iandfall2013syl syllabus for all subjects 2013.pdf

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Subject CT1

Financial MathematicsCore Technical

Syllabus

for the 2013 Examinations

1 J une 2012

Institute and Faculty of Actuaries



Subject CT1 – Financial Mathematics Core Technical

Page 2 © Institute and Faculty of Actuaries

Aim

The aim of the Financial Mathematics subject is to provide a grounding in financial mathematics and its simple applications.

Links to other subjects

Subject CT2 – Finance and Financial Reporting: develops the use of the asset types introduced in this

subject.

Subject CT4 – Models: develops the idea of stochastic interest rates.

Subject CT5 – Contingencies: develops some of the techniques introduced in this subject in situations

where cashflows are dependent on survival.

Subject CT7 – Business Economics: develops the behaviour of interest rates.

Subject CT8 – Financial Economics: develops the principles further.

Subjects CA1 – Actuarial Risk Management, CA2 – Model Documentation, Analysis and Reporting

and the Specialist Technical and Specialist Applications subjects: use the principles introduced in this

subject.

Objectives

On completion of the subject the trainee actuary will be able to:

(i) Describe how to use a generalised cashflow model to describe financial transactions.

1. For a given cashflow process, state the inflows and outflows in each future time period

and discuss whether the amount or the timing (or both) is fixed or uncertain.

2. Describe in the form of a cashflow model the operation of a zero coupon bond, a fixed

interest security, an index-linked security, cash on deposit, an equity, an “interest only”

loan, a repayment loan, and an annuity certain.

(ii) Describe how to take into account the time value of money using the concepts of compound

interest and discounting.

1. Accumulate a single investment at a constant rate of interest under the operation of:

• simple interest

• compound interest

2. Define the present value of a future payment.

3. Discount a single investment under the operation of simple (commercial) discount at a

constant rate of discount.




© Institute and Faculty of Actuaries Page 3

4. Describe how a compound interest model can be used to represent the effect of

investing a sum of money over a period.

(iii) Show how interest rates or discount rates may be expressed in terms of different time periods.

1. Derive the relationship between the rates of interest and discount over one effective

period arithmetically and by general reasoning.

2. Derive the relationships between the rate of interest payable once per effective period

and the rate of interest payable p times per time period and the force of interest.

3. Explain the difference between nominal and effective rates of interest and derive

effective rates from nominal rates.

4. Calculate the equivalent annual rate of interest implied by the accumulation of a sum of money over a specified period where the force of interest is a function of time.

(iv) Demonstrate a knowledge and understanding of real and money interest rates.

(v) Calculate the present value and the accumulated value of a stream of equal or unequal

payments using specified rates of interest and the net present value at a real rate of interest,

assuming a constant rate of inflation.

1. Discount and accumulate a sum of money or a series (possibly infinite) of cashflows to

any point in time where:

• the rate of interest or discount is constant

• the rate of interest or discount varies with time but is not a continuous function of

time

• either or both the rate of cashflow and the force of interest are continuous functions

of time

2. Calculate the present value and accumulated value of a series of equal or unequal

payments made at regular intervals under the operation of specified rates of interest

where the first payment is:

• deferred for a period of time

• not deferred

(vi) Define and use the more important compound interest functions including annuities certain.

1. Derive formulae in terms of i, v, n, d, δ, i( p) and d ( p) for ,na ,ns ( )

, pn

a ( )

, pn

s ,na

,ns ( ) , pn

a( ) , and p

n nns a s .





2. Derive formulae in terms of i, v, n, d, δ, i( p) and d ( p) for ,nma

⏐ ( ) ,

p

nma

⏐,nm

a⏐ ( ) p

nma

⏐

and .nm a⏐

3. Derive formulae in terms of i, v, n, δ, na and na for ( ) n Ia , ( ) n Ia , ( ) n Ia , ( ) n Ia and

the respective deferred annuities.

(vii) Define an equation of value.

1. Define an equation of value, where payment or receipt is certain.

2. Describe how an equation of value can be adjusted to allow for uncertain receipts or

payments.

3. Understand the two conditions required for there to be an exact solution to an equation

of value.

(viii) Describe how a loan may be repaid by regular instalments of interest and capital.

1. Describe flat rates and annual effective rates.

2. Calculate a schedule of repayments under a loan and identify the interest and capital

components of annuity payments where the annuity is used to repay a loan for the case

where annuity payments are made once per effective time period or p times per

effective time period and identify the capital outstanding at any time.

(ix) Show how discounted cashflow techniques can be used in investment project appraisal.

1. Calculate the net present value and accumulated profit of the receipts and payments

from an investment project at given rates of interest.

2. Calculate the internal rate of return implied by the receipts and payments from an

investment project.

3. Describe payback period and discounted payback period and discuss their suitability for

assessing the suitability of an investment project.

4. Determine the payback period and discounted payback period implied by the receiptsand payments from an investment project.

5. Calculate the money-weighted rate of return, the time-weighted rate of return and the

linked internal rate of return on an investment or a fund.

(x) Describe the investment and risk characteristics of the following types of asset available for

investment purposes:

• fixed interest government borrowings

• fixed interest borrowing by other bodies





• shares and other equity-type finance

• derivatives

(xi) Analyse elementary compound interest problems.

1. Calculate the present value of payments from a fixed interest security where the coupon

rate is constant and the security is redeemed in one instalment.

2. Calculate upper and lower bounds for the present value of a fixed interest security that

is redeemable on a single date within a given range at the option of the borrower.

3. Calculate the running yield and the redemption yield from a fixed interest security (as

in 1.), given the price.

4. Calculate the present value or yield from an ordinary share and a property, given simple(but not necessarily constant) assumptions about the growth of dividends and rents.

5. Solve an equation of value for the real rate of interest implied by the equation in the

presence of specified inflationary growth.

6. Calculate the present value or real yield from an index-linked bond, given assumptions

about the rate of inflation.

7. Calculate the price of, or yield from, a fixed interest security where the investor is

subject to deduction of income tax on coupon payments and redemption payments are

subject to the deduction of capital gains tax.

8. Calculate the value of an investment where capital gains tax is payable, in simple

situations, where the rate of tax is constant, indexation allowance is taken into account

using specified index movements and allowance is made for the case where an investor

can offset capital losses against capital gains.

(xii) Calculate the delivery price and the value of a forward contract using arbitrage free pricing

methods.

1. Define “arbitrage” and explain why arbitrage may be considered impossible in many

markets.

2. Calculate the price of a forward contract in the absence of arbitrage assuming:

• no income or expenditure associated with the underlying asset during the term of

the contract

• a fixed income from the asset during the term

• a fixed dividend yield from the asset during the term.

3. Explain what is meant by “hedging” in the case of a forward contract.





4. Calculate the value of a forward contract at any time during the term of the contract in

the absence of arbitrage, in the situations listed in 2 above.

(xiii) Show an understanding of the term structure of interest rates.

1. Describe the main factors influencing the term structure of interest rates.

2. Explain what is meant by the par yield and yield to maturity.

3. Explain what is meant by, derive the relationships between and evaluate:

• discrete spot rates and forward rates

• continuous spot rates and forward rates

4. Define the duration and convexity of a cashflow sequence, and illustrate how these may be used to estimate the sensitivity of the value of the cashflow sequence to a shift in

interest rates.

5. Evaluate the duration and convexity of a cashflow sequence.

6. Explain how duration and convexity are used in the (Redington) immunisation of a

portfolio of liabilities.

(xiv) Show an understanding of simple stochastic models for investment returns.

1. Describe the concept of a stochastic interest rate model and the fundamental distinction

between this and a deterministic model.

2. Derive algebraically, for the model in which the annual rates of return are

independently and identically distributed and for other simple models, expressions for

the mean value and the variance of the accumulated amount of a single premium.

3. Derive algebraically, for the model in which the annual rates of return are

independently and identically distributed, recursive relationships which permit the

evaluation of the mean value and the variance of the accumulated amount of an annual

premium.

4. Derive analytically, for the model in which each year the random variable (1 + i) has anindependent log-normal distribution, the distribution functions for the accumulated

amount of a single premium and for the present value of a sum due at a given specified

future time.

5. Apply the above results to the calculation of the probability that a simple sequence of

payments will accumulate to a given amount at a specific future time.

END OF SYLLABUS



Subject CT2

Finance and Financial ReportingCore Technical

Syllabus


1 J une 2012




Subject CT2 – Finance and Financial Reporting Core Technical


Aim

The aim of the Finance and Financial Reporting subject is to provide a basic understanding of corporate finance including a knowledge of the instruments used by companies to raise finance and

manage financial risk and to provide the ability to interpret the accounts and financial statements of

companies and financial institutions.


Subject CT1 – Financial Mathematics: uses this subject to provide a grounding in financial

mathematics and investments.

Subject CA1 – Actuarial Risk Management: develops some of the concepts introduced in this subject.

Subjects ST5 – Finance and Investment Specialist Technical A, ST6 – Finance and InvestmentSpecialist Technical B, SA5 – Finance Specialist Applications and SA6 – Investment Specialist

Applications: develop the technical and practical applications of topics introduced in this subject.

Objectives

On completion of this subject the candidate will be able to:

(i) Demonstrate a knowledge and understanding of the principal terms in use in investment and

asset management.

(ii) Demonstrate an awareness of the key principles of finance.

1. Outline the relationship between finance and the real resources and objectives of an

organisation.

2. Outline the relationship between the stakeholders in an organisation (including lenders

and investors).

3. Outline the role and effects of the capital markets.

4. Outline agency theory.

5. Outline the theory of the maximisation of shareholder wealth.

(iii) Describe the structure of a joint stock company and the different methods by which it may be

financed.

1. Outline the distinctive characteristics of sole traders, partnerships and limited

companies as business entities.

2. Describe the different types of loan and share capital.

3. Distinguish between authorised and issued share capital.





4. Discuss the economic advantages and disadvantages of a limited company as a business

entity.

5. Outline the main differences between a private and public company.

6. Outline the different types of medium term company finance:

• hire purchase

• credit sale

• leasing

• bank loans

7. Describe the following different types of short term company finance:

• bank overdrafts

• trade credit

• factoring

• bills of exchange

• commercial paper

(iv) Describe the basic principles of personal and corporate taxation.

1. Describe the basic principles of personal taxation.

2. Describe the basic principles of the taxation of capital gains.

3. Describe the basic principles of company taxation.

4. Explain the different systems of company taxation from the points of view of an

individual shareholder and the company.

5. Outline the basic principles of double taxation relief.

(v) Demonstrate a knowledge and understanding of the characteristics of the principal forms of

financial instrument issued or used by companies and the ways in which they may be issued.

1. Outline the reasons a company might have for seeking a quotation on the stock

exchange.

2. Describe the characteristics, from an issuer’s point of view of:

• debenture stocks

• unsecured loan stocks

• Eurobonds

• preference shares

• ordinary shares

• convertible unsecured loan stocks





• convertible preference shares

• warrants

• floating rate notes• subordinated debt

• options issued by companies

3. Describe the characteristics and possible uses by a non-financial company of:

• financial futures

• options

• interest rate and currency swaps

4. Outline the following methods of obtaining a quotation for securities:

• offer for sale

• offer for sale by tender

• offer for subscription

• placing

• introduction

5. Describe the following types of new issues to existing shareholders:

• scrip issue

• rights issue

6. Describe the role of underwriting in the issue of securities.

(vi) Discuss the factors to be considered by a company when deciding on its capital structure and

dividend policy.

1. Describe the effect that the capital structure used by a company will have on the market

valuation of the company.

2. Describe the effect of taxation on the capital structure used by a company.

3. Discuss the principal factors that a company should consider in setting dividend policy.

4. Discuss alternative ways of distributing profits, such as buybacks.

5. Discuss the effect that the dividend policy will have on the market valuation of a

company.





(vii) Define what is meant by a company’s cost of capital and discuss how its cost of capital

interacts with the nature of the investment projects it undertakes.

1. Describe how to calculate a company’s weighted average cost of capital.

2. Discuss the different methods used for project evaluation.

3. Describe methods commonly used to evaluate risky investments including probability

trees, simulation and certainty equivalents.

4. Discuss the issues in establishing the required rate of return for a capital project.

(viii) Describe the major types of financial institution operating in the financial markets.

1. Describe the main features of the following institutions and analyse their influence onthe financial markets:

• central banks

• investment exchanges

• investment banks

2. Describe the role played in financial markets by each of the following institutions:

• clearing banks

• building societies

•

investment trusts• unit trusts

• investment management companies

• self-administered pension funds

• life insurance companies

• general insurance companies

(ix) Describe the basic construction of accounts of different types and the role and principal

features of the accounts of a company.

1. Explain why companies are required to produce annual reports and accounts.

2. Explain the fundamental accounting concepts which should be adopted in the drawingup of company accounts.

3. Explain the purpose of a:

• statement of financial position

• statement of comprehensive income

• cash flow statement

and of the notes to the accounts.





4. Construct simple statements of financial position and income statements; understand

and interpret cash flow statements.

5. Understand the structure and content of insurance company accounts.

6. Explain what is meant by the terms subsidiary company and associated company.

7. Explain the purpose of consolidated accounts.

8. Explain how goodwill might arise on the consolidation of group accounts.

9. Explain how depreciation is treated in company accounts.

10. Explain the function of the following accounts – share capital, other reserves and retained earnings.

(x) Interpret the accounts of a company or a group of companies and discuss the limitations of

such interpretation.

1. Calculate and explain priority percentages and gearing.

2. Calculate and explain interest cover and asset cover for loan capital.

3. Describe the possible effects of interest rate movements on a highly geared company.

4. Calculate and explain price earnings ratio, dividend yield, dividend cover and EBITDA.

5. Explain net earnings per share.

6. Calculate and explain accounting ratios which indicate:

• profitability

• liquidity

• efficiency

7. Discuss the shortcomings of historical cost accounting.

8. Discuss the limitations in the interpretation of company accounts.

9. Discuss the ways that reported figures can be manipulated to create a false impression

of a company's financial position.





(xi) Show how financial techniques can be used in the assessment of capital investment projects.

1. Discuss the principal methods that may be used to determine the viability of a capital project.

2. Discuss the factors underlying the choice of discount rate within project assessment

including:

• the assumptions and limitations in the use of the weighted average cost of capital

• the allowance for leverage

• the allowance for risk.

3. Discuss the methods that may be used for identifying the risks that may be present for

different types of project.

4. Discuss suitable techniques for ascertaining the probability of occurrence of different

risks over varying timescales and the financial impact of occurrence.

5. Discuss suitable techniques for ascertaining the distribution of the possible financial

outcomes of a capital project.

END OF SYLLABUS



Subject CT3

Probability and Mathematical StatisticsCore Technical

Syllabus


1 J une 2012




Subject CT3 – Probability and Mathematical Statistics Core Technical


Aim

The aim of the Probability and Mathematical Statistics subject is to provide a grounding in the aspectsof statistics and in particular statistical modelling that are of relevance to actuarial work.


Subjects CT4 – Models and CT6 – Statistical Methods: use the statistical concepts and models

covered in this subject. These are then developed further in other subjects in particular Subject ST1 –

Health and Care Specialist Technical, Subject ST7 – General Insurance – Reserving and Capital

Modelling Specialist Technical and Subject ST8 – General Insurance – Pricing Specialist Technical.

Objectives


(i) Summarise the main features of a data set (exploratory data analysis).

1. Summarise a set of data using a table or frequency distribution, and display it

graphically using a line plot, a box plot, a bar chart, histogram, stem and leaf plot, or

other appropriate elementary device.

2. Describe the level/location of a set of data using the mean, median, mode, as

appropriate.

3. Describe the spread/variability of a set of data using the standard deviation, range,

interquartile range, as appropriate.

4. Explain what is meant by symmetry and skewness for the distribution of a set of data.

(ii) Explain the concepts of probability.

1. Explain what is meant by a set function, a sample space for an experiment, and an

event.

2. Define probability as a set function on a collection of events, stating basic axioms.

3. Derive basic properties satisfied by the probability of occurrence of an event, and calculate probabilities of events in simple situations.

4. Derive the addition rule for the probability of the union of two events, and use the rule

to calculate probabilities.

5. Define the conditional probability of one event given the occurrence of another event,

and calculate such probabilities.

6. Derive Bayes’ Theorem for events, and use the result to calculate probabilities.





7. Define independence for two events, and calculate probabilities in situations involving

independence.

(iii) Explain the concepts of random variable, probability distribution, distribution function,

expected value, variance and higher moments, and calculate expected values and probabilities

associated with the distributions of random variables.

1. Explain what is meant by a discrete random variable, define the distribution function

and the probability function of such a variable, and use these functions to calculate

probabilities.

2. Explain what is meant by a continuous random variable, define the distribution function

and the probability density function of such a variable, and use these functions to

calculate probabilities.

3. Define the expected value of a function of a random variable, the mean, the variance,

the standard deviation, the coefficient of skewness and the moments of a random

variable, and calculate such quantities.

