3B General Insurance

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3B - General Insurance

• Overview

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3B - General Insurance

• First tutorial
• Overview of course
• Tips for success
• Going forward

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Course 3B Syllabus

• The aim of this course, together with Course Part
  A is for the future actuary to have a depth of
  knowledge and understanding necessary to make
  sound judgments about the practice of general
  insurance or commercial problems related to
  general insurance.

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Course 3B Syllabus

• Important to begin to understand how all the
  individual units across 3A and 3B fit together
• If you can understand the synthesis of all the
  units, youre half way there
• Other half is being able to demonstrate your
  understanding in the assignment and exam

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Examination technique

• In my opinion this is the major reason why
  students who should pass dont pass
• The examiners want you all to pass, but you have
  to demonstrate understanding

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Examination technique

• Remember the exams are set, reviewed and marked
  by practising GI actuaries
• Answer the question!
• Dont waste time re-writing the question
• Take some time to plan your answer
• Try to be concise bullet points can help

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Examination technique

• Answer the question!
• Dont brain dump - try to be specific
• Think about processes
• Apply materiality - main issues first
• Open book, open schmook
• Look back at your answer to see if the question
  has been answered
• Be careful of dangerous misstatement

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UNIT 5 - PREMIUM RATING

• Aim 10 Apply and discuss risk classification,
  forecasting and premium rating projection
  techniques.
• Aim 11 Understand the principles of premium
  rating and the philosophy of pricing.
• Aim 12 Apply the principles of premium rating
  and pricing to practical situations.

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PREM RATING - A Simple example

• Using past data to help to set appropriate
  premiums
• Calculation of risk premium

• What else is needed to set an appropriate premium?

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PREM RATING - A Simple example

• Now the same data is broken into three regions

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PREM RATING - A Simple example

• Now compare the aggregate data with the sum of
  the three regions

• What else is needed to set an appropriate premium?

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PREM RATING - A Simple example

• Very simple example
• Chosen deliberately to illustrate fundamental
  concepts these may then be built upon
• GLMs or other statistical methods just fancy
  tools to classify risk
• Premiums are set in the real world, not within a
  bubble of statistical models

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UNIT 6 INVESTMENTS, REINSURANCE, AND RISK
MANAGEMENT

• Aim 14 Understand the impact of investment
  policy for general insurance companies.
• Aim 15 Understand the underlying theory and
  philosophy of reinsurance, design an outwards
  reinsurance programme and consider the issues
  relating to inwards reinsurance.

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UNIT 6 INVESTMENTS, REINSURANCE, AND RISK
MANAGEMENT

• Remember this is investments within the GI
  course, not a specialist investment subject
• As part of synthesising your knowledge think
  about different investments for different
  products
• Dont forget the risks!
• Understand different reinsurance types
• Dont forget about inflation or escalation
  clauses
• As part of synthesising your knowledge think
  about different reinsurance for different products

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UNIT 6 INVESTMENTS, REINSURANCE, AND RISK
MANAGEMENT

• As part of synthesising your knowledge think
  about the implications for capital requirements,
  both generally and MCR requirements under GPS110
  (esp MER)
• APRA GPS230 deals with reinsurance
• APRA GPS220 deals with risk management
• Not just intended for Approved Actuaries
• Risk management a specific part of the Financial
  Condition Report (FCR)

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UNIT 7 - FINANCIAL CONTROL, APPRAISAL AND
FINANCIAL CONDITION REPORTING

• Aim 16 Understand the importance of financial
  control for general insurance including profit,
  investments and financial planning.
• Aim 17 Understand the importance of solvency for
  general insurance, including the concepts of risk
  based capital and minimum capital requirement.

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UNIT 7 - FINANCIAL CONTROL, APPRAISAL AND
FINANCIAL CONDITION REPORTING

• Aim 18 Assess the purposes and apply the methods
  to determine appraisal values of general
  insurance companies and portfolios.
• Aim 19 Understand the key risks and issues
  impacting on the financial condition of an
  insurer in relation to the preparation of a
  compliant Financial Condition Report.

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UNIT 7 - FINANCIAL CONTROL, APPRAISAL AND
FINANCIAL CONDITION REPORTING

• Very important section of the course which brings
  together units from 3A and 3B
• APRA GPS110 for capital addresses the various
  sources of risk
• Dont forget APRAs aim is Prudential Regulation
  the regulator imposes requirements to minimise
  the probability of failure. It is attempting to
  deal with Information Asymmetry
• More capital may be good from the point of view
  of consumers, but what about shareholders?

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UNIT 8 PROFESSIONALISM

• Aim 20 Understand the actuarys responsibilities
  under professional and prudential standards.

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UNIT 8 PROFESSIONALISM

• Professionalism should underlie all your work,
  assignments and exams
• Dont think of this as the last unit rather it
  should be considered as part of all the units

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UNIT 8 PROFESSIONALISM

• Objectives
• a) Apply professional Standard PS300 in
  conducting and documenting an outstanding claims
  valuation.
• b) Outline the criteria to be appointed as the
  approved actuary of a general insurance company.
• c) Describe the responsibilities of the approved
  actuary under the General Insurance Reform Act
  2001.

