CP1 Actuarial Practice

What is an actuarial control cycle?
The actuarial control cycle is a fundamental tool of risk management which involves the process of analysing, quantifying, mitigating and monitoring risks.

List few applications of actuarial control cycle to actuarial work.
a) Asset-liability management
b) Model validation
c) Monitoring the effect of investment mismatching
d) Assessing the need for and calculator of provisions.
e) Determining and monitoring mortality, expense and persistency assumptions for use within design of and reserving for contracts or schemes

List a few clients to whom actuaries provide advice to.
a) Policyholders
b) Employers
c) Insurance company
d) Employees
e) Auditors of insurance companies
f) Sponsors of benefit schemes
g) Banks
h) Members of investment schemes
i) Investment fund managers

Describe three types of advice given by actuary.
a) Indicative advice: giving an opinion without fully investigating the whole issue
b) Factual advice: based on research eg legislation
c) Recommendation: made consistent with requirements

State two forms of insurance that are compulsory in some countries
Employers’ liability insurance and motor third party insurance.

Define information asymmetry.
Information asymmetry is an imbalance between two negotiating parties in their knowledge of relevant factors and details. Typically, that imbalance means that the side with more information enjoys a competitive advantage over the other party.

Which five parties are the main providers of benefits?
a) The state
b) Employers or group of employers
c) Individuals
d) Financial institutions
e) Other organisations

Define a defined benefit scheme.
A defined benefit plan, more commonly known as a pension plan, offers guaranteed retirement benefits for employees. Defined benefit plans are largely funded by employers, with retirement payouts based on a set formula that considers an employee’s salary, age and tenure with the company.

Define a defined contribution scheme.
Defined contribution (DC) schemes are occupational pension schemes where your own contributions and your employer’s contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement. The value of the ultimate benefits payable from the DC scheme depends on the amount of contributions paid, the investment return achieved less any fees and charges, and the cost of buying the benefits.

Define microinsurance.
Microinsurance products offer coverage to low-income households or to individuals who have little savings. It is tailored specifically for lower valued assets and compensation for illness, injury, or death.

What are three types of interest paid on cash deposits?
The three types of interest include simple (regular) interest, accrued interest, and compounding interest.
Simple (Regular) Interest- Simple or regular interest is the amount of interest due on the loan, based on the principal loan outstanding.

Example: For example, if an individual borrows ${\$2,000}$ with a $3 \%$ annual interest rate, the loan would require a $\$ 60$ interest payment per year $(\$2,000 * 3 \%=\$ 60)$.
Accrued Interest- Accrued interest is accumulated interest that is unpaid until the end of the period. If a loan requires monthly payments (at the end of each month), interest steadily accumulates throughout the month.

Example: If $\$ 30$ is the interest expense each month, the loan is accruing $\$ 1$ of interest each day that requires payment once the end of the month is reached. In this example, by day 15 , the loan will have accumulated $\$ 15$ in accrued interest (but require payment once $\$ 30$ is reached).
Compound Interest- Compounding interest essentially means “interest on interest.” The interest payments change each period instead of staying fixed. Simple interest is based solely on the principal outstanding, whereas compound interest uses the principal and the previously earned interest.

Example: If a person borrowed $\$ 1,000$ with $2 \%$ interest and has $\$ 100$ of accrued interest, then that year’s interest would be $\$ 22$. It is because the interest is paid on the principal $(\$ 1000)$ and the accrued interest $(\$ 100)$, for a total of $\$ 1100.2 \%$ of $\$ 1100$ is $\$ 22$.

What is meant by ‘bond’?
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or government).Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.

What are the main features of an index-linked security?
An index-linked bond is a bond in which payment of interest income on the principal is related to a specific price index, usually the Consumer Price Index (CPI). This feature provides protection to investors by shielding them from changes in the underlying index.

What is the relationship between real and nominal yields?
Nominal yield= risk-free real yield+ expected future inflation + inflation risk premium, if inflation risk premium is ignored, the difference between nominal and real yields gives an estimate of the market’s expectations for inflation.

What is the purpose of collective investment schemes?
A Collective Investment Scheme is an investment scheme where various individuals come together and pool their money in order to invest their whole fund collection in a particular asset.

Why should an investor choose an investment fund scheme?

Diversification- Funds typically spread their investment across different companies, asset types and geographical regions, providing a benefit known as ‘diversification’. When one investment is down, another might be up, and you’re not taking a chance on the fortunes of one single asset.
Ease of use- The day-to-day running of your investment is designed to be straightforward. A fund manager invests on your behalf and you’ll receive regular reports on how your money has been invested
Cost- They spread fixed costs, such as the charges for safekeeping of assets across all investors in the fund.
Professional investment management- Investment funds allow you to access the expertise of full‑time, dedicated fund managers and their teams of analysts who have access to market information outside the scope of the average investor.

What are types of collective investment schemes?
There are two main types of collective investment scheme – unit trusts and investment trusts. As a closed ended fund, investment trusts have a fixed number of shares in an issue. This allows managers to take a longer-term view because they do not have to sell assets when investors sell their shares. Unit trusts are the most common types of collective investment scheme in the UK and are also referred to as open-ended funds, because they will always accept more cash from investors – they just become bigger to accommodate the demand. On the flip side, if there are more sellers than buyers, the fund will become smaller. This is because it is structured as a company that can create shares for new investors and which will buy shares back from an investor if they wish to sell.

What factors influence the risk appetite of any organisation?
Risk appetite can vary based on a number of factors, such as:
a) industry,
b) company culture,
c) competitors,
d) the nature of the objectives pursued (e.g. how aggressive they are), and
e) the financial strength and capabilities of the organisation (i.e. the more resources a company has, the more willing it may be to accept risks and the costs associated with them).

Give examples of ESG factors affecting risk appetite.
ESG risks are the risks of any negative financial impact on the institution stemming from the current or prospective impacts of ESG factors on its counterparties or invested assets.
For example :
a) Carbon emissions.
b) Air and water pollution.
c) Deforestation.
d) Employee gender and diversity.
e) Data security.
f) Diversity of board members.
g) Political contributions.