4. Evaluate probabilities (by calculation or by referring to tables as appropriate) associated

with distributions.

5. Derive the distribution of a function of a random variable from the distribution of the

random variable.

(iv) Define a probability generating function, a moment generating function, a cumulant

generating function and cumulants, derive them in simple cases, and use them to evaluate

moments.

1. Define and determine the probability generating function of discrete, integer-valued

random variables.

2. Define and determine the moment generating function of random variables.

3. Define the cumulant generating function and the cumulants, and determine them for

random variables.

4. Use generating functions to determine the moments and cumulants of random variables, by expansion as a series or by differentiation, as appropriate.

5. Identify the applications for which a probability generating function, a moment

generating function, a cumulant generating function and cumulants are used, and the

reasons why they are used.

(v) Define basic discrete and continuous distributions, be able to apply them and simulate them in

simple cases.

1. Define and be familiar with the discrete distributions: geometric, binomial, negative

binomial, hypergeometric, Poisson and uniform on a finite set.





2. Define and be familiar with the continuous distributions: normal, lognormal,

exponential, gamma, chi-square, t , F , beta and uniform on an interval.

3. Define a Poisson process and note the connection between Poisson processes and the

Poisson distribution, and that a Poisson process may be equivalently characterised as:

(1) the distribution of waiting times between events, (2) the distribution of process

increments and (3) the behaviour of the process over an infinitesimal time interval.

4. Generate basic discrete and continuous random variables using simulation methods.

(vi) Explain the concepts of independence, jointly distributed random variables and conditional

distributions, and use generating functions to establish the distribution of linear combinations

of independent random variables.

1. Explain what is meant by jointly distributed random variables, marginal distributionsand conditional distributions.

2. Define the probability function/density function of a marginal distribution and of a

conditional distribution.

3. Specify the conditions under which random variables are independent.

4. Define the expected value of a function of two jointly distributed random variables, the

covariance and correlation coefficient between two variables, and calculate such

quantities.

5. Define the probability function/density function of the sum of two independent random

variables as the convolution of two functions.

6. Derive the mean and variance of linear combinations of random variables.

7. Use generating functions to establish the distribution of linear combinations of

independent random variables.

(vii) State the central limit theorem, and apply it.

1. State the central limit theorem for a sequence of independent, identically distributed

random variables.

2. Apply the central limit theorem to establish normal approximations to other

distributions, and to calculate probabilities.

3. Explain and apply a continuity correction when using a normal approximation to a

discrete distribution.





(viii) Explain the concepts of random sampling, statistical inference and sampling distribution, and

state and use basic sampling distributions.

1. Explain what is meant by a sample, a population and statistical inference.

2. Define a random sample from a distribution of a random variable.

3. Explain what is meant by a statistic and its sampling distribution.

4. Determine the mean and variance of a sample mean and the mean of a sample variance

in terms of the population mean, variance and sample size.

5. State and use the basic sampling distributions for the sample mean and the sample

variance for random samples from a normal distribution.

6. State and use the distribution of the t -statistic for random samples from a normal

distribution.

7. State and use the F distribution for the ratio of two sample variances from independent

samples taken from normal distributions.

(ix) Describe the main methods of estimation and the main properties of estimators, and apply

them.

1. Describe the method of moments for constructing estimators of population parameters

and apply it.

2. Describe the method of maximum likelihood for constructing estimators of population

parameters and apply it.

3. Define the terms: efficiency, bias, consistency and mean squared error.

4. Define the property of unbiasedness of an estimator and use it.

5. Define the mean square error of an estimator, and use it to compare estimators.

6. Describe the asymptotic distribution of maximum likelihood estimators and use it.

(x) Construct confidence intervals for unknown parameters.

1. Define in general terms a confidence interval for an unknown parameter of a

distribution based on a random sample.

2. Derive a confidence interval for an unknown parameter using a given sampling

distribution.

3. Calculate confidence intervals for the mean and the variance of a normal distribution.





4. Calculate confidence intervals for a binomial probability and a Poisson mean, including

the use of the normal approximation in both cases.

5. Calculate confidence intervals for two-sample situations involving the normal

distribution, and the binomial and Poisson distributions using the normal

approximation.

6. Calculate confidence intervals for a difference between two means from paired data.

(xi) Test hypotheses.

1. Explain what is meant by the terms null and alternative hypotheses, simple and

composite hypotheses, type I and type II errors, test statistic, likelihood ratio, critical

region, level of significance, probability-value and power of a test.

2. Apply basic tests for the one-sample and two-sample situations involving the normal,

binomial and Poisson distributions, and apply basic tests for paired data.

3. Use a χ2 test to test the hypothesis that a random sample is from a particular

distribution, including cases where parameters are unknown.

4. Explain what is meant by a contingency (or two-way) table, and use a χ2 test to test the

independence of two classification criteria.

(xii) Investigate linear relationships between variables using correlation analysis and regression

analysis.

1. Draw scatterplots for bivariate data and comment on them.

2. Define and calculate the correlation coefficient for bivariate data, explain its

interpretation and perform statistical inference as appropriate.

3. Explain what is meant by response and explanatory variables.

4. State the usual simple regression model (with a single explanatory variable).

5. Derive and calculate the least squares estimates of the slope and intercept parameters in

a simple linear regression model.

6. Perform statistical inference on the slope parameter in simple linear regression.

7. Calculate R2 (coefficient of determination) and describe its use to measure the goodness

of fit of a linear regression model.

8. Use a fitted linear relationship to predict a mean response or an individual response

with confidence limits.

9. Use residuals to check the suitability and validity of a linear regression model.





10. State the usual multiple linear regression model (with several explanatory variables).

(xiii) Explain the concepts of analysis of variance and use them.

1. Describe the circumstances in which a one-way analysis of variance can be used.

2. State the usual model for a one-way analysis of variance and explain what is meant by

the term treatment effects.

3. Perform a simple one-way analysis of variance.

(xiv) Explain the concepts of conditional expectation and compound distribution, and apply them.

1. Define the conditional expectation of one random variable given the value of another

random variable, and calculate such a quantity.

2. Show how the mean and variance of a random variable can be obtained from expected

values of conditional expected values, and apply this.

3. Derive the moment generating function of the sum of a random number of independent,

identically distributed random variables (a compound distribution), and use the result to

calculate the mean and variance of such a distribution.

END OF SYLLABUS



Subject CT4

ModelsCore Technical

Syllabus


1 J une 2012




Subject CT4 – Models Core Technical


Aim

The aim of the Models subject is to provide a grounding in stochastic processes and survival modelsand their application.


Subject CT1 – Financial Mathematics: provides an introduction to stochastic interest rates.

Subject CT3 – Probability and Mathematical Statistics: introduces the concepts of statistical

distributions and modelling.

Subject CT5 – Contingencies develops the application of Markov chains.

Subject CT8 – Financial Economics: develops the concepts introduced here further.

Subject CA1 – Actuarial Risk Management and the Specialist Technical subjects use the models and

principles introduced in this subject.

Objectives


(i) Describe the principles of actuarial modelling.

1. Describe why and how models are used.

2. Explain the benefits and limitations of modelling.

3. Explain the difference between a stochastic and a deterministic model, and identify the

advantages/disadvantages of each.

4. Describe, in general terms, how to decide whether a model is suitable for any particular

application.

5. Explain the difference between the short-run and long-run properties of a model, and

how this may be relevant in deciding whether a model is suitable for any particular

application.

6. Describe, in general terms, how to analyse the potential output from a model, and

explain why this is relevant to the choice of model.

7. Describe the process of sensitivity testing of assumptions and explain why this forms an

important part of the modelling process.

8. Explain the factors that must be considered when communicating the results following

the application of a model.





(ii) Describe the general principles of stochastic processes, and their classification into different

types.

1. Define in general terms a stochastic process and in particular a counting process.

2. Classify a stochastic process according to whether it:

• operates in continuous or discrete time

• has a continuous or a discrete state space

• is a mixed type

and give examples of each type of process.

3. Describe possible applications of mixed processes.

4. Explain what is meant by the Markov property in the context of a stochastic process and

in terms of filtrations.

(iii) Define and apply a Markov chain.

1. State the essential features of a Markov chain model.

2. State the Chapman-Kolmogorov equations that represent a Markov chain.

3. Calculate the stationary distribution for a Markov chain in simple cases.

4. Describe a system of frequency based experience rating in terms of a Markov chain and

describe other simple applications.

5. Describe a time-inhomogeneous Markov chain model and describe simple applications.

6. Demonstrate how Markov chains can be used as a tool for modelling and how they can

be simulated.

(iv) Define and apply a Markov process.

1. State the essential features of a Markov process model.

2. Define a Poisson process, derive the distribution of the number of events in a given

time interval, derive the distribution of inter-event times, and apply these results.

3. Derive the Kolmogorov equations for a Markov process with time independent and

time/age dependent transition intensities.

4. Solve the Kolmogorov equations in simple cases.

5. Describe simple survival models, sickness models and marriage models in terms of

Markov processes and describe other simple applications.





6. State the Kolmogorov equations for a model where the transition intensities depend not

only on age/time, but also on the duration of stay in one or more states.

7. Describe sickness and marriage models in terms of duration dependent Markov

processes and describe other simple applications.

8. Demonstrate how Markov jump processes can be used as a tool for modelling and how

they can be simulated.

(v) Explain the concept of survival models.

1. Describe the model of lifetime or failure time from age x as a random variable.

2. State the consistency condition between the random variable representing lifetimes

from different ages.

3. Define the distribution and density functions of the random future lifetime, the survival

function, the force of mortality or hazard rate, and derive relationships between them.

4. Define the actuarial symbols t p x and t q x and derive integral formulae for them.

5. State the Gompertz and Makeham laws of mortality.

6. Define the curtate future lifetime from age x and state its probability function.

7. Define the expected value and variance of the complete and curtate future lifetimes and derive expressions for them. Define the symbols e x and xe

D

and derive an approximate

relation between them.

8. Describe the two-state model of a single decrement and compare its assumptions with

those of the random lifetime model.

(vi) Describe estimation procedures for lifetime distributions.

1. Describe the various ways in which lifetime data might be censored.

2. Describe the estimation of the empirical survival function in the absence of censoring,

and what problems are introduced by censoring.

3. Describe the Kaplan-Meier (or product limit) estimate of the survival function in the

presence of censoring, compute it from typical data and estimate its variance.

4. Describe the Nelson-Aalen estimate of the cumulative hazard rate in the presence of

censoring, compute it from typical data and estimate its variance.

5. Describe the Cox model for proportional hazards, derive the partial likelihood estimate

in the absence of ties, and state its asymptotic distribution.





(vii) Derive maximum likelihood estimators for the transition intensities in models of transfers

between states with piecewise constant transition intensities.

1. Describe an observational plan in respect of a finite number of individuals observed

during a finite period of time, and define the resulting statistics, including the waiting

times.

2. Derive the likelihood function for constant transition intensities in a Markov model of

transfers between states given the statistics in 1.

3. Derive maximum likelihood estimators for the transition intensities in 2. and state their

asymptotic joint distribution.

4. Describe the Poisson approximation to the estimator in 3. in the case of a single

decrement and its advantages and disadvantages.

(viii) Describe the Binomial model of mortality, derive a maximum likelihood estimator for the

probability of death and compare the Binomial model with the multiple state models.

1. Describe the Binomial model of the mortality of a group of identical individuals subject

to no other decrements between two given ages.

2. Derive the maximum likelihood estimator for the rate of mortality in the Binomial

model and its mean and variance.

3. Describe the advantages and disadvantages of the multiple state model and the

Binomial model, including consistency, efficiency, simplicity of the estimators and their distributions, application to practical observational plans and generality.

(ix) Describe how to estimate transition intensities depending on age, exactly or using the census

approximation.

1. Explain the importance of dividing the data into homogeneous classes, including

subdivision by age and sex.

2. Describe the principle of correspondence and explain its fundamental importance in the

estimation procedure.

3. Specify the data needed for the exact calculation of a central exposed to risk (waitingtime) depending on age and sex.

4. Calculate a central exposed to risk given the data in 3.

5. Explain how to obtain estimates of transition probabilities, including in the single

decrement model the actuarial estimate based on the simple adjustment to the central

exposed to risk.

6. Explain the assumptions underlying the census approximation of waiting times.





7. Explain the concept of rate interval.

8. Develop census formulae given age at birthday where the age may be classified as next,last, or nearest relative to the birthday as appropriate.

The deaths and census data may use different definitions of age.

9. Specify the age to which estimates of transition intensities or probabilities in 8. apply.

(x) Describe how to test crude estimates for consistency with a standard table or a set of

graduated estimates, and describe the process of graduation.

1. Describe the following statistical tests of crude estimates, for comparison with a

standard table:

• chi-square test

• standardised deviations test

• sign test

• cumulative deviation test

• grouping of signs test

• serial correlations test

For each test describe:

• the formulation of the hypothesis

• the test statistic• the distribution of the test statistic using approximations where appropriate

• the application of the test statistic

2. Describe the reasons for graduating crude estimates of transition intensities or

probabilities, and state the desirable properties of a set of graduated estimates.

3. Describe a test for smoothness of a set of graduated estimates.

4. Describe the process of graduation by the following methods, and state the advantages

and disadvantages of each:

• parametric formula

• standard table

• graphical

(The student will not be required to carry out a graduation.)

5. Describe how the tests in 1. should be amended to compare crude and graduated sets of

estimates.

6. Describe how the tests in 1. should be amended to allow for the presence of duplicate

policies.





7. Carry out a comparison of a set of crude estimates and a standard table, or of a set of

crude estimates and a set of graduated estimates.

END OF SYLLABUS



Subject CT5

ContingenciesCore Technical

Syllabus


1 J une 2012




Subject CT5 – Contingencies Core Technical


Aim

The aim of the Contingencies subject is to provide a grounding in the mathematical techniques whichcan be used to model and value cashflows dependent on death, survival, or other uncertain risks.


Subjects CT1 – Financial Mathematics, CT3 – Probability and Mathematical Statistics and CT4 – Models: introduce techniques that will be drawn upon and used in the development of thissubject.

Subject ST2 – Life Insurance Specialist Technical: uses the principles and techniques in this subject tohelp in the solution of life insurance problems.

Objectives


(i) Define simple assurance and annuity contracts, and develop formulae for the means and variances of the present values of the payments under these contracts, assuming constantdeterministic interest.

1. Define the following terms:

• whole life assurance•

term assurance• pure endowment• endowment assurance• critical illness assurance• whole life level annuity• temporary level annuity• premium• benefit

including assurance and annuity contracts where the benefits are deferred.

2. Define the following probabilities: n|mq x , n|q x and their select equivalents n|mq[ x]+r ,

n|q[ x]+r .

3. Obtain expressions in the form of sums for the mean and variance of the present valueof benefit payments under each contract above, in terms of the curtate random futurelifetime, assuming that death benefits are payable at the end of the year of death and that annuities are paid annually in advance or in arrear, and, where appropriate, simplifythese expressions into a form suitable for evaluation by table look-up or other means.

4. Obtain expressions in the form of integrals for the mean and variance of the presentvalue of benefit payments under each contract above, in terms of the random future





lifetime, assuming that death benefits are payable at the moment of death and thatannuities are paid continuously, and, where appropriate, simplify these expressions into

a form suitable for evaluation by table look-up or other means.

5. Extend the techniques of 3. and 4. above to deal with the possibility that premiums are payable more frequently than annually and that benefits may be payable annually or more frequently than annually.

6. Define the symbols A x , : x n A ,1: x n A , 1

: x n A , a x , : x na , : x nm

a⏐

, xa ,: x n

a ,:m x n

a and

their select and continuous equivalents. Extend the annuity factors to allow for the possibility that payments are more frequent than annual but less frequent thancontinuous.

7. Derive relations between annuities payable in advance and in arrear, and betweentemporary, deferred and whole life annuities.

8. Derive the relations A x = 1 − xda ,: x n

A = 1 − : x n

da , and their select and continuous

equivalents.

9. Define the expected accumulation of the benefits in 1., and obtain expressions for themcorresponding to the expected present values in 3., 4., and 5. (note: expected valuesonly).

(ii) Describe practical methods of evaluating expected values and variances of the simple

contracts defined in objective (i).

1. Describe the life table functions l x and d x and their select equivalents l[ x]+r and d [ x]+r .

2. Express the following life table probabilities in terms of the functions in 1.: n p x , nq x ,

n|m q x and their select equivalents n p[ x]+r , nq[ x]+r , n|mq[ x]+r .

3. Express the expected values and variances in objective (i) 3. in terms of the functions in1. and 2.

4. Evaluate the expected values and variances in objective (i) 3. by table look-up, where

appropriate, including the use of the relationships in objectives (i) 7. and 8.

5. Derive approximations for, and hence evaluate, the expected values and variances inobjective (i) 4. in terms of those in objective (i) 3.