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UNIT 8 PROFESSIONALISM

• Objectives (continued)
• d) Describe the responsibilities of a general
  insurance actuary, including NSW CTP rate filing.
• e) Understand the actuarys responsibilities
  under the Code of Conduct and apply these
  principles to a variety of situations.
• f) Understand and apply other relevant actuarial
  standards set out in the course.

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Discussion Topics

• Previously (say 10 years ago), specific
  professional requirements were less than now (had
  CoC, PS300, NSW CTP Filing)
• Now more specific standards and other legislative
  requirements (more standards, APRA)
• May be relevant to any examination question

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Code of Professional Conduct

• Institutes Governance Keystone
• Covers all Members
• Concerned with Behaviour

• Act with Integrity, honesty and due care
• Personal responsibility
• CPD
• Confidentiality
• Misuse of advice to evade law / mislead 3rd
  parties
• Definition of Actuarial Advice
• Experience requirements
• Dealing with conflicts
• Replacement of one actuary with another
• Advice transmission to 3rd parties
• Indemnity insurance
• Report contents
• Appropriate use of publicity

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Institute Standards Most Relevant to
General Insurance

• PS300 - Valuation of Technical Liabilities
• PS305 - Financial Condition reports
• PS100 External Peer Review
• Change in Standard setting procedure
• Has led to revisions in PS300

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PS300 Valuation of GI Liabilities

• A new draft exists
• Covers
• Purpose and terms of reference
• Information and data
• Selection of method and assumptions
• By Class
• Claim development, Economic, Expenses,
  Recoveries, Premium refund and Unclosed Business
• Central estimate
• Uncertainty, sensitivity and risk margins
• Reconciliation
• Changes in the central estimate value
• Quantification of impact of assumption changes

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Approved Actuary Role

• Advice on Valuation of Insurance Liabilities
  (subject to Mandatory Peer
  Review)
• Impartial Assessment of overall financial
  condition (not subject to
  Mandatory Peer Review)
• Non routine reporting as required by APRA
• Appointed by and Reports to the Board
• Responsible Person as defined by GPS520
• Criteria
• Competence, character, diligence, honesty,
  integrity, judgement
• Not disqualified under the Act
• Not CEO or Director
• Not a partner of the Auditor
• 5 years relevant experience
• Resident in Australia
• Appropriate formal qualifications (FIAA)

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PS305 Financial Condition Reports

• Scope
• Business Overview
• Recent Experience and Profitability
• Insurance Liability Valuation
• Adequacy of Past Estimates
• Pricing including Premium Adequacy
• Asset and Liability Management
• Capital Management and Capital Adequacy
• Reinsurance
• Risk Management

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Risk Management

• Includes
• Balance sheet and market risk
• Credit risk
• Operational risk
• Insurance risk
• Risks arising from reinsurance arrangements
• Concentration risk
• Strategic and tactical risks associated with the
  Business Plan

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PS305 Financial Condition Reports - Discussion

• What is so special about the FCR?
• How does it differ from other actuarial reports?
• Is the Approved Actuary the most appropriate
  person to consider all of the FCR items?
• Is it valuable? To whom?

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PS100 External Peer Review

• Mandated by APRA Standard GPS310
• Includes a clear definition of External
• Similar criteria for EPR actuary as Approved
  Actuary - GPS520
• Disclosure of commercial employment
  relationships
• Rotation
• Mandatory statements
• Suitable methods
• Comparison of experience against previous
  projections
• Basis for assumptions
• Review of Primary Actuarys quality controls
• Explanation of changes in result from previous
  balance date
• Compliance with legislation and Standards
• Specified scope of conclusion
• Copies to Approved Actuary, Approved Auditor,
  Board, Management
• Optional whether EPR covers FCR

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PS100 External Peer Review GI Items

• Appropriateness of Primary Actuarys Scope
• Data appropriate, sufficient, quality checking,
  auditing at source
• Appropriate choice and application of methods
• Process for determining assumptions
• Claim development
• Claims handling policy administration expenses
• Recoveries
• Inflation
• Premium refunds
• Risk margins etc
• Control processes
• Analysis of results (movements, comparison to
  case reserves, reconciliation to previous result,
  consistency with Actual v Expected)
• Identification of results, sensitivities and
  risks uncertainties

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PS100 External Peer Review discussion

• Does an EPR add value?
• What happens in the case of disagreement?
• How can EPR actuary have the same knowledge as
  the Approved Actuary?

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Top tips

• Get an understanding of various products,
  particularly the components of premium (average
  claim size and frequency)
• Try to understand the big picture, and the
  synthesis of the various topics
• Practice with different reinsurance structures
• Try to get access to an ILVR
• Try to get access to an FCR
• Think of the capital implications

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Going forward

• Assignment
• More tutorials
• On-line discussion forums
• Past exams
• Questions?