lecture 12 and 13 revised

7/26/2019 Lecture 12 and 13 Revised

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Australian School of Business

Actuarial Theory & Practice A - Weeks 12/13

Review and revision

Anthony Asher 2016


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Operational Risks

What are the causes, the data sources, and the most likely statisticaldistribution that could be used for:

Internal Fraud - misappropriation of assets, tax evasion, intentionalmismarking of positions, bribery?

External Fraud- theft of information, hacking damage, third-party theft andforgery?

Employment Practices and Workplace Safety - discrimination, workerscompensation, employee health and safety?

Clients, Products, & Business Practice- market manipulation, antitrust,improper trade, product defects, fiduciary breaches, account churning?

Damage to Physical Assets - natural disasters, terrorism, vandalism?

Business Disruption & Systems Failures - utility disruptions, softwarefailures, hardware failures?

Execution, Delivery, & Process Management - data entry errors, accountingerrors, failed mandatory reporting, negligent loss of client assets?


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Other risksWhat would be covered by strategic risk? How would you measure it?

What distribution would you use?

What type of risk is lapse risk? How would you measure it?


What type of risk is regulatory risk? How would you measure it?


Would you classify the following risks in categories above or previous slides? Implementation risk

Contagion and related party risk

Competition risk

Legal and judicial risk

Technology change risk Extreme events risk

Social attitudes risk

Environmental change risk


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Discussion Topic 1

What are the major risks in PI contracts and how would you manage these?


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Discussion Topic 2

How are policy conditions, underwriting and claims related?


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Assignment comments 1

Data: LibraryBloomberg

Big banks vs other banks and insurers

Need to take a longer term perspective

o Commodities high only after 2000

o Major bank crises in (1893, 1931, 1977?, 1993)

o Retailers, Telstra Comparisonsindustry or international

o ROE vs COE adjusted for risks and losses

o Tobins Q

o Jensens alpha


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Assignment comments 2

Economic (monopoly) rents are unethical:

o Serve no social purpose (not deserved)o Undermine trust, as they exploit customers/suppliers

o Distort the political process

o Allow for excessive remuneration/undermines equality & fairness

Regulation

o Barriers to entryexcessive capital, complexity

o Empower consumersdisclosure, freedom of movement

o Consumer protectionunconscionable conduct

o Limit product design, prices

A picture worth a thousand wordso Check numbers; label axes and lines

o Clearlyallowing for red/green colour blind and printing without colour


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Risk and reward

How do utility functions measure the trade-off?Can you have utility free trade-offs?

What is the difference between risk aversion and ambiguity aversion?

What are background risks?


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Risk relevance

How do you measure the size of a risk?

What are the biggest risks for:

Retail banks?

Investment banks?

Life insurance companies?

General Insurance companies?

Health insurance companies?

Defined contribution superannuation funds?

Defined benefit superannuation funds?

Financial conglomerates?

Mines?

Manufacturing companies?


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Discussion questions 3 - 5

How would you decide whether to have a high return/ highrisk investment strategy and a low return/ low riskstrategy?

How would you decide how much reinsurance to hold?

If you were a general insurer and just suffered a heavyunderwriting loss as a result of an extreme event so that

both profit and capital were down, would you thenincrease reserves as well and exacerbate the loss?


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Sample question 1

You are the CFO of a mobile phone operator in Australia.What are the main financial risks faced by the company?

How would you use the actuarial control cycle to determinethe value of different groups of clients and to monitor

changes in value?How would you determine the economic capitalrequirements of the company?


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Sample question 2

QANTAS has a frequent flyer program where customersaccumulate points when they buy tickets from QANTAS,and also when they use QANTAS branded credit cards andbuy from some QANTAS partners. The number of points

required for different flights is changed from time to timemainly to increase the number required and points expireafter a number of years. Points can be used for flights fromQANTAS and their partner airlines. How would you use theactuarial control cycle to manage the frequent flyerprogram? [13]


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Sample Question 3

Extreme risks are difficult to model as their frequency is lowand their severity high. In assessing these risks, financialinstitutions can use their own data, external data (collectedfrom the industry) and expert opinion, or a combination of

these sources. In estimating the extreme risk of anadministration organisation to whom the administration of asuperannuation fund has been outsourced, which source(s)would you consider more appropriate than the other(s) andset out your reasons for your conclusion


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Sample Question 4

You are approached by the Helicopter Pilots Association toissue a contract insuring all member pilots for $1 million ifthey are killed or permanently disabled whilst flying ahelicopter.

Set out with reasons whether you would use heavy (a lot ofquestions) underwriting or light (very few questions)underwriting.

Set out with reasons the type of reinsurance program you

might establish for this business.


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Sample Question 5

A general insurer is proposing to issue a new contract toinsure superannuation fund trustees that are licensed in

Australia by APRA against breach of their licenceconditions. This type of contract has not been issued in

Australia previously.Outline the major risks faced by the insurer in issuing thiscontract and how you would manage these risks.


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Sample Question 6

You are an actuarial consultant who has been asked to write a report for thetrustees of a large industry superannuation fund in Queensland. The fundcurrently only offers allocated pensions and level term annuities, which areunderwritten by a life insurance company. The report is to explain the need tointroduce an inflation linked life annuity product for their retiring members andhow the fund might go about introducing such a product. Set out what you

would include in your report.

lecture 12 and 13 revised

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