6. Evaluate the expected accumulations in objective (i) 9.

7. Describe practical alternatives to the life table which can be used to obtain theevaluations in 4., 5., and 6.





(iii) Describe and calculate, using ultimate or select mortality, net premiums and net premiumreserves of simple insurance contracts.

1. Define the net random future loss under an insurance contract, and state the principle of equivalence.

2. Define and calculate net premiums for the insurance contract benefits in objective (i) 1.Premiums and annuities may be payable annually, more frequently than annually, or continuously. Benefits may be payable at the end of the year of death, immediately ondeath, annually, more frequently than annually, or continuously.

3. State why an insurance company will set up reserves.

4. Describe prospective and retrospective reserves.

5. Define and evaluate prospective and retrospective net premium reserves in respect of the contracts in objective (i) 1., with premiums as in (iii) 2.

6. Show that prospective and retrospective reserves are equal when calculated on the same basis.

7. Derive recursive relationships between net premium reserves at annual intervals, for contracts with death benefits paid at the end of the year of death, and annual premiums.

8. Understand Thiele’s differential equation, satisfied by net premium reserves for contracts with death benefits paid at the moment of death, and premiums payablecontinuously.

9. Define and calculate, for a single policy or a portfolio of policies (as appropriate):

• death strain at risk • expected death strain• actual death strain• mortality profit

(iv) Describe the calculation, using ultimate or select mortality, of net premiums and net premiumreserves for increasing and decreasing benefits and annuities.

1. Extend the techniques of (ii) to calculate the expected present value of an annuity, premium, or benefit payable on death, which increases or decreases by a constantcompound rate. Calculate net premiums and net premium reserves for contracts with

premiums and benefits which vary as described.

2. Define the symbols ( IA) x , ( ) x Ia , and ( Ia) x and their select equivalents.

3. Calculate the expected present value of an annuity, premium or benefit payable ondeath, which increases or decreases by a constant monetary amount. Calculate net





premiums and net premium reserves for contracts with premiums and benefits whichvary as described.

4. Define with profits contract.

5. List the types of bonus that may be given to with profits contracts.

6. Calculate net premiums and net premium reserves for with profits contracts.

(v) Describe the calculation of gross premiums and reserves of assurance and annuity contracts.

1. List the types of expenses incurred in writing a life insurance contract.

2. Describe the influence of inflation on the expenses listed in 1.

3. Define the gross future loss random variable for the benefits and annuities listed in (i) 1.and (iv).

4. Calculate gross premiums using the future loss random variable and the equivalence principle. Premiums and annuities may be payable annually, more frequently thanannually, or continuously. Benefits may be payable at the end of the year of death,immediately on death, annually, more frequently than annually, or continuously.

5. Calculate gross premiums using simple criteria other than the equivalence principle.

6. Calculate gross premium prospective reserves using the future loss random variable.

7. Define and calculate the gross premium retrospective reserve.

8. State the conditions under which, in general, the prospective reserve is equal to theretrospective reserve allowing for expenses.

9. Prove that, under the appropriate conditions, the prospective reserve is equal to theretrospective reserve, with or without allowance for expenses, for all standard fixed

benefit and increasing/decreasing benefit contracts.

10. Derive a recursive relation between successive annual reserves for an annual premium

contract, with allowance for expenses, for standard fixed benefit contracts.

(vi) Define and use straightforward functions involving two lives.

1. Extend the techniques of objectives (i)–(v) to deal with cashflows dependent upon thedeath or survival of either or both of two lives.

2. Extend the techniques of 1. to deal with functions dependent upon a fixed term as wellas age.





(vii) Describe methods which can be used to model cashflows contingent upon competing risks.

1. Explain how the value of a cashflow, contingent upon more than one risk, may bevalued using a multiple-state Markov Model.

2. Derive dependent probabilities from given transition intensities, using the Kolmogorovequations introduced in Objective (vii) of the Models Subject.

3. Derive transition intensities from given dependent probabilities.

(viii) Describe the technique of discounted emerging costs, for use in pricing, reserving, and assessing profitability.

1. Define unit-linked contract.

2. Evaluate expected cashflows for whole life, endowment and term assurances, annuities,and unit-linked contracts.

3. Profit test simple annual premium contracts of the types listed in 2. and determine the profit vector, the profit signature, the net present value, and the profit margin.

4. Show how the profit test may be used to price a product.

5. Show how the profit test may be used to determine reserves.

6. Describe the construction and use of multiple decrement tables, including therelationships with associated single decrement tables.

7. Use multiple decrement tables to evaluate expected cashflows dependent upon morethan one decrement, including:

• pension benefits• other salary related benefits• health and care insurance

8. Describe practical alternatives to the multiple decrement table which can be used toobtain the evaluations in 7.

9. Extend the techniques of 3., 6., and 7. to evaluate expected cashflows contingent uponrisks other than human life.





(ix) Describe the principal forms of heterogeneity within a population and the ways in whichselection can occur.

1. State the principal factors which contribute to the variation in mortality and morbidity by region and according to the social and economic environment, specifically:

• occupation• nutrition• housing• climate/geography• education• genetics

2. Define and give examples of the main forms of selection:

• temporary initial selection• class selection• time selection• spurious selection• adverse selection

3. Explain how selection can be expected to occur amongst individuals taking out each of the main types of life insurance contracts, or amongst members of large pensionschemes.

4. Explain why it is necessary to have different mortality tables for different classes of lives.

5. Explain how decrements can have a selective effect.

6. Explain the theoretical basis of the use of risk classification in life insurance.

7. Explain the impact of the availability of genetic information on risk classification in lifeinsurance.

8. Explain the concept of a single figure index and its advantages and disadvantages for summarising and comparing actual experience.

9. Define the terms crude mortality rate, directly standardised and indirectly standardised mortality rate, standardised mortality ratio, and illustrate their use.

END OF SYLLABUS



Subject CT6

Statistical MethodsCore Technical

Syllabus


1 J une 2012




Subject CT6 – Statistical Methods Core Technical


Aim

The aim of the Statistical Methods subject is to provide a further grounding in mathematical and statistical techniques of particular relevance to financial work.


Subject CT3 – Probability and Mathematical Statistics: provides a grounding in probability and

statistics.

Subject CA1 – Actuarial Risk Management – develops some of the concepts introduced in this

subject.

Subjects ST1 – Health and Care Specialist Technical , Subject ST7 – General Insurance – Reserving

and Capital Modelling Specialist Technical and Subject ST8 – General Insurance – Pricing SpecialistTechnical use the mathematics developed in this subject.

Objectives


(i) Explain the concepts of decision theory and apply them.

1. Determine optimum strategies under the theory of games.

2. Explain what is meant by a decision function and a risk function.

3. Apply decision criteria to determine which decision functions are best with respect to a

specified criterion. In particular consider the minimax criterion and the Bayes criterion.

(ii) Calculate probabilities and moments of loss distributions both with and without limits and

risk-sharing arrangements.

1. Describe the properties of the statistical distributions which are suitable for modelling

individual and aggregate losses.

2. Derive moments and moment generating functions (where defined) of loss distributions

including the gamma, exponential, Pareto, generalised Pareto, normal, lognormal,Weibull and Burr distributions.

3. Apply the principles of statistical inference to select suitable loss distributions for sets

of claims.

4. Explain the concepts of excesses (deductibles), and retention limits.

5. Describe the operation of simple forms of proportional and excess of loss reinsurance.





6. Derive the distribution and corresponding moments of the claim amounts paid by the

insurer and the reinsurer in the presence of excesses (deductibles) and reinsurance.

7. Estimate the parameters of a failure time or loss distribution when the data is complete,

or when it is incomplete, using maximum likelihood and the method of moments.

(iii) Construct risk models involving frequency and severity distributions and calculate the

moment generating function and the moments for the risk models both with and without

simple reinsurance arrangements.

1. Construct models appropriate for short term insurance contracts in terms of the numbers

of claims and the amounts of individual claims.

2. Describe the major simplifying assumptions underlying the models in 1.

3. Derive the moment generating function of the sum of N independent random variables;

in particular when N has a binomial, Poisson, geometric or negative binomial

distribution.

4. Define a compound Poisson distribution and show that the sum of independent random

variables each having a compound Poisson distribution also has a compound Poisson

distribution.

5. Derive the mean, variance and coefficient of skewness for compound binomial,

compound Poisson and compound negative binomial random variables.

6. Derive formulae for the moment generating functions and moments of aggregate claims

over a given time period for the models in 1. In terms of the corresponding functions for

the distributions of claim numbers and claim amounts, stating the mathematical

assumptions underlying these formulae.

7. Repeat 5. for both the insurer and the reinsurer after the operation of simple forms of

proportional and excess of loss reinsurance.

(iv) Explain the concept of ruin for a risk model. Calculate the adjustment coefficient and state

Lundberg’s inequality. Describe the effect on the probability of ruin of changing parameter

values and of simple reinsurance arrangements.

1. Explain what is meant by the aggregate claim process and the cash-flow process for a

risk.

2. Use the Poisson process and the distribution of inter-event times to calculate

probabilities of the number of events in a given time interval and waiting times.

3. Define a compound Poisson process and derive the moments and moment generating

function for such a process.





4. Define the adjustment coefficient for a compound Poisson process and for discrete time

processes which are not compound Poisson, calculate it in simple cases and derive an

approximation.

5. Define the probability of ruin in infinite/finite and continuous/discrete time and state

and explain relationships between the different probabilities of ruin.

6. State Lundberg's inequality and explain the significance of the adjustment coefficient.

7. Describe the effect on the probability of ruin, in both finite and infinite time, of

changing parameter values.

8. Analyse the effect on the adjustment coefficient and hence on the probability of ruin of

simple reinsurance arrangements.

(v) Explain the fundamental concepts of Bayesian statistics and use these concepts to calculate

Bayesian estimators.

1. Use Bayes’ Theorem to calculate simple conditional probabilities.

2. Explain what is meant by a prior distribution, a posterior distribution and a conjugate

prior distribution.

3. Derive the posterior distribution for a parameter in simple cases.

4. Explain what is meant by a loss function.

5. Use simple loss functions to derive Bayesian estimates of parameters.

6. Explain what is meant by the credibility premium formula and describe the role played

by the credibility factor.

7. Explain the Bayesian approach to credibility theory and use it to derive credibility

premiums in simple cases.

8. Explain the empirical Bayes approach to credibility theory, in particular its similarities

with and its differences from the Bayesian approach.

9. State the assumptions underlying the two models in 8.

10. Calculate credibility premiums for the two models in 8.

(vi) Describe and apply techniques for analysing a delay (or run-off) triangle and projecting the

ultimate position.

1. Define a development factor and show how a set of assumed development factors can

be used to project the future development of a delay triangle.





2. Describe and apply the basic chain ladder method for completing the delay triangle.

3. Show how the basic chain ladder method can be adjusted to make explicit allowance for inflation.

4. Discuss alternative ways for deriving development factors which may be appropriate

for completing the delay triangle.

5. Describe and apply the average cost per claim method for estimating outstanding claim

amounts.

6. Describe and apply the Bornhuetter-Ferguson method for estimating outstanding claim

amounts.

7. Describe how a statistical model can be used to underpin a run-off triangles approach.

8. Discuss the assumptions underlying the application of the methods in 1. to 7. above.

(vii) Explain the fundamental concepts of a generalised linear model (GLM), and describe how a

GLM may apply.

1. Be familiar with the principles of Multiple Linear Regression and the Normal Linear

Model

2. Define an exponential family of distributions. Show that the following distributions

may be written in this form: binomial, Poisson, exponential, gamma, normal.

3. State the mean and variance for an exponential family, and define the variance function

and the scale parameter. Derive these quantities for the distributions in 2.

4. Explain what is meant by the link function and the canonical link function, referring to

the distributions in 2.

5. Explain what is meant by a variable, a factor taking categorical values and an

interaction term. Define the linear predictor, illustrating its form for simple models,

including polynomial models and models involving factors.

6. Define the deviance and scaled deviance and state how the parameters of a GLM may be estimated. Describe how a suitable model may be chosen by using an analysis of

deviance and by examining the significance of the parameters.

7. Define the Pearson and deviance residuals and describe how they may be used.

8. Apply statistical tests to determine the acceptability of a fitted model: Pearson’s Chi-

square test and the Likelihood ratio test





(viii) Define and apply the main concepts underlying the analysis of time series models.

1. Explain the concept and general properties of stationary, I (0), and integrated, I (1),univariate time series.

2. Explain the concept of a stationary random series.

3. Explain the concept of a filter applied to a stationary random series.

4. Know the notation for backwards shift operator, backwards difference operator, and the

concept of roots of the characteristic equation of time series.

5. Explain the concepts and basic properties of autoregressive (AR), moving average

(MA), autoregressive moving average (ARMA) and autoregressive integrated moving

average (ARIMA) time series.

6. Explain the concept and properties of discrete random walks and random walks with

normally distributed increments, both with and without drift.

7. Explain the basic concept of a multivariate autoregressive model.

8. Explain the concept of cointegrated time series.

9. Show that certain univariate time series models have the Markov property and describe

how to rearrange a univariate time series model as a multivariate Markov model.

10. Outline the processes of identification, estimation and diagnosis of a time series, the

criteria for choosing between models and the diagnostic tests that might be applied to

the residuals of a time series after estimation.

11. Describe briefly other non-stationary, non-linear time series models.

12. Describe simple applications of a time series model, including random walk,

autoregressive and cointegrated models as applied to investment variables.

13. Develop deterministic forecasts from time series data, using simple extrapolation and

moving average models, applying smoothing techniques and seasonal adjustment when

appropriate.

(ix) Explain the concepts of “Monte Carlo” simulation using a series of pseudo-random numbers.

1. Explain the disadvantages of using truly random, as opposed to pseudo-random,

numbers.

2. Describe how pseudo-random drawings from specified distributions can be generated.

3. Explain the circumstances in which the same set of random numbers would be used for

two sets of simulations and the circumstances in which different sets would be used.





4. Discuss how to decide how many simulations to carry out in order to estimate a

quantity of interest.

END OF SYLLABUS



Subject CT7

Business EconomicsCore Technical

Syllabus


1 J une 2012




Subject CT7 – Business Economics Core Technical


Aim

The aim of the Business Economics subject is to introduce students to the core economic principlesand how these can be used in a business environment to help decision making and behaviour. It

provides a grounding in the fundamental concepts of micro and macro economics as they affect the

operation of insurance and other financial systems, both from the point of view of individuals and

their requirements for financial security, and from the point of view of financial institutions and their

ability to provide products that meet individual and institutional clients’ needs.


Subjects CT2 – Finance and Financial Reporting, CT8 – Financial Economics, CT9 – Business

Awareness Module, CA1 – Actuarial Risk Management, ST5 – Finance and Investment Specialist

Technical A and ST6 – Finance and Investment Specialist Technical B complement and develop the

material introduced in this subject.

Other Specialist Technical subjects and all the Specialist Application subjects require the use of

economic judgement.

Objectives


(i) Appreciate the relevance of economics to the world of business.

1. Describe what is meant by opportunity cost and scarcity and their relevance to

economic choice.

2. Understand the core economic concepts involved in choices made by businesses

relevant to selection of outputs, inputs, technology, location and competition.

3. Distinguish between microeconomics and macroeconomics.

(ii) Discuss the workings of competitive markets.

1. Describe how the markets operate, explain the role of the price mechanism in a free

market and discuss the behaviour of firms and consumers in such markets.

2. Describe the factors which influence the market demand and supply and describe and

discuss how market equilibrium quantity and price are achieved.

3. Discuss how markets react to changes in demand and supply.

4. Define and calculate price and income elasticities of demand and price elasticity of

supply. Calculate elasticities of demand using both original and average quantities.

Discuss the factors that affect elasticity.

5. Explain the effect of elasticity on the workings of markets in the short and long run.





6. Understand how firms deal with risk and uncertainty about future market movements.

(iii) Discuss consumer demand and behaviour.

1. Understand the concept of utility and describe how it affects consumers’ purchasing

decisions.

2. Describe how insurance companies help to reduce or remove risk.

3. Explain what is meant by the terms “moral hazard” and “adverse selection”.

4. Analyse simple insurance problems in terms of utility theory.

(iv) Understand the importance of a firm’s decision on product selection and marketing and

advertising strategies.

1. Describe what is meant by product differentiation.

2. Explain various marketing strategies that firms can adopt and the elements that could be

involved in a marketing strategy.

3. Explain the effects of advertising and features of a successful advertising campaign.

(v) Gain a knowledge of the production function, costs of production, revenue and profit in order

to understand a firm’s price and output decisions.

1. Explain how the production function reflects the relationship between inputs and

outputs in the short and long run.

2. Define average and marginal product.

3. Understand the meaning and measurement of costs and explain how these vary with

output in the short and long run.

