. 

Model error, parameter error, or both

Nature of error e.g. low frequency or new emerging risk

Complexity of model

Speed at which errors surface

What happens when a regulator intervenes

A pretty cat reviewed credit card management system

Aim

Project solvency (stochastic or det)

Corrective actions

Recovery plan closely monitored

Close to new biz

Cost savings pay liabilities

Merger and acquisition

Statutory scheme