UAM Chapter 1

1.2 What is an actuary?

A business professional who analyses the financial consequences of risk. Use skills in
o Measuring and managing risk and uncertainty
o Designing financial contracts
o Advising on investments
o Measuring demographic influences on financial arrangements
Uses maths, stats and financial theory to study future events (insurance/pension) when the
amount of a future payment or timing of when it is paid is uncertain
Evaluate likelihood of these events(and costs associated with it) and design creative ways to
decrease impact of adverse events that do occur.
Understanding how businesses operate, how legislation may impact and how financial
economics can affect values are all vital skills

1.3 The control cycle framework

Is useful in describing processes needed for the development and ongoing management of a
financial enterprise, product or scheme.
Based on simple approach (takes into account external forces eg. economic conditions):
o Define the problem (understanding background, identifying all the issues and
specifying them clearly to ensure client and actuary agree on work to be done)
o Design the solution (modelling)
o Monitor the results

1.5 An illustration of the Actuarial Control Cycle

A life insurance company decides to sell lifetime annuities that increase in line with inflation
When the company sells an annuity:
o It receives large one off payment (single premium)
o It makes regular, smaller, increasing payments for lifetime of customer
Important that companys risks are properly managed, actuaries advising company have
professional responsibilities (as people will be entrusting large part of retirement savings to
company)
Questions to ask?
o What needs will these annuities meet and why will people buy them?
o What is the environment company will offer these products?
o Are competing products available?
o How are they taxed? What is the outlook for interest, inflation and mortality rates?
o Sources of risk? (increasing inflation, longevity)
Product needs to be specified (decisions on design issues eg. Guaranteed minimum payment
period, and how inflationary increases are designed)
Develop model to forecast likely future cash flows of product (analyse available data to
shape model and set assumptions)
Models are useful because:
 o Determine extent of risk company will face
o Determine how much capital is required if conditions change
o Helps value liabilities, decide on prices or premiums to charge (after allowing for
risks and interests of all stakeholders)
After meeting expenses, single premium is invested in assets to generate income. (selection
of assets must take into account nature of liabilities so company meets obligations and
achieves profit objectives without taking excessive risks)
Assumptions about investment earnings, inflation, mortality rates and expenses in future
need to be monitored over time (compare actual vs assumed, differences analysed)
Advise company how to respond to these changes

1.7 Applying the control cycle framework

Can be applied to management of entire financial institution or subdivisions of the whole

such as subsidiary companies, business units, product groups, individual products etc.

1.8 Communicating results of actuarial work

Did actuary understand client needs?

Did client fully understand actuarys advice?

UAM Chapter 19
The actuary can then begin design of solution. Various tools could be used to manage
uncertainties, such as
Model building was an important part of the work and the resultant projections of cash
flows required an understanding of the nature of assets and liabilities.
The parties providing would be interested in the solvency of the project and the actuarial
models provide them with a clearer picture of the security of their investment under
different scenarios.
Interpreting the results of the cash flow models would the profits be sufficient to make
project viable?
Advise on what aspects need to be monitored by the client and might also expect to be re-
engaged in a few years to assess subsequent developments and recommend adjustments.
Enterprise Risk Management (ERM) means an integrated view of generally financial risk.
Each department responsible for managing interest rate risk, credit risk, equity market risk
or alternatively an organisation may manage its risk by business unit.
The ERM function brings the various risks/units together to see how they interact with each
other in the same economic environments.
Measuring risk profiles against company limits
Discussion with various areas of organisation to understand what risks they are dealing with
and help to quantify the impact/exposure.
Organisations that manage risk at an enterprise level can identify diversification benefits and
therefore be able to hold less capital
 Any delays in the recalibration of model (to take into account recent expectations) meant
that the model had systemic biases that resulted in poorer quality predictions.
Either the models parameters need to be recalibrated or a further variable needed to be
introduced.