4. Define total, average and marginal costs.

5. Describe what is meant by “economies of scale” and explain the reasons for such

economies and how a business can achieve efficiency in selecting the level of its inputs.

6. Understand revenue and profit and explain how both are influenced by market

conditions.

7. Define and calculate average and marginal revenue.

8. Describe how profit is measured, and explain how the firm arrives at its profit

maximising output.

9. Explain what is meant by the “shut-down” point in the short and long run.





(vi) Describe profit maximisation under perfect competition and monopoly.

1. Explain what determines the market power of a firm.

2. Describe the main features of a market characterised by perfect competition and explain

how firms in such markets determine output and price in the short and long run.

3. Describe how monopolies emerge, how a monopolist selects its profit maximising price

and output and how much profit a monopolist makes.

4. Describe the barriers to entry in an industry and a contestable market and explain how

these affect a monopolist’s profit.

(vii) Describe profit maximisation under imperfect competition.

1. Describe the behaviour of firms under monopolistic competition and explain why in

this type of market only normal profits are made in the long run.

2. Describe the main features of an oligopoly and explain how firms behave in an

oligopoly.

3. Discuss what determines competition and collusion of firms in an oligopoly and how

the strategic decisions of such firms can be explained by game theory.

4. Discuss if firms in an oligopoly act in consumers’ interest.

(viii) Understand the role of a firm’s growth strategy on its profitability and survival.

1. Describe why businesses want to grow larger and explain the relationship between

growth and profitability.

2. Describe the constraints on a firm’s growth and alternative growth strategies open to a

firm.

3. Describe the growth strategy of internal expansion, and explain how the firm may

pursue vertical integration, product differentiation or diversification to achieve internal

expansion.

4. Explain why a firm may adopt the strategy of merging with, or taking over, other firms.

5. Explain under what circumstances a firm might want to form a strategic alliance with

other firms.

(ix) Understand various pricing strategies that firms can adopt.

1. Describe how prices are determined in practice and factors that affect the ability of a

firm to determine its prices.





2. Describe average cost pricing and price discrimination.

3. Understand pricing strategy for multiple products and explain how pricing varies withthe stage in the life of a product.

(x) Understand the reasons for government intervention in the market.

1. Explain and discuss the extent to which businesses meet the interests of consumers and

society in general.

2. Explain in what sense perfect markets are “socially efficient” and why most markets

fail to achieve social efficiency.

3. Describes the ways in which governments intervene in markets in order to influence

business behaviour and explain the drawbacks of such intervention.

4. Explain and discuss whether taxation or regulation could be more useful in correcting

markets’ shortcomings.

(xi) Understand the relationship between the government and the individual firm.

1. Describe the main targets of “competition policy” and explain the extent to which it is

effective.

2. Understand and explain why a free market fails to achieve the optimal amount of

research and development.

3. Describe the various forms of intervention that the government can undertake in order

to encourage technological advance and innovation.

(xii) Understand globalisation and multinational business.

1. Understand what is meant by globalisation and describe its impact on business.

2. Explain what is driving the process of globalisation and whether the world benefits

from globalisation of business.

(xiii) Understand the importance of international trade.

1. Describe the growth of international trade and its benefits to countries and firms.

2. Explain the advantages of specialisation.

3. Discuss the arguments for trade restriction and protection of domestic industries.

4. Explain the role of the World Trade Organisation (WTO) in international trade.





(xiv) Understand the macroeconomic environment of the business.

1. State and describe the main macroeconomic variables that governments seek to control.

2. Explain what determines the level of economic activity and hence the overall business

climate.

3. Describe the effect on business output if a stimulus is given to the economy.

4. Distinguish between actual and potential growth.

5. Describe why economies experience periods of boom followed by periods of recession

and explain factors which influence the length and magnitude of the phases of a

business cycle.

6. Describe the causes and costs of unemployment and how unemployment relates to the

level of business activity.

7. Understand the determination of the price level in the economy by the interaction

between aggregate supply and aggregate demand in a simple AS-AD model.

8. Describe the causes and costs of inflation and how inflation relates to the level of

business activity.

9. Explain what is meant by GDP and describe how it is measured.

10. Understand the representation of the economy as a simple model of the circular flow of

income.

(xv) Understand what is meant by the balance of payments and how exchange rates are

determined.

1. Describe what is meant by “the balance of payments” and how trade and financial

movements affect it.

2. Explain how exchange rates are determined and how changes in exchange rates affect

business.

3. Explain the relationship between the balance of payments and the exchange rates.

4. Discuss the advantages and disadvantages of fixed and floating exchange rates.

5. Explain how governments and/or central banks seek to influence the exchange rates,

and describe the implications of such actions for other macroeconomic policies and for

business.





(xvi) Understand the role of money and interest rates in the economy.

1. Describe the function of money.

2. Describe what determines the amount of money in the economy, what causes it to grow

and what is the role of banks in this process.

3. Describe how interest rates are determined.

4. Explain the relationship between money and interest rates.

5. Explain why central banks play a crucial role in the functioning of the economies.

6. Describe how a change in the money supply and/or interest rates affects the level of

business activity.

(xvii) Understand what determines the level of business activity and how it affects unemployment

and inflation.

1. Understand how the equilibrium level of income is determined within a simple

Keynesian model.

2. Understand the concept of the multiplier and calculate its value.

3. Describe the effect of a rise in money supply on output and prices.

4. Describe the relationship between unemployment and inflation and whether the

relationship is stable.

5. Understand how business and consumer expectations affect the relationship between

unemployment and inflation and explain how such expectations are formed.

6. Describe how a policy of targeting inflation affects the relationship between

unemployment and inflation.

7. Describe what determines the course of a business cycle and its turning points.

8. Discuss whether the business cycle is caused by changes in aggregate demand, or changes in aggregate supply (or both).

(xviii) Understand how macroeconomic policies impact on businesses.

1. Describe the types of macroeconomic policy that are likely to impact on business and

explain the way in which this impact takes effect.

2. Describe the impact of fiscal policy on the economy and business, and factors that

determine its effectiveness in smoothing out economic fluctuations.





3. Describe the fiscal rules adopted by the government and discuss if following these rules

is a good idea.

4. Explain how monetary policy works in the UK and the Eurozone and describe the roles

of the Bank of England and the European Central Bank.

5. Explain how targeting inflation influences interest rates and hence the economic

activity.

6. Discuss the merits of following a simple inflation target as a rule for determining

interest rates, and offer an alternative rule.

(xix) Understand how supply side policies impact on businesses.

1. Describe the effect of supply side policies on business and the economy.

2. Describe the types of supply side policies that can be pursued and examine their

effectiveness.

3. Explain the impact on business of a policy of tax cuts.

4. Describe the major types of policy open to governments to encourage increased

competition.

END OF SYLLABUS



Subject CT8

Financial EconomicsCore Technical

Syllabus


1 J une 2012




Subject CT8 – Financial Economics Core Technical


Aim

The aim of the Financial Economics subject is to develop the necessary skills to construct assetliability models and to value financial derivatives. These skills are also required to communicate with

other financial professionals and to critically evaluate modern financial theories.


Concepts introduced in Subjects CT1 – Financial Mathematics, CT4 – Models and

CT7 – Business Economics are used in this subject.

Topics introduced in this subject are further developed in Subjects CA1 – Actuarial Risk Management

and ST6 – Finance and Investment Specialist Technical B. Other Specialist Technical subjects

provide an application for some of the hedging and derivative pricing techniques as well as asset-

liability modelling.

Objectives


(i) 1. Explain the meaning of the term “utility function”.

2. Explain the axioms underlying utility theory and the expected utility theorem.

3. Explain how the following economic characteristics of consumers and investors can be

expressed mathematically in a utility function:

• non-satiation

• risk aversion, risk neutrality and risk seeking

• declining or increasing absolute and relative risk aversion

4. Discuss the economic properties of commonly used utility functions.

5. Discuss how a utility function may depend on current wealth and discuss state

dependent utility functions.

6. Explain the concept of utility maximisation and hence explain the traditional theory of

consumer choice.

7. Perform calculations using commonly used utility functions to compare investment

opportunities

8. State conditions for absolute dominance and for first and second-order dominance and

discuss their relationship with utility theory.





(ii) Discuss the advantages and disadvantages of different measures of investment risk.

1. Define the following measures of investment risk:

• variance of return

• downside semi-variance of return

• shortfall probabilities

• Value at Risk (VaR) / Tail VaR

2. Describe how the risk measures listed in (i) 1. above are related to the form of an

investor’s utility function.

3. Perform calculations using the risk measures listed above to compare investment

opportunities.

4. Explain how the distribution of returns and the thickness of tails will influence the

assessment of risk.

(iii) Describe and discuss the assumptions of mean-variance portfolio theory and its principal

results.

1. Describe and discuss the assumptions of mean-variance portfolio theory.

2. Discuss the conditions under which application of mean-variance portfolio theory leads

to the selection of an optimum portfolio.

3. Calculate the expected return and risk of a portfolio of many risky assets, given the

expected return, variance and covariance of returns of the individual assets, using

mean-variance portfolio theory.

4. Explain the benefits of diversification using mean-variance portfolio theory.

(iv) Describe and discuss the properties of single and multifactor models of asset returns.

1. Describe the three types of multifactor models of asset returns:

• macroeconomic models

• fundamental factor models• statistical factor models

2. Discuss the single index model of asset returns.

3. Discuss the concepts of diversifiable and non-diversifiable risk.

4. Discuss the construction of the different types of multifactor models.

5. Perform calculations using both single and multi-factor models





(v) Describe asset pricing models, discussing the principal results and assumptions and

limitations of such models.

1. Describe the assumptions and the principal results of the Sharpe-Lintner-Mossin

Capital Asset Pricing Model (CAPM).

2. Discuss the limitations of the basic CAPM and some of the attempts that have been

made to develop the theory to overcome these limitations.

3. Discuss the assumptions, principal results and limitations of the Ross Arbitrage Pricing

Theory model (APT).

4. Perform calculations using the CAPM.

(vi) Discuss the various forms of the Efficient Markets Hypothesis and discuss the evidence for and against the hypothesis.

1. Discuss the three forms of the Efficient Markets Hypothesis and their consequences for

investment management.

2. Describe briefly the evidence for or against each form of the Efficient Markets

Hypothesis.

(vii) Demonstrate a knowledge and understanding of stochastic models of the behaviour of security

prices.

1. Discuss the continuous time log-normal model of security prices and the empirical

evidence for or against the model.

2. Discuss the structure of auto-regressive models of security prices and other economic

variables, such as the Wilkie model, and describe the economic justification for such

models.

3. Discuss the main alternatives to the models covered in (vi) 1. and (vi) 2. above and

describe their strengths and weaknesses.

4. Perform simple calculations involving the models described above.

5. Discuss the main issues involved in estimating parameters for asset pricing models:

• data availability

• data errors

• outliers

• stationarity of underlying time series

• the role of economic judgement





(viii) Define and apply the main concepts of Brownian motion (or Wiener Processes).

1. Explain the definition and basic properties of standard Brownian motion or Wiener process.

2. Demonstrate a basic understanding of stochastic differential equations, the Ito integral,

diffusion and mean-reverting processes.

3. State Ito’s formula and be able to apply it to simple problems.

4. Write down the stochastic differential equation for geometric Brownian motion and

show how to find its solution.

5. Write down the stochastic differential equation for the Ornstein-Uhlenbeck process and

show how to find its solution.

(ix) Demonstrate a knowledge and understanding of the properties of option prices, valuation

methods and hedging techniques.

1. State what is meant by arbitrage and a complete market.

2. Outline the factors that affect option prices.

3. Derive specific results for options which are not model dependent:

• Show how to value a forward contract.

• Develop upper and lower bounds for European and American call and put options.

• Explain what is meant by put-call parity.

4. Show how to use binomial trees and lattices in valuing options and solve simple

examples.

5. Derive the risk-neutral pricing measure for a binomial lattice and describe the risk-

neutral pricing approach to the pricing of equity options.

6. Explain the difference between the real-world measure and the risk-neutral measure.

Explain why the risk-neutral pricing approach is seen as a computational tool (rather

than a realistic representation of price dynamics in the real world).

7. State the alternative names for the risk-neutral and state-price deflator approaches to

pricing.

8. Demonstrate an understanding of the Black-Scholes derivative-pricing model:

• Explain what is meant by a complete market.





• Explain what is meant by risk-neutral pricing and the equivalent martingale

measure.

• Derive the Black-Scholes partial differential equation both in its basic and Garman-

Kohlhagen forms.

• Demonstrate how to price and hedge a simple derivative contract using the

martingale approach.

9. Show how to use the Black-Scholes model in valuing options and solve simple

examples.

10. Discuss the validity of the assumptions underlying the Black-Scholes model.

11. Describe and apply in simple models, including the binomial model and the Black-

Scholes model, the approach to pricing using deflators and demonstrate its equivalence

to the risk-neutral pricing approach.

12. Demonstrate an awareness of the commonly used terminology for the first, and where

appropriate second, partial derivatives (the Greeks) of an option price.

(x) Demonstrate a knowledge and understanding of models of the term structure of interest rates.

1. Describe the desirable characteristics of a model for the term-structure of interest rates.

2. Describe, as a computational tool, the risk-neutral approach to the pricing of zero-coupon bonds and interest-rate derivatives for a general one-factor diffusion model for

the risk-free rate of interest.

3. Describe, as a computational tool, the approach using state-price deflators to the pricing

of zero-coupon bonds and interest-rate derivatives for a general one-factor diffusion

model for the risk-free rate of interest.

4. Demonstrate an awareness of the Vasicek, Cox-Ingersoll-Ross and Hull-White models

for the term-structure of interest rates.

5. Discuss the limitations of these one-factor models and show an awareness of how these

issues can be addressed.

(xi) Demonstrate a knowledge and understanding of simple models for credit risk.

1. Define the terms credit event and recovery rate.

2. Describe the different approaches to modelling credit risk: structural models, reduced

form models, intensity-based models.

3. Demonstrate a knowledge and understanding of the Merton model.





4. Demonstrate a knowledge and understanding of a two-state model for credit ratings

with a constant transition intensity.

5. Describe how the two-state model can be generalised to the Jarrow-Lando-Turnbull

model for credit ratings.

6. Describe how the two-state model can be generalised to incorporate a stochastic

transition intensity.

END OF SYLLABUS



Subject CT9

Business Awareness

Syllabus

for the 2012/2013 Practical Examinations

1 J une 2012




Subject CT9 – Business Awareness


Aim

The aim of the Business Awareness practical exam is to provide candidates with an understanding of:

• the business environment in which they will be working

• how to tackle business-related problems

• the basic legal principles that are relevant to actuarial work

• their professional responsibilities

• the need for lifelong learning


The Business Awareness practical exam has links to many other subjects. The knowledge gained

should enable candidates to provide more rounded business-related solutions when working on later

subjects and help them in the development of their practical work-based skills.

Objectives


(i) Specify, describe or discuss a range of topics relevant to working as an actuary in the

financial services industry.

1. Specify the type of skills that must be acquired to become a competent practising

actuary in the financial services industry.

2. List the aspects of an employing company about which knowledge should be obtained.

3. Specify those aspects of the financial services industry about which knowledge should

be obtained and maintained.

4. Describe why it is important to know how other industries affect the financial services

industry.

5. State those aspects of the global economy and politics about which some knowledge

should be gained and maintained.

6. Describe the activities of the Actuarial Profession.

7. Discuss the issues and challenges faced currently by each main practice area, namely

life, pensions, general, healthcare, finance, investment and enterprise risk management.





(ii) Develop an approach to strategic thinking.

1. Describe what a strategy is and how it relates to competitive advantage and competitive positioning.

2. Develop a process for strategic decision making.

3. Define a PEST analysis (Political/legislative, Economic, Societal, Technological) and

describe how to carry one out.

4. Describe how to identify business and consumer needs, and how to prioritise them.

5. Describe the industry value chain and how to apply it.

6. Discuss how to combat competitive forces.

7. Learn how to communicate strategic messages to gain buy-in and attention, selecting

appropriate structures to present different types of information.

8. Discuss how a company’s culture affects decision making.

9. Discuss how a company’s structure affects decision making.

10. Analyse case studies and present results of the analyses.

(iii) Develop an approach to business decision making.

1. Discuss the importance of a clear mission statement.

2. Describe the importance of a clear business strategy.

3. Describe the benefits of teamwork.

4. Describe the advantages of time management

5. Discuss the importance of extracting relevant information from a large volume of data.

6. Describe the interaction of various company functions.

7. Discuss the value of different people skills.

8. Assess his/her ability to influence others.

9. Discuss the advantages of communicating clearly.

10. Describe how to develop a decision making process.

11. Discuss attitude to risk in decision making.12. Discuss how competition can affect a market.

13. Discuss commercial awareness.





(iv) Describe and understand the basic legal principles that are relevant to the work of an actuary,

and their practical implications.

1. Appreciate the sources of English law and how Scottish law may differ (overview

only).

2. Understand the requirements for a valid contract (overview only).

3. Identify when the courts will imply terms into contracts.

4. Understand the extent to which liability can be excluded.

5. Make simple assessments of likely contractual remedies.

6. Calculate a basic award of damages.

7. Identify the factors which must be established before liability for professional

negligence can arise.

8. Understand the concept of a trust and the duties of trustees.

9. Understand the concept of agency and list the types of authority an agent might possess.

10. Appreciate the concepts of separate legal personality and limited liability.11. Understand and at a basic level be able to explain the role of directors and shareholders

within a company.

12. Appreciate the duties imposed on directors by statute, common law and equity.

13. At a basic level be able to explain the nature of partnership and the duties owed by

partners to insiders and third parties.

(v) Describe or specify important aspects of professionalism and ethics.

1. State important characteristics of a profession and its advantages to interested parties.

2. Demonstrate a knowledge of the Actuaries’ Code which binds all members of the

Actuarial Profession.

3. List the measures by which the Financial Reporting Council and the Actuarial

Profession regulate the activities of the actuaries and students of the Institute and

Faculty of Actuaries.

4. Describe the Actuarial Profession’s corporate governance structure.

5. Analyse appropriate case studies relating to professionalism and ethics, and present

results of the analyses.

END OF SYLLABUS



Subject CA1

Actuarial Risk Management

Syllabus


1 J une 2012




Subject CA1 – Actuarial Risk Management


Aim

The aim of the Actuarial Risk Management subject is that upon successful completion, the candidateshould understand strategic concepts in the management of the business activities of financial

institutions and programmes, including the processes for management of the various types of risk

faced, and be able to analyse the issues and formulate, justify and present plausible and appropriate

solutions to business problems.


Each of Subjects CT1–CT8 provides principles and tools that are built upon in Actuarial Risk

Management.

The Specialist Technical Subjects ST1–ST6 and the Specialist Applications Subjects SA1–SA6 use

the concepts developed in this subject to solve complex problems, to produce coherent advice and tomake recommendations in specific practice areas.

Objectives

On the successful completion of this subject the candidate will be able to:

1 How to do a professional job

1.1 Describe how actuaries can contribute to meeting the business needs of their clients and

other stakeholders.

1.2 Describe the statutory roles that may be required of actuaries in pensions and insurance,

both in the public and private sectors.

1.3 Outline the professionalism framework of the Actuarial Profession and the Board for

Actuarial Standards.

1.4 Describe the factors and issues to be taken into account when doing a professional job.

1.5 Describe the Actuarial Control Cycle and explain the purpose of each of its components.

1.6 Demonstrate how the Actuarial Control Cycle can be applied in a variety of practical

commercial situations, including its use as a Risk Management Control Cycle.

2 Stakeholders and their needs

2.1 Identify the clients that actuaries advise in both the public and private sectors and the

stakeholders affected by that advice.

2.2 Describe how stakeholders other than the client might be affected by any actuarial

advice given.





2.3 Describe the functions of the clients and potential clients that actuaries advise and the

types of advice that actuaries might give to their clients.

2.4 Explain why and how certain factual information about the client should be sought in

order to be able to give advice.

2.5 Explain why subjective attitudes of clients and other stakeholders – especially towards

risk – are relevant to giving advice.

2.6 Distinguish between the responsibility for giving advice and the responsibility for taking

decisions.

2.7 Describe the main providers of benefits on contingent events.

2.8 Describe how products, schemes, contracts and other arrangements can provide benefitson contingent events which meet the needs of clients and stakeholders.

2.9 Describe the ways of analysing the needs of clients and stakeholders to determine the

appropriate benefits on contingent events to be provided by financial and other products,

schemes, contracts and other arrangements.

3 General environment

3.1 Risk environment

3.1.1 Describe the risk management process for a business that can aid in the design of

products, schemes, contracts and other arrangements to provide benefits on

contingent events.

3.1.2 Describe how risk classification can aid in the design of products, schemes,

contracts and other arrangements that provide benefits on contingent events.

3.1.3 Discuss the difference between systematic and diversifiable risk.

3.1.4 Discuss risk appetite and the attainment of risk efficiency.

3.1.5 Describe credit risk and the use of credit ratings.

3.1.6 Describe liquidity risk.

3.1.7 Describe market risk.

3.1.8 Describe operational risk.

3.1.9 Describe business risk.

3.1.10 Describe attitudes to and methods of risk acceptance, rejection, transfer and

management for stakeholders.





3.1.11 Discuss the portfolio approach to the overall management of risk, including the

use of diversification and avoidance of risk concentrations.

3.1.12 Distinguish between the risks taken as an opportunity for profit and the risks to

be mitigated.

3.1.13 Describe the principle of pooling risks.

3.1.14 Describe the methods of transferring risks.

3.1.15 Describe how integrated risk management at the enterprise level can add value

to the management of a business.

3.1.16 Describe the risks and uncertainties affecting:

• the level and incidence of benefits payable on contingent events • the overall security of benefits payable on contingent events

3.2 Regulatory environment

3.2.1 Describe the principles and aims of prudential and market conduct regulatory

regimes.

3.2.2 Explain the concept of information asymmetry.

3.2.3 Explain how certain features of financial contracts might be identified as unfair.

3.2.4 Discuss the implications of a requirement to treat the customer fairly.

3.3 External environment

Describe the implications for the main providers of benefits on contingent events of:

• legislation – regulations

• State benefits

• tax

• accounting standards

• capital adequacy and solvency• corporate governance

• risk management requirements

• competitive advantage

• commercial requirements

• changing cultural and social trends

• demographic changes

• environmental issues

• lifestyle considerations

• international practice





• technological changes

3.4 Investment environment

3.4.1 Discuss the cashflows of simple financial arrangements and the need to invest

appropriately to provide for financial benefits on contingent events.

3.4.2 Demonstrate a knowledge and understanding of the characteristics of the

principal investment assets and of the markets in such assets.

3.4.3 Explain the principal economic influences on investment markets.

3.4.4 Describe the main features of the behaviour of market price levels and total

returns and discuss their relationships to each other.

3.4.5 Discuss the theoretical and historical relationships between the total returns and

the components of total returns, on equities, bonds and cash, and price and

earnings inflation.

3.5 Capital requirements

3.5.1 Discuss why the main providers of benefits on contingent events need capital.

3.5.2 Describe how the main providers of benefits on contingent events can meet,

manage and match their capital requirements.

3.5.3 Discuss the implications of the regulatory environment in which the business is

written for provisioning and capital requirements.

3.5.4 Discuss different measures of capital needs.

3.5.5 Discuss the relative merits of looking at an economic balance sheet in order to

consider the capital requirements of a provider of benefits on contingent events.

3.5.6 Discuss the use of internal models for assessment of economic and regulatory

capital requirements.

4 Specifying the problem

4.1 Contract design

4.1.1 Discuss the factors to be considered in determining a suitable design for

financial structures e.g. products, schemes, contracts or other arrangements that

will provide benefits on contingent events in relation to:

• the characteristics of the parties involved

• the risk appetite or risk aversion of the parties involved

• the level and form of benefits to be provided





• any options or guarantees that may be included

• the benefits payable on discontinuance or transfer of rights.

• the method of financing the benefits to be provided • the choice of assets when benefits are funded

• the charges that will be levied

• the capital requirements

4.1.2 Describe how the design of products, schemes, contracts and other arrangements

can be used to help develop corporate human resource strategy.

4.2 Project planning and management

4.2.1 Describe the process of project management.

4.2.2 Show how actuarial techniques can be used in the assessment of capital

investment projects and cost-benefit analyses.

4.2.3 Discuss how the risks of the project are taken into account in project

management.

5 Data

5.1 Discuss the data requirements for determining values for assets, future benefits and

future funding requirements.

5.2 Describe the checks that can and should be made on data.

5.3 Describe the circumstances under which the ideal data required might not be available

and discuss ways in which this problem may be overcome.

5.4 Describe how to determine the appropriate grouping of data to achieve the optimal level

of homogeneity.

6 Risk management

6.1 Discuss the issues surrounding the management of risk.

6.2 Describe the tools that can be used to aid the management of risk.

6.3 Discuss the methods of measuring risk that can be used by the main providers of benefits

on contingent events.

6.4 Describe how risks with low likelihood but high impact might be managed.

6.5 Discuss the use of scenario analysis, stress testing and stochastic modelling in the

evaluation of risk





7 Producing the solution

7.1 Modelling

7.1.1 Describe the approaches available to produce the solutions.

7.1.2 Describe the use of actuarial models to support the methodology used in terms

of:

• the objectives of and requirements for building a model

• the basic features of a model required to project future cash and revenue

flows

• the use of these models for:

– pricing or setting future financing strategies

– risk management

– assessing the capital requirements and the return on capital or the

funding levels required

– assessing the provisions needed for existing commitments to provide

benefits on contingent events

– pricing and valuing options and guarantees

• how sensitivity analysis of the results of the models can be used to help

decision making

7.2 Assumption setting

Describe the principles behind the determination of assumptions as input to a model

relevant to producing a specific solution having regard to:

• the types of information that may be available to help in determining the

assumptions to be used

• the extent to which each type of information may be useful, and the other

considerations that may be taken into account, in deciding the assumptions

• the level of prudence in the assumptions required to meet the objectives of the client





7.3 Expenses

7.3.1 Describe the types of expenses that the providers of benefits on contingentevents must meet.

7.3.2 Describe how expenses might be allocated when pricing products, schemes,

contracts or other arrangements.

7.4 Developing the cost and the price

7.4.1 Discuss how to determine the cost of providing benefits on contingent events.

7.4.2 Discuss the factors to take into account when determining the appropriate level

and incidence of contributions to provide benefits on contingent events.

7.4.3 Discuss the factors to take into account when determining the price or the

contributions to charge for benefits on contingent events.

7.4.4 Discuss the influence of provisioning or reserving requirements on pricing or

setting financing strategies.

7.5 Investment management

7.5.1 Discuss the principles and objectives of investment management and analyse the

investment needs of an investor, taking into account liabilities, liquidity

requirements and the risk appetite of the investor.

7.5.2 Discuss the different methods for the valuation of individual investments and

demonstrate an understanding of their appropriateness in different situations.

7.5.3 Discuss the different methods for the valuation of portfolios of investments and

demonstrate an understanding of their appropriateness in different situations.

7.5.4 Show how actuarial techniques and asset/liability modelling may be used to

develop an appropriate investment strategy.

7.5.5 Discuss methods of quantifying the risk of investing in different classes and sub-

classes of investment.

7.5.6 Describe the use of a risk budget for controlling risks in a portfolio.

7.6 Provisioning

7.6.1 Discuss the different reasons for the valuation of the benefits from financial and

other products, schemes, contracts and other arrangements and the impact on the

choice of methodology and assumptions.





7.6.2 Discuss how to determine values for provisions in terms of:

• the need for placing values on provisions and the extent to which valuesshould reflect risk management strategy

• the principles of “fair valuation” of assets and liabilities and other “market

consistent” methods of valuing the liabilities.

• the reasons why the assumptions used may differ in different circumstances

• the reasons why the assumptions and methods used to place a value on

guarantees and options may differ from those used for calculating the

accounting provisions needed

• the use of replicating portfolios for valuing liabilities

• the use of stochastic deflators and other stochastic discount methods

• how sensitivity analysis can be used to check the appropriateness of the

values

and be able to perform calculations to demonstrate an understanding of the

valuation methods.

7.6.3 Describe different methods of allowing for risk in cash-flows.

7.6.4 Discuss different methods of allowing for uncertainty in present values of

liabilities.

7.6.5 Discuss the purpose of and uses for equalisation reserves.

7.6.6 Describe the influence of comparisons with market values.

7.7 Relationship between assets and liabilities

7.7.1 Describe the principles of investment and the asset/liability matching

requirements of the main providers of benefits on contingent events.

7.7.2 Discuss the use of portfolio theory to take account of an investor's liabilities.

7.7.3 Discuss the need to monitor investment performance and to review investment

strategy.





8 Living with the solution

8.1 Maintaining profitability

Describe how the main providers of benefits on contingent events can control and

manage the cost of:

• payments arising on contingent events

• expenses associated with the payment of benefits on contingent events

8.2 Determining the expected results

8.2.1 Describe how a provider’s expected results can be projected.

8.2.2 Discuss the possible sources of surplus/profit and the levers that can control theamount of surplus/profit.

8.3 Reporting actual results

8.3.1 Describe the reports and systems which may be set up to control the progress of

the financial condition of the main providers of benefits on contingent events.

8.3.2 Describe the reports and systems which may be set up to monitor and manage

risk at the enterprise level.

8.3.3 Discuss the issues facing the main providers of benefits on contingent events

relating to reporting of risk.

8.4 Asset management

Describe the principles of asset management and allocation.

8.5 Capital management

Describe the principles of capital management.

8.6 Surplus management

8.6.1 Describe why a provider will carry out an analysis of the changes in its

surplus/profit.

8.6.2 Describe how any surplus/profit arising may be distributed.

8.6.3 Discuss the issues surrounding the amount of surplus/profit that may be

distributed at any time and the rationale for retention of surplus/profit.





8.7 Insolvency and closure

Discuss the issues that need to be taken into account on the insolvency or closure of a provider of benefits on contingent events.

8.8 Options and guarantees

Discuss the issues surrounding the management of options and guarantees.

9 Monitoring

9.1 Describe how the actual experience can be monitored and assessed, in terms of:

• the reasons for monitoring experience

• the data required

• the process of analysis of the various factors affecting the experience

• the use of the results to revise models and assumptions

9.2 Describe how the results of the monitoring process in the Actuarial Control Cycle or the

Risk Management Control Cycle are used to update the financial planning in a

subsequent period.

10 Have an understanding of the principal terms used in financial services and risk

management.

END OF SYLLABUS



Subject CA2

Model Documentation, Analysis andReporting

Syllabus


1 J une 2012




Subject CA2 – Model Documentation, Analysis and Reporting


Aim

The aim of this subject is to ensure that the successful candidate can model data, document the work (including maintaining an audit trail for a fellow student and senior actuary), analyse the methods

used and outputs generated and communicate to a senior actuary the approach, results and

conclusions.


Subject CA2 – Model Documentation, Analysis and Reporting requires the student to undertake a

practical modelling assignment. This can be based on any of the Core Technical subjects CT1–CT8

and also uses the principles in Subject CA1 – Actuarial Risk Management and some features of the

communications development in Subject CA3 – Communications.

Previous related study

From July 2010 a student needs to have passed or been granted an exemption from the Profession for

all the CT subjects. The student must also have at least one year’s work experience with an actuarial

employer.

The student needs a working knowledge of computer based spreadsheets and word processing

packages.

Objectives

The successful candidate will be able to demonstrate:

I analysis of data

II development of a model with clear documentation (including an audit trail for a fellow student

and senior actuary)

III ability to analyse the methods used and the model’s outputs

IV ability to apply and interpret the results

V communication of the approach, results and conclusions to a senior actuary

END OF SYLLABUS



Subject CA3

Communications

Syllabus


1 J une 2012




Subject CA3 – Communications


Subject CA3 – Communications consists of two parts as follows:

CA3 Part A – Written communicationCA3 Part B – Oral communication


The overall objective will be to draft communications intended for a non-actuarial person who is

usually assumed to have some business knowledge. While it is recognised that some clients, such as

Finance Directors or a Trustee Board Chairmen, might include actuaries, many clients will not be.

Therefore the purpose of CA3 is to assess an actuary’s ability to communicate clearly to non-

actuaries. The examination will be based on material taught in Subject CA1 – Actuarial Risk

Management.

Overall objectives

Part A – Written communication

To gain a clear pass in the examination, a candidate will be required to draft communications intended

to be read by a recipient usually with some assumed business knowledge, to a standard where (bearing

in mind that it has been produced under examination conditions) the drafts would:

• be acceptable as final documents without major changes or rewriting, though a moderate number

of more minor changes might still be required

• be to a standard which might be appropriate for a newly qualified actuary, rather than a specialist

experienced actuary

• convey the most important points clearly and contain no major mis-statements of fact or

omissions or unsupported opinion

• Omit superfluous detail which would detract from the core messages

The overall objective against which the candidates’ answers will be measured against is to draft a

communication which the recipient:

• is likely to understand clearly the written communication

• will be satisfied that the issues raised have been answered

• is pleased with the way in which the messages have been communicated





Part B – Oral communication

To gain a clear pass in the examination, a candidate will be required to prepare an oralcommunication, with or without visual aids, intended to be received by a panel of actuaries and/or

non-actuaries with some assumed business knowledge, to a standard where (bearing in mind that it

has been produced under examination conditions) the presentations would:

• be acceptable as final versions without major changes or rewriting, though a moderate number of

more minor changes might still be required

• be to a standard which might be appropriate for a newly qualified actuary, rather than a specialist

experienced actuary

• convey the most important points clearly and contain no major mis-statements of fact or

omissions or unsupported opinion

• omit superfluous detail which would detract from the core messages

The overall objective against which the candidates’ answers will be measured against is to draft an

oral presentation which the recipient:

• is likely to understand clearly the points presented

• will be satisfied that the issues raised have been answered

• is pleased with the way in which the messages have been communicated

Specific objectives

Part A – Written communication

(i) Demonstrate the extent to which technical terms need to be defined/explained considering the

needs of different audiences including:

1. clients with a degree of financial/business awareness (reports or letters to pension

scheme trustees, company finance directors)

2. non-actuarial managers (reports, letters or memoranda to a marketing manager,

customer service director, human resources director, manager or a press team,

investment manager)

3. individuals in a business context (letters to a pension scheme member or insurance

policyholder)





(ii) Demonstrate the ability to use the appropriate tone and language in written communication:

1. Use the appropriate degree of formality in a written response (for example a report tothe Board of Directors compared to a briefing memorandum to a customer services

manager).

2. Employ a positive and tactful approach to drafting a written response.

3. Demonstrate recognition and appropriate empathy with the audience’s request and

situation.

4. Avoid colloquial language in a written response.

(iii) Identify the key issues which need to be addressed. Ensure that a written response states the

main messages clearly and prominently

(iv) Present the points in a response in an appropriate order, understanding the different structures

required for different forms of written communication:

Be able to include appropriate key elements of structuring which might include any of:

1. appropriate addressing (address, date, dear sir or dear John etc.)

2. title

3. introduction

4. executive summary

5. content

6. appropriate use of headings

7. conclusion or summary

(v) Demonstrate a written communication that is clearly worded and easy for an audience to

understand and:

1. is free from inappropriate technical terms or detail

2. is technically correct

3. does not include irrelevant points

4. is free from grammatical errors

5. is free from spelling mistakes

(vi) Demonstrate an appropriate use of numbers where required:

1. Correctly use approximate or accurate numbers according to the context of the question

and the audience.

2. Use numerical examples where necessary to enhance the audience’s understanding.





Part B – Oral communication

(i) Demonstrate the extent to which technical terms need to be defined/explained considering theneeds of different audiences including:

1. clients with a degree of financial/business awareness (oral reports at pension scheme

trustee meetings)

2. non-actuarial managers (oral reports or presentations to a marketing manager, customer

service director, human resources director, manager or a press team, investment

manager)

3. other groups in a business environment (eg a group of employees, pension scheme

members, consumer body)

(ii) Demonstrate the ability to use the appropriate tone and language in oral communication:

1. Use the appropriate degree of formality in an oral response (for example a presentation

to a meeting of the Board of Directors compared to an informal training session for

peers in the office).

2. Employ a positive and tactful approach.

3. Demonstrate recognition and appropriate empathy with the audience’s request and

situation.

4. Avoid colloquial language.

(iii) Identify the key issues which need to be addressed. Ensure that an oral response states the

main messages clearly and prominently.

(iv) Present the points in a response in an appropriate order, understanding the different structures

required for different forms of oral communication:

Be able to include appropriate key elements of structuring which might include any of:

1. appropriate addressing (good morning, good afternoon, hello etc.)

2. title/subject

3. introduction/agenda4. executive summary

5. content

6. signposting

7. conclusion or summary

8. question and answer session





Subject ST1

Health and CareSpecialist Technical

Syllabus


1 J une 2012




Subject ST1 – Health and Care Specialist Technical


Aim

The aim of the Health and Care Specialist Technical subject is to instil in successful candidates theability to apply, in simple situations, the principles of actuarial planning and control needed in health

and care matters on sound financial lines.


Subject CT3 – Probability and Mathematical Statistics: provides a basic grounding in statistics.

Subject CT4 – Models: covers some stochastic models used in health and care.

Subject CT6 – Statistical Methods: covers some of the mathematical methods relevant for this subject.

Subject CA1 – Actuarial Risk Management: covers the general underlying principles affecting allspecialisms.

Subject SA1 – Health and Care Specialist Applications will use the principles developed in this

subject to develop a deeper understanding of health and care insurance business and United Kingdom

practice.

Objectives


(a) Understand the principal terms in health and care.

(b) Describe and understand the main types of contract and their purpose for the customer:

• critical illness insurance

• income protection insurance

• long term care insurance

• health cash plans

• major medical expenses

• private medical insurance

• group and individual covers

(c) Describe the principles by which health and care insurance contracts are designed and theinterests of the various stakeholders in the process.

(d) Understand the operating environments in which health and care insurance products and

services are traded:

• distribution channels

• regulatory and fiscal regimes

• professional guidance

• economic influences





(e) Explain the role of the State in the provision of alternative or complementary health and care

protection:

• objectives of State healthcare provision

• manner of State healthcare provision

• funding approaches

(f) Understand and apply the techniques used in pricing health care insurance products in terms

of:

• data availability

• assumptions used

• equation of value / formula approach

•

cash flow techniques• group risk assessments

• options and guarantees

• external influences

(g) Understand the nature of the risks facing the insurer:

• data

• claim rates

• claim amounts

• investment performance

• expenses and inflation

• persistency

• mix of new business

• volume of new business

• guarantees and options

• competition

• actions of management

• counterparties

• regulatory and fiscal developments

• reputation

• internal audit failures/fraud

• physical risks

• aggregation and concentration of risk

• catastrophes

• non-disclosure and anti-selection

(h) Understand how insurers use reinsurance to manage their risks and the reinsurance products

involved:

• reasons for reinsurance

• types of reinsurance

• determination of the retention level





(i) Describe how insurers manage their risks in other ways:

• experience monitoring• service level agreements with outsourcers

• competence assessments for key staff

• checks on policy and claims data

• surveys on customer service satisfaction

• underwriting

• claims management

• treating customers fairly

• controlling the distribution process

(j) Describe the principal modelling techniques appropriate to health and care insurance:

• asset liability modelling

• objectives and basic features of a health insurance model

• uses (pricing, return and capital, profitability assessment)

• multi-state modelling in pricing, reserving and reporting

• comparison of formula and cash flow approach

• sensitivity analysis

• deterministic and stochastic models

(k) Understand the assumptions that are crucial to pricing and valuation, including profit

requirements.

(l) Understand the purposes of valuation and reserving, and the methodologies by which they are

performed:

• role of statistical and individual case estimates

• purpose of calculation

• setting assumptions

• best estimate and market consistent reserves

• embedded values

(m) Understand the principles and practices of supervisory reporting:

• principles of setting statutory or supervisory reserves• difference in assumptions from those used in pricing

• use of sensitivity analysis

• interplay between the strength of reserves and the level of solvency capital requirements

(n) Describe the principles of investment and how they apply to health and care insurance.





(o) Describe the principles by which the experience from a health insurance operation is used to

refocus business planning:

• reasons for monitoring experience

• data required

• analysis of mortality, morbidity, claim amounts and withdrawal rates

• analysis of expenses, new business and investment experience

• reasons for analysis of surplus and analysis of embedded value profit

• use of results to revise the models and assumptions used

END OF SYLLABUS



Subject ST2

Life InsuranceSpecialist Technical

Syllabus


1 J une 2012




Subject ST2 – Life Insurance Specialist Technical


Aim

The aim of the Life Insurance Specialist Technical subject is to instil in successful candidates principles of actuarial planning and control, and mathematical and economic techniques, relevant to

life insurance companies. The student should gain the ability to apply the knowledge and

understanding, in simple situations, to the operation, on sound financial lines, of life insurance

companies. The life insurance products covered by this subject exclude health and care insurance

products covered by the Health and Care Specialist Technical subject.


Subject CT5 – Contingencies: introduces techniques that will be drawn upon and developed by this

subject.

Subject CA1 – Actuarial Risk Management: covers the general underlying principles affecting allspecialisms.

Subject SA2 – Life Insurance Specialist Applications: will use the principles and techniques in this,

and the earlier subjects, to solve life insurance problems within a specifically United Kingdom

context.

Objectives


(a) Define the principal terms used in life insurance.

(b) Describe the main types of life insurance products in terms of:

• the needs of consumers versus the objectives of the insurer

• the benefits, guarantees, and options that may be provided

• the main types of products issued

• the purpose and risks of the products for the insurer

• the purpose and risks of the products for the insured

The products under this syllabus objective may provide benefits of the following types:

• single, or periodic, payments from the date of death• single, or periodic, payments on survival to a specified point in time

• periodic payments on continued survival



Subject ST2 – Life Insurance Specialist Technical


and the products may be written on the following bases:

• single or regular premium• without profits non-linked

• unit-linked

• index-linked

• with profits

• single, joint, or group life basis

• with or without options

(c) Describe the following methods of distributing profits to with profits policyholders:

• cash bonus

•

premium reduction• benefit increase

• “additions to benefits” method

• “revalorisation” method

• “contribution” method

(d) Describe the technique of asset shares, explain how an asset share may be built up using a

recursive formula, and explain the main uses of asset shares.

(e) Describe the effect of the general business environment, including the impact on level of risk

to the insurer, in terms of:

• propensity of consumers to purchase products

• methods of sale

• remuneration of sales channels

• types of expenses and commissions including influence of inflation

• economic environment

• legal environment

• regulatory constraints and opportunities

• fiscal constraints and opportunities

• professional guidance constraints and opportunities

(f) Discuss how the following can be a source of risk to a life insurance company:

• policy and other data

• mortality rates

• investment performance

• expenses, including the effect of inflation

• withdrawals

• mix of new business

• volume of new business

• guarantees and options

• competition







Subject ST4

Pensions and other BenefitsSpecialist Technical

Syllabus


1 J une 2012




Subject ST4 – Pensions and other Benefits Specialist Technical


Aim

The aim of the Pensions and Other Benefits Specialist Technical subject is to instil in successfulcandidates the ability to apply, in simple situations, the mathematical and economic techniques and

the principles of actuarial planning and control needed for the operation on sound financial lines of

providers of pensions or other employee benefits.


The Core Technical subjects provide principles and tools that are necessary in the actuarial planning

and control of the provision of pensions and other benefits.

Subject CA1 – Actuarial Risk Management: covers the general underlying principles affecting all

specialisms.

Subject SA4 – Pensions and other Benefits Specialist Applications: uses the principles in this subject

to solve complex problems, produce coherent advice and recommendations within a specifically

United Kingdom context.

Objectives


(a) Define the principal terms used in the provision of pensions.

(b) Describe the role that each of the following parties may play in the provision of pensions and

other benefits:

• the State

• employers or groups of employers

• individuals or groups of individuals

(c) Compare alternative systems of social security, mandatory individual accounts, occupational

pension schemes and personal pensions.

(d) Describe the ways in which the parties in (b) may meet their needs in relation to:

• the forms and levels of benefits that may be needed by individuals• the financing and non-finance related needs of different sponsors

• the regulation of non-State provision

(e) Discuss the implications, for the parties in (b), of the environment in which benefits are

provided in terms of the effect of:

• different presentation and reporting of benefits and contributions

• any professional guidance for actuaries or other professionals





(f) Describe the ways in which providers may be able to finance the benefits to be provided in

terms of:

• the alternatives that may exist relating to the timing of contributions relative to benefit

payments

• the forms and characteristics of investment that may be available if contributions are

made before benefits are due for payment

(g) Discuss the issues surrounding sponsor covenant in terms of:

• what is meant by sponsor covenant

• how to measure the willingness of the sponsor to contribute

• how to measure the ability of the sponsor to contribute

• when the other parties involved should consider the sponsor covenant

(h) Discuss the factors to consider in determining a suitable design for a defined benefit scheme,

in terms of benefits and contributions, in relation to:


• the method of financing the benefits to be provided

• the choice of assets when benefits are to be funded

(i) Describe the risks and uncertainties affecting:

• the level and incidence of benefits• the level and incidence of contributions

• the level and incidence of return on assets when benefits are funded

• the overall security of benefits

(j) Discuss the use of actuarial models for decision making purposes in non-state pensions, in

terms of:

• the objectives of and requirements for building a model for the management of the

provision of pensions and other benefits

•

the basic features of a model required to project income and outgo

• the use of these models for setting contributions and assessing the return on assets when

benefits are funded

• how sensitivity analysis of the results of the models can be used to help decision making





(k) Discuss the application of actuarial methods and techniques to the financial management of a

social security scheme in:

• the process of population projection and its main determinants

• evaluating the liabilities in terms of emerging costs using a collective method

• analysing the yield from a given contribution structure

• showing how contribution levels can be assessed on a pure pay-as-you-go basis and using

an average premium to smooth contributions over time

(l) Discuss the principles behind the determination of assumptions for valuing future benefits and

contributions, having regard to the management of risk and the return on capital, in terms of:

• the types of information that may be available to help in determining the assumptions to

be used

• the extent to which each type of information may be useful, and the other considerations

that may be taken into account, in deciding the assumptions

• the possible objectives of the various parties involved

(m) Discuss the principles behind the determination of discontinuance terms in respect of benefits,

in relation to how the following may be taken into consideration when determining

discontinuance terms:

• rights of beneficiaries

• other benefit expectations

• the availability and selection of a method of provision of discontinuance benefits

• the level of available assets

(n) Discuss how to determine values for assets, future benefits and future contributions, in terms

of:

• the data requirements

• the need for placing values on assets, future benefits and contributions and the extent to

which values should reflect risk management strategy


• the reasons why the assumptions and methods used to place a value on guarantees and

options may differ from those used for calculating the reserves needed

• how sensitivity analysis can be used to check the appropriateness of the values





• and be able to perform calculations to demonstrate an understanding of the valuation

methods

(o) Discuss the application of actuarial methods and techniques to the design and financial

management of defined contribution pension schemes in:

• establishing the fairness, viability and robustness of the contribution structure

• considering the need for and insurance of additional risk benefits, such as those payable

on death or ill health before retirement

• setting annuity rates for conversion of individual accounts into pension

• establishing provisions and monitoring the finances of the annuity provider

• advising members on their retirement income planning and scheme sponsors on

establishing appropriate levels of contribution

• evaluating the costs of minimum pension guarantees

• establishing provisions for financial guarantees and future operating expenses

(p) Analyse the asset-liability matching requirements of a provider of pensions and related

benefits in relation to the trade-off between risk and reward, and describe how projection

models may be used to develop appropriate strategies.

(q) Discuss the principles underlying the use of insurance, and the choice of insurance contract,

as a means of reducing some of the risks and uncertainties associated with the provision of

pensions or other benefits.

(r) Identify the sources of surplus/deficit for a benefit provider and discuss the factors that affect

the application of this surplus/deficit.

(s) With reference to the Actuarial Control Cycle, explain why and describe how the actual

experience, should be monitored and assessed, in terms of:

• the reasons for monitoring



END OF SYLLABUS



Subject ST5

Finance and InvestmentSpecialist Technical A

Syllabus


1 J une 2012




Subject ST5 – Finance and Investment Specialist Technical A


Aim

The aim of this Finance and Investment Technical subject is to instill in successful candidates theability to apply, in simple situations, the principles of actuarial planning and control to the appraisal of

investments, and to the selection and management of investments appropriate to the needs of

investors.


This subject draws on the issues introduced in Subjects CT2 – Finance and Financial Reporting, CT7

– Business Economics and CT8 – Financial Economics.


specialisms.

Subjects SA5 – Finance Specialist Applications and SA6 – Investment Specialist Applications: use

the principles in this subject to solve complex problems, to produce coherent advice and

recommendations within a specifically United Kingdom context.

Objectives


(a) State what is meant by a risk-free rate of return, and describe assets that may be assumed to

be risk-free in practical work.

(b) Describe the typical ways in which investment returns are taxed and the effect of the taxation basis on investor behaviour.

(c) Demonstrate knowledge of the influences over the commercial and economic environment

from:

• central banks

• main investor classes

• government policy

(d) Demonstrate a knowledge of the principles of fundamental analysis of equities and bonds.

(e) Apply appropriate methods for the valuation of individual investments and demonstrate an

understanding of their appropriateness in different situations.

• fixed income analytics and valuation (including interest rate swaps and futures)

• arbitrage pricing and the concept of hedging

• empirical characteristics of asset prices

• introduction into fixed income option pricing

• evaluating a securitisation (including CBO’s and MBS’s)

• evaluation of a credit derivative





(f) Describe methods by which an institution can monitor and control its exposure to the

following types of risk:

• asset / liability mismatching risk

• market risk

• credit risk (including counterparty risk)

• operational risk

• liquidity risk

• relative performance risk

and explain in the context of mean-variance portfolio theory what is meant by:

• opportunity set

•

efficient frontier • indifference curves

• the optimum portfolio

(g) (i) Describe the principles and aims of market conduct regulatory regimes.

(ii) Demonstrate a knowledge of the principles underlying the legislative and regulatory

framework for investment management and the securities industry.

(iii) Demonstrate how these principles can be applied in the areas of:

• trust law

• corporate governance• role of the listings authority

• environmental and ethical issues

• competition and fair trading controls

• monopolies regulators

• investment restrictions in investment agreements

• provision of financial services

• institutional investment practices

• EU legislation

• role and responsibilities of directors

• development of international accounting standards

(h) Demonstrate a knowledge and understanding of the theory of finance.

(i) Discuss the relationship between financial management and acting as an entrepreneur.

(ii) Outline the possible motives for mergers and divestitures.

(iii) Discuss the key findings in behavioural finance.

(iv) Outline the main steps involved in financial planning.







(n) Analyse the performance of an investment portfolio and discuss the limitations of such

portfolio measurement.

(i) Assess the performance of a portfolio relative to a published market index.

(ii) Assess the performance of a portfolio relative to a predetermined benchmark

portfolio.

(iii) Analyse the performance of a portfolio into components relating to investment sector

selection and individual stock selection.

(iv) Discuss the relative merits of assessing portfolio performance relative to published

indices, other portfolios or a predetermined benchmark portfolio.

(v) Discuss the uses of risk adjusted performance measures.

(vi) Discuss the value of portfolio performance measurement and its limitations.

(o) Demonstrate a knowledge and understanding of the principal techniques in portfolio

management including risk control techniques.

(i) Describe and discuss the principal active management “styles” (value, growth,

momentum, rotational).

(ii) Discuss the principal equity portfolio management techniques.

(iii) Discuss the principal bond portfolio management techniques.

(iv) Discuss the uses which an institutional investor might make of financial futures and

options, including over the counter contracts.

(v) Discuss the uses which an institutional investor might make of interest rate and

currency and inflation swaps.

(vi) Discuss the uses which an institutional investor might make of forward foreign

exchange contracts for currency hedging.

(vii) Discuss the usefulness of multifactor models in practical investment management and risk control.

(viii) Discuss the problems of making significant changes to the investment allocation of a

substantial portfolio.

(ix) Transition management and asset allocation techniques (including overlay strategies).

(x) Role of the custodian.





(xi) Portfolio construction with attention to:

• value at risk • tracking error

• risk budgets

(xii) Measurement, comparison and attribution of risk.

END OF SYLLABUS



Subject ST6

Finance and InvestmentSpecialist Technical B

Syllabus


1 J une 2012






Subject ST6 – Finance and Investment Specialist Technical B


(ii) Define the following:

• investment commodity• consumption commodity

• cost of carry

• convenience yield

• storage costs

(c) Show an awareness of the role of futures in hedging.

(i) Describe how to use futures contracts defined in (b) for hedging.

(ii) Define what is meant by basis risk and its impact on hedging strategies.

(d) Define and describe the following traded derivative contracts:

• stock options

• currency options

• index options

• options on futures

• warrants

• convertibles

• over-the-counter options

• property derivatives

(e) Define and describe the following interest rates, and interest-rate derivatives:

• Treasury Rates, LIBOR Rates, Repo Rates

• Zero Rates

• Forward Rates

• Forward Rate Agreements

• Interest Rate Futures

• Treasury Bond Futures

• Interest Rate Swaps

• European Swap Options (swaptions)

• Caps and caplets

• Floors and floorlets• Bermudan swaptions

(f) Describe the following exotic equity and foreign exchange derivatives:

• Quanto options

• Chooser options

• Barrier options

• Binary options

• Lookback options

• Asian options





• Exchange options

• Basket options

(g) (i) Describe how the following factors affect option prices:

• stock price

• strike price

• term to expiry

• volatility

• risk-free rate

• dividends

(ii) Draw simple charts to illustrate these effects.

(h) Demonstrate a knowledge and understanding of the mathematics underpinning the pricing and

hedging of derivative instruments.

(i) Demonstrate a knowledge and understanding of the theory underpinning the

calculation of derivative prices and their hedging strategies using the binomial model

including:

• sample paths

• filtrations

• the Binomial Representation Theorem

• conditional expectations

• previsible process• self-financing portfolio strategies

• replicating strategies

• pricing under the martingale measure

(ii) Demonstrate a knowledge and understanding of the theory underpinning the

calculation of derivative prices and their hedging strategies using the Black-Scholes

model including:

• Brownian motion

• Ito calculus

• Ito’s formula• statement of the Cameron-Martin-Girsanov Theorem

• the concept of the Radon-Nikodym derivative

• change of measure

• statements of the Martingale Representation Theorem

• continuous-time portfolio strategies

• self-financing portfolios in continuous time

• the Black-Scholes model

• construction of replicating strategies using the martingale approach

• the Black-Scholes formula for non-dividend paying stocks





(iii) Show how to adapt the martingale approach to the pricing of foreign-exchange

options and options on stock indexes paying dividends continuously.

(iv) Derive the Black-Scholes-Merton partial differential equation.

(v) Demonstrate an understanding of the role of the market price of risk in the transfer

between the real-world and the risk-neutral probability measures.

(vi) Demonstrate an understanding of the role of the volatility parameter in the valuation

of options, including:

• calculation of implied volatility from option prices

• estimation of volatility from historical time series or other market indices (e.g. the

VIX index)

• the “smile” effect and volatility surfaces

(vii) Describe approaches to valuing options of discrete dividend paying securities.

(viii) Describe the following numerical methods for calculating equity and foreign

exchange derivative prices and hedging strategies: finite differences, Monte Carlo

techniques, lattices.

(ix) Demonstrate an awareness of the problems in pricing American options and describe

the following methods of calculation:

• Binomial and trinomial trees

• Monte Carlo simulation using the Least-Squares (Longstaff-Schwartz) approach

(i) Demonstrate a knowledge and understanding of how to hedge derivatives.

(i) Calculate the partial derivatives (the Greeks) and discuss their use in hedging

individual derivatives and portfolios of derivatives.

(ii) Demonstrate the way in which option prices and Greeks change in relation to

underlying variables.

(iii) Describe how to manage portfolios of derivatives using scenario analysis.

(iv) Understand the risk management characteristics of certain exotic products (e.g.

foreign exchange or equity barrier options).

(j) Demonstrate a knowledge and understanding of interest rate derivatives and the Black model.

(i) Calculate, and explain how to calculate:

• the yield curve, zero rates, forward rates and bond prices





• the relationship between forward rates and futures rates

• the value of interest rate swaps

(ii) Describe the relationship between swap quotes and LIBOR zero rates.

(iii) Demonstrate a knowledge and understanding of the use of the Black model for

pricing and valuing the following contracts:

• Options on futures contracts

• Caps and floors

• European swap options (swaptions)

(iv) Comment on the assumptions underlying Black’s model.

(v) Describe the hedging of interest rate derivatives with respect to the underlying

parameters (the Greeks).

(k) Demonstrate a knowledge and understanding of models of the term structure of interest rates.

(i) Describe the Hull & White model for the term-structure of interest rates and contrast

this with the Vasicek and Cox-Ingersoll-Ross models.

(ii) Show an understanding of the numerical techniques used to value an interest-rate

derivative using the risk-neutral approach to pricing.

(iii) Be aware of valuation methods of an interest-rate derivative using an appropriateForward Measure and Zero-coupon bond.

(iv) Demonstrate an understanding of the role of the market price of risk and changes of

numeraire in the dynamics of term structure models.

(v) Describe how interest-rate models can be developed in a multifactor setting.

(vi) Demonstrate an understanding of the characteristics of the LIBOR Market Model and

Swap Market Model and show how they can be used to price caps and swaptions.

(vii) Demonstrate how Black’s model can be used to calibrate the LIBOR and Swap

Market Models, and discuss the problems with this approach.

(l) Demonstrate an awareness of the characteristics of different types of structured derivatives

and synthetic securities that can be encountered in actuarial work.

(i) Define the following securities and OTC contracts and describe how each can be used

to hedge certain types of liability:

• Gilt STRIPS

• Interest-rate swaps

• Interest-rate swaptions





• Index-linked gilts

• Inflation swaps

• Limited Price Indexation (LPI) swaps• LPI bonds

(ii) Describe how non-economic risks such as longevity risk can be hedged using suitable

index-linked securities and OTC contracts.

(iii) Describe how the following issues affect the suitability of traded securities and OTC

contracts for liability hedging:

• Basis risk

• Capital structure

•

Credit risk

(iv) Describe how special purpose vehicles can be used as part of a mechanism for risk

transfer, including the role of a credit enhancement agency.

(m) Identify the market, credit and liquidity risks that arise in the use of derivatives.

(i) Define market risk, credit risk and liquidity risk.

(ii) Outline the way in which these risks affect the use of derivatives and how these risks

may be handled.

(iii) Demonstrate an understanding of the use and limitations of credit ratings.

(iv) Demonstrate an understanding of simple techniques for measuring credit risk on

derivatives.

(v) Outline possible methods for establishing Value at Risk (on a portfolio).

(vi) Demonstrate a knowledge and understanding of the following types of credit

derivatives:

• Credit default swaps (CDS’s)

• N th to default baskets

• Collateralised debt obligations (CDO’s)

(vii) Demonstrate an awareness of the relationship between CDS’s and corporate bonds, in

particular as shown by their relative credit spreads.

(viii) Describe how credit derivatives can be used to manage the credit risk present in a

portfolio of securities.

(ix) Show an awareness of the role of correlation in pricing credit derivatives.

END OF SYLLABUS



Subject ST7

General Insurance: Reserving andCapital ModellingSpecialist Technical

Syllabus


1 J une 2012




Subject ST7 – General Insurance: Reserving and Capital Modelling Specialist Technical


Aim

The aim of this General Insurance Specialist Technical subject is to instil in successful candidates the

ability to apply, in simple reserving and capital modelling situations, the mathematical and economic

techniques and the principles of actuarial planning and control needed for the operation on sound

financial lines of general insurers.


Subject CT3 – Probability and Mathematical Statistics: provides a basic grounding in statistics

Subject CT4 – Models: covers some stochastic models used in general insurance.

Subject CT6 – Statistical Methods: covers some of the mathematical methods relevant for general

insurance.


specialisms.

Subject ST8 – General Insurance: Pricing Specialist Technical.

Subject SA3 – General Insurance Specialist Applications: will use the principles of general insurance

developed in this subject to develop a deeper understanding of general insurance business and United

Kingdom practice.

Objectives


(a) Define the principal terms in use in general insurance.

(b) Describe the main types of general insurance product in terms of:

• the needs of customers

• the financial and other risks they pose for the general insurer including their capital

requirements and possible effect on solvency

(c) Describe the main types of general reinsurance products and the purposes for which they may be used.

(d) Describe the implications of the general business environment in terms of:

• the main features of the general insurance market

• the effect of different marketing strategies

• the effect of fiscal regimes

• the effect of inflation and economic factors

• the effect of legal, political and social factors





• the effect of the climate and environmental factors

• the general effect of professional guidance

• the impact of technological change

(e) Outline the key features of the Lloyd’s market.

(f) Describe the major areas of risk and uncertainty in general insurance business with respect to

reserving and capital modelling, in particular those that might threaten profitability or

solvency.

(g) With regard to the use of data in reserving and capital modelling:

(i) Describe the types of data that are used.

(ii) Describe the main uses of data.

(iii) Describe the requirements for a good information system.(iv) Outline the possible causes of data errors.

(v) Understand the effects of inadequate data.

(h) Outline the major actuarial investigations and analyses of experience undertaken with regard

to reserving and capital modelling for general insurers.

(i) With regard to reserving work using triangulations:

(i) Understand the range of general issues that can affect reserving work using

triangulations.

(ii) Gain an appreciation of how to deal with these general issues in reserving work.

(iii) Have an understanding of the main triangulation methods in use – namely the chain

ladder method, the Bornhuetter-Ferguson method and the Average Cost per Claim

method.

(j) Develop appropriate reserving bases for general insurance business, having regard to:

• the different reasons for calculating reserves

• the assumptions that might be appropriate in each case

• why the assumptions may differ from a rating exercise

• the allowance for future inflation

• whether or not to discount for investment income

• the approach for additional unexpired risk reserve

• communication of the reserving basis

(k) (i) Describe the uses of stochastic reserving methods.

(ii) Describe the likely sources of reserving uncertainty.





(iii) Describe the following types of stochastic reserving methods:

• analytic methods

• simulation-based methods

(iv) Describe the Bootstrapping approach to reserving

(v) Describe the issues, advantages and disadvantages of each of the methods.

(vi) Describe the approach to aggregating the results of stochastic reserving across

multiple lines of business, and discuss methods of correlation.

(l) (i) Describe the factors an actuary should consider in assessing the reasonableness of the

results of a reserving exercise.

(ii) Describe typical diagnostics that are commonly used to assess the reasonableness of

the results of a reserving exercise.

(iii) Describe the factors an actuary should consider in assessing the reasonableness of

changes in results of a reserving exercise over time.

(iv) Describe how an analysis of experience might be carried out in the context of a

reserving exercise.

(v) Describe how alternative results of reserving exercises can arise and highlight some

of the professional issues in resolving them.

(m) (i) Understand what is meant by a “best estimate” reserve.

(ii) Describe the following approaches to estimating ranges of reserves:

• stochastic models

• scenario tests

• use of alternative sets of assumptions

(iii) Discuss the uses ,advantages and disadvantages of each of these methods.

(iv) Discuss the issues to be considered when communicating reserve ranges and

uncertainties.

(n) Describe:

• the principles of investment

• the asset-liability matching requirements of a general insurer

• how projection models might be used to develop an appropriate investment strategy





(o) (i) Understand the key considerations in deriving and applying capital modelling

techniques.

(ii) Understand the following approaches to capital modelling:

• deterministic models

• stochastic models

(iii) Discuss the following issues with regard to parameterisation of capital models:

• developing assumptions

• validation

(p) Describe approaches to the assessment of capital requirements for the following risk types:

• insurance risk

• market risk

• credit risk


• liquidity risk

• group risk

(q) Explain some of the areas to consider when approaching a capital modelling exercise.

(r) Describe the practical considerations which should be borne in mind when undertaking capital

modelling.

(s) (i) Describe the factors influencing the choice of an appropriate reinsurance programme

for a general insurer.

(ii) Describe how to test the appropriateness of alternative reinsurance structures for a

general insurer.

(iii) Describe how reinsurance purchasing decisions might be impacted by capital

management considerations.

(t) (i) Describe the following approaches to reserving for outwards reinsurance:

• gross less net

• application of standard techniques to reinsurance data

• use of appropriate factors

• application of detailed contract terms

(ii) Understand the advantages and disadvantages of each of the above methods and the

appropriate circumstances in which to use them.

(iii) Discuss suitable approaches to reserving for inwards reinsurance.





(u) (i) Describe the methods and principles of accounting for general insurance business and

interpret the accounts of a general insurer.

(ii) Describe the changes to accounting methods expected under IFRS.

(v) (i) Discuss the purposes of regulating general insurance business.

(ii) Outline possible methods by which general insurers can be regulated, including

advantages and drawbacks of each.

END OF SYLLABUS



Subject ST8

General Insurance: PricingSpecialist Technical

Syllabus


1 J une 2012




Subject ST8 – General Insurance: Pricing Specialist Technical


Aim

The aim of this General Insurance Specialist Technical subject is to instil in successful candidates the

ability to apply, in simple pricing analysis situations, the mathematical and economic techniques and

the principles of actuarial planning and control needed for the operation on sound financial lines of

general insurers.


Subject CT3 – Probability and Mathematical Statistics: provides a basic grounding in statistics

Subject CT4 – Models: covers some stochastic models used in general insurance.

Subject CT6 – Statistical Methods: covers some of the mathematical methods relevant for general

insurance.


specialisms.

Subject ST7 – General Insurance: Reserving and Capital Modelling Specialist Technical.

Subject SA3 – General Insurance Specialist Applications: will use the principles of general insurance

developed in this subject to develop a deeper understanding of general insurance business and United

Kingdom practice.

Objectives


(a) Define the principal terms in use in general insurance.

(b) Describe the main types of general insurance product in terms of:

• the needs of customers

• the financial and other risks they pose for the general insurer including their capital

requirements and possible effect on solvency

(c) Describe the main types of general reinsurance products and the purposes for which they may be used.

(d) Describe the implications of the general business environment in terms of:

• the main features of the general insurance market

• the effect of different marketing strategies

• the effect of the regulatory and fiscal regimes

• the effect of inflation and economic factors

• the effect of legal, political and social factors





• the effect of the climate and environmental factors

• the general effect of professional guidance

• the impact of technological change

(e) Describe the major areas of risk and uncertainty in general insurance business with respect to

pricing, in particular those that might threaten profitability or solvency.

(f) With regard to the use of data in pricing:

(i) Describe the types of data that are used.

(ii) Describe the main uses of data.

(iii) Describe the requirements for a good information system.

(iv) Outline the possible causes of data errors.

(v) Understand the effects of inadequate data.

(g) Outline the major actuarial investigations and analyses of experience undertaken with regard

to pricing for general insurers, including the monitoring of business being written.

(h) (i) Describe the Individual Risk Model and its applications in a general insurance

environment.

(ii) Describe the Collective Risk Model and its applications in a general insurance

environment.

(iii) Understand the derivation of the Aggregate Claim Distribution for the Collective Risk

Model, and its approximations using stochastic simulation.

(i) (i) Understand the various components of a general insurance premium.

(ii) Describe the basic methodology used in rating general insurance business.

(iii) Appreciate the various factors to consider when setting rates.

(j) Develop appropriate rating bases for general insurance contracts, having regard to:

• return on capital

• underwriting considerations

• reinsurance considerations

• investment

•

policy conditions such as self retention limits• the renewal process

• expenses

(k) (i) Describe the burning cost approach to rating.

(ii) Understand the assumptions required when using this approach.

(iii) Outline the practical considerations when using this approach.

(l) (i) Describe the frequency / severity approach to rating.







(m) (i) Describe how Original Loss Curves can be used in rating.



(n) Understand the applications of Generalised Linear Models to the rating of personal lines

business and small commercial risks.

(o) (i) Understand the uses of multivariate models in pricing.

(ii) Outline the different types of multivariate models.

(p) (i) Outline the fundamental concepts of credibility theory.

(ii) Describe and compare the Classical and Bayes credibility models.

(iii) Describe the practical uses of credibility models in a general insurance environment.

(q) (i) Outline the similarities and differences between pricing direct and reinsurance business.

(ii) Describe how to determine appropriate premiums for each of the following types of

reinsurance:

• proportional reinsurance

• non-proportional reinsurance

• property catastrophe reinsurance

• stop losses

(iii) Describe the data required to determine appropriate premiums for each of the above

types of reinsurance.

(r) (i) Outline the basic structure of a catastrophe model.

(ii) Describe the key perils that can be modelled.

END OF SYLLABUS



Subject ST9

Enterprise Risk Management

Syllabus


1 J une 2012




Subject ST9 – Enterprise Risk Management


Aim

The aim of the Enterprise Risk Management (ERM) Specialist Technical subject is to instil insuccessful candidates the key principles underlying the implementation and application of ERM

within an organisation, including governance and process as well as quantitative methods of risk

measurement and modelling. The student should gain the ability to apply the knowledge and

understanding of ERM practices to any type of organisation.


This subject develops concepts introduced in the CT subjects, particularly Subject CT6 – Statistical

Methods and CT8 – Financial Economics.

It also develops the risk management techniques introduced in Subject CA1 – Actuarial Risk

Management.

Subjects SA5 – Finance Specialist Applications uses the principles in this subject to solve complex

problems, and to produce coherent advice and recommendations within a specifically United

Kingdom context.

Objectives


1 ERM Concept and Framework

1.1 Understand the principal terms in Enterprise Risk Management (ERM).

1.2 Describe the concept of ERM, including:

1.2.1 Define what is meant by ERM.

1.2.2 Describe the role of the following concepts in ERM:

• the holistic approach

• downside and upside risks

• measurement of risk

• unquantifiable risks• responses to risk, and risk management.

1.2.3 Describe the benefits of ERM.

1.3 Discuss the framework for risk management and control within a company, including:

1.3.1 Describe an appropriate framework for an organisation’s ERM.

1.3.2 Discuss how to adopt best practice in ERM in compliance and corporate

governance.





1.3.3 Describe governance issues including market conduct, audit, and legal risk.

1.3.4 Discuss the cultural aspects of risk assessment and management, includingthe problems of bias.

1.4 Understand risk frameworks in regulatory environments, including:

1.4.1 Discuss the role of regulators in ERM and effective management of the

supervisor relationship.

1.4.2 Describe the Basel II and Solvency II frameworks, including their

underlying principles and approaches to risk measurement.

1.4.3 Demonstrate an understanding of Sarbanes-Oxley and other regulatory risk

frameworks and their underlying principles.

1.4.4 Demonstrate an awareness of how different parts of an organisation and

different parts of a portfolio may be subject to different capital adequacy

standards.

1.5 Describe the role of credit agencies in the evaluation of risk management functions,

including the risk management grading criteria used, and discuss the relevance of

these criteria.

2 ERM Process

2.1 Demonstrate an understanding of the relevance of ERM to all stakeholders, including:

2.1.1 Discuss the relevance of risk measurement and management to all

stakeholders.

2.1.2 Show an understanding of the role of contagion and how it affects different

stakeholders.

2.1.3 Discuss the risks arising from any misalignment of interests between

different groups of stakeholders.

2.2 Describe how to determine a company’s risk appetite, risk capacity and risk objectives.

2.3 Describe and assess the elements and structure of a successful risk management

function, including the ERM roles and responsibilities of the people within an

organisation, and how the different groups should interact, and recommend a

structure for an organisation’s risk management function.

2.4 Describe how financial and other risks and opportunities influence the selection of

strategy.





2.5 Discuss the application of the risk management control cycle, including the relevance

of external influences and emerging risks.

2.6 Discuss how to identify risks and their causes and implications.

2.7 Demonstrate the application of ERM to real and hypothetical contexts:

2.7.1 Discuss important past examples of both good risk management practices

and of risk failures, and discuss how better risk management might have

prevented these failures.

2.7.2 Analyse hypothetical examples ex ante and discuss how the situations

described could benefit from risk management.

3 Risk Categories and Classification

3.1 Explain what is meant by risk and uncertainty, and discuss different definitions and

concepts of risk.

3.2 Show an awareness and understanding of risk categories:

3.2.1 Show an understanding of the following risk categories and be able to

provide examples of each type of risk: market risk, economic risk, interest

rate risk, foreign exchange risk, basis risk, credit risk, liquidity risk,

insurance risk, operational risk, legal risk, regulatory risk, political risk,

agency risk, reputational risk, project risk, strategic risk, demographic risk,

moral hazard.

3.2.2 Show an awareness of how individual risks might be categorised in

different ways.

3.3 Describe the relationship between systematic risk, non-systematic or specific risk, and

concentration of risk.

4 Risk Modelling and Aggregation of Risks

4.1 Discuss the extent to which each of the risks in 3.2.1 can be amenable to quantitative

analysis.

4.2 Describe risk aggregation and correlation:

4.2.1 Describe enterprise-wide risk aggregation techniques incorporating the use

of correlation.

4.2.2 Describe different measures of correlation and discuss the relative merits of

each for modelling purposes.





4.3 Describe the use of scenario analysis and stress testing in the risk measurement

process, including the advantages and disadvantages of each.

4.4 Demonstrate understanding of the use of copulas as part of the process of modelling

multivariate risks, including recommendation of an appropriate copula.

4.5 Explain the importance of the tails of distributions, tail correlations and low

frequency / high severity events.

4.6 Demonstrate how extreme value theory can be used to help model risks that have a

low probability.

4.7 Demonstrate an understanding of model and parameter risk.

4.8 Discuss the use of models in the overall ERM decision-making process, including:

4.8.1 Describe the development and use of models for decision-making purposes

in ERM.

4.8.2 Discuss how the decision-making process takes account of the

organisation’s risk appetite and corporate governance, and builds on the

results of stochastic modelling, scenario analysis, stress testing and analysis

of model and parameter risk.

5 Risk Measurement and Assessment

5.1 Describe the properties and limitations of common risk measures, including:

• Value at Risk (VaR)

• Tail Value at Risk (TVaR)

• Probability of ruin

• Expected shortfall

5.2 Describe how to choose a suitable time horizon and risk discount rate.

5.3 Analyse univariate and multivariate financial and insurance data (including asset

prices, credit spreads and defaults, interest rates and insurance losses) using

appropriate statistical methods.

5.4 Recommend a specific choice of model based on the results of both quantitative and

qualitative analysis of financial or insurance data.

5.5 Discuss the assessment of different types of market risk.

5.6 Evaluate credit risk:

5.6.1 Describe what is meant by a credit spread, and describe the components of

a credit spread.





5.6.2 Discuss different approaches to modelling credit risk.

5.7 Discuss the assessment of operational, liquidity and insurance risks.

6 Risk Management Tools and Techniques

6.1 Describe risk optimisation and responses to risk, including:

6.1.1 Discuss how to optimise an objective, possibly subject to constraints.

6.1.2 Discuss risk optimisation and responses to risk using illustrative examples.

6.2 Recommend approaches, which balance benefits against inherent costs, that can be

used to manage an organisation’s overall risk profile, including:

6.2.1 Describe how to reduce risk by transferring it.

6.2.2 Describe how to reduce risk without transferring it.

6.2.3 Demonstrate an understanding of the importance of residual risks and new

risks arising following risk mitigation actions.

6.2.4 Demonstrate an understanding of how an organisation’s ability to manage

risk is affected by regulatory, capacity and cost constraints.

6.3 Discuss the management of market risk, including:

6.3.1 Develop and recommend strategies for the reduction of market risk using

financial derivatives.

6.3.2 Demonstrate an awareness of the practical issues related to dynamic

hedging using market instruments.

6.4 Describe the tools and techniques for identifying and managing credit risk.

6.5 Discuss the management of operational, liquidity and insurance risks.

7 Economic Capital

7.1 Demonstrate an understanding of economic capital calculations, including:

7.1.1 Describe the concept of economic measures of value and capital, and their

uses in corporate decision-making processes.

7.1.2 Demonstrate the ability to develop an economic capital model for a

representative financial firm.





7.2 Demonstrate an understanding of how to allocate capital across an organisation.

END OF SYLLABUS



Subject SA1

Health and CareSpecialist Applications

Syllabus


1 J une 2012




Subject SA1 – Health and Care Specialist Applications


Aim

The aim of the Health and Care Specialist Applications subject is to instil in the successful candidatesthe ability to apply knowledge of the United Kingdom health and care environment and the principles

of actuarial practice to the provision of health and care benefits in the United Kingdom.


Subject ST1 – Health and Care Specialist Technical: provides the underlying principles of health and

care upon which this subject is based. It is assumed that candidates have a good understanding of this

material.

Candidates can expect to be examined in aspects of general principles developed in Subject ST1 –

Health and Care Specialist Technical as well as in the United Kingdom specific aspects developed in

this subject.

Subject P1 – Health and Care UK Practice Module Specialist: the knowledge required to pass Subject

P1 is contained in this subject.

Objectives


(a) Define the principal terms used in health and care provision in the UK.

(b) Analyse the main types of UK health and care insurance products in terms of:

• customer needs

• interaction with State provision

• higher order insurer risk considerations

• bundling and unbundling

• impact of unit-linked wrappers

(c) Describe the general business environment for health and care insurers in the UK, in terms of:

• products and distribution, including the roles of the State and employers

• underwriting approaches, including genetic testing

• use of counterparties• external influences – demographic, medical, economic and social





(d) Understand the legal, taxation and regulatory framework as applicable to UK health and care

insurance:

• taxation of UK health and care products: premiums, benefits, profits

• taxation of mutuals, proprietaries and providents

• supervision of valuation of assets, liabilities and capital requirements

• principles underlying the Solvency II regulatory regime

• conduct of business rules

• financial reporting requirements

• policyholder protection schemes

• treating customers fairly

• equality legislation

• statutory actuarial roles

(e) Describe the principles underlying the requirements of the professional standards and

guidance relevant to actuaries practising in or advising UK health and care operations.

(f) Understand how to design and price health and care insurance products to be sold by UK

insurers, including:

• policy conditions

• capital requirements and return on capital

• marketability, competition and distribution

• management of the risks

• underwriting

• reinsurance

• investment policy

• the renewal process and options

(g) Understand the principles and practices in specific areas of evaluation:

• assessment of the market for a new company launch

• assessment of overseas markets

• assessment of a company or portfolio for takeover

• embedded value analysis

(h) Evaluate the uses and benefits of reinsurance support in health and care insurance:

• control of risks

• financing

• technical assistance

• reinsurance impact

• badging

(i) Analyse the asset-liability matching requirements of a UK health and care insurer and develop

appropriate strategies.





(j) Analyse the experience of a health and care insurer.

(k) Develop appropriate strategic recommendations for a health and care insurer following ananalysis of experience.

(l) Understand the considerations underlying the provision of national healthcare systems:

• the importance of healthcare provision

• different healthcare systems worldwide

• different approaches to financing healthcare

• QALYs (quality adjusted life years)

(m) Understand areas of best practice in UK health and care provision, including the ABI

guidelines.

(n) Produce coherent advice and recommendations for the overall financial management of a

health and care insurance company.

• Analyse more complex problems in terms of actuarial, economic and financial factors to a

level where appropriate analytical techniques may be used.

• Integrate the results of such an analysis into a coherent whole, and

• Evaluate critically and interpret the results in a wider context and draw appropriate

conclusions.

END OF SYLLABUS





Subject SA2 – Life Insurance Specialist Applications


Aim

The aim of the Life Insurance Specialist Applications subject is to instil in the successful candidatesthe ability to apply knowledge of the United Kingdom life insurance environment and the principles

of the actuarial practice of life insurance to a United Kingdom life insurance company.


Subject ST2 – Life Insurance Specialist Technical: provides the underlying principles upon which this

subject is based. It is assumed that students have a good understanding of the principles covered in

that subject.


Life Insurance Specialist Technical as well as in the UK specific aspects developed in this subject.

Subject P2 – Life Insurance UK Practice Module Specialist: the knowledge required to pass Subject

P2 is contained in this subject.

Subjects ST1 and SA1 – these Health and Care Specialist Technical and Applications subjects cover

health and care products such as income protection and critical illness, and related matters. These two

products are covered to a limited extent in Subject SA2 because they are relevant products to a life

insurance actuary. Questions may get asked in the examination paper for Subject SA2 about matters

relating to these products that are not covered specifically in the Core Reading for SA2, in particular

applying the concepts covered in SA2 to income protection and critical illness products.

Objectives


(a) Define the principal terms used in life insurance in the UK.

(b) Describe the major products of UK life insurance companies, additional to the generic

coverage in Subject ST2, and whether currently sold or not, in terms of:



• the purpose and risks of the products to the policyholder and the insurer

The products under this syllabus objective are:

• term assurance

• income protection

• critical illness

• conventional with profits

• accumulating with profits

• property linked

• index-linked

• mortgage endowment





• single premium bonds

• personal pension, including self-invested personal pension

• group personal pension• stakeholder products

• annuities

• deposit administration

• life insurance products related to occupational pension schemes

• wraps

• variable annuities

• equity release products

• Takaful insurance

(c) Describe the general business environment for life insurance companies in the UK, including

the risks involved, in terms of:

• new business

• distribution of products

• the wider competitive environment

• the principles of treating customers fairly


• corporate finance

• outsourcing

• securitisation

• mergers and acquisitions

•

demutualisations• closed funds

(d) Describe the principles of UK contract and trust law as they affect life insurance, including

reference to Unfair Contract Terms legislation, the Financial Ombudsman Service, and the

impact of equality legislation.

(e) Describe, in terms of the following, the regulatory environment for UK life insurance

companies, and how this environment affects the way these companies carry out their

business in practice, including the related analyses and investigations:

1. The taxation of the UK business of life insurance companies and the effect of taxation

on the benefits and premiums paid under UK life insurance contracts.

2. The supervision of the UK business of life insurance companies under the relevant

Prudential sourcebooks with regard to:

A the valuation of the assets

B the valuation of the liabilities, including appropriate methods and bases taking

account of the nature of the assets

C realistic balance sheets





D individual capital assessments

E the supervisory reports to be submitted

F transfers of surplus, including the requirements of surplus distribution systems

3. The capital requirements of a life insurance company, including:

• the reasons for projecting solvency

• determining methods and appropriate bases for assessing the current and future

solvency of a UK life insurance company, bearing in mind

– the risks the company is taking, and the use of risk based capital approaches toassess the impact of these risks

– the company’s ongoing business strategy, including the impact of writing new

business

– the impact of the regulatory capital requirements

- why a company holds capital

- sources of capital

•

the principles of asset-liability management, including the use of derivatives

4. The transfer of liabilities from one life insurance company to another.

5. An analysis of surplus on a supervisory basis – reasons for carrying out the analysis,

how to do it, and using the results.

6. Profit and value reporting under the Companies Act legislation, EU approved IFRS, and

embedded values, including market consistent embedded values.

7. An analysis of the change in the embedded value of a proprietary UK life insurance

company, using the results to reassess the design of the company’s contracts or

actuarial bases.

8. The Conduct of Business rules with regard to Treating Customers Fairly, disclosure

and, for with profits business, the Principles and Practices of Financial Management

(“PPFM”), including the Consumer Friendly PPFM.





9. The management and controls to be exercised by a life insurance company in order to

conduct its affairs responsibly and effectively with adequate risk management systems

including coverage of the following specific categories of risk:

• Credit risk

• Market risk

• Liquidity risk

• Operational risk

• Insurance risk

• Group risk

10. The principles underlying the requirements of the professional standards and guidance

relevant to actuaries practising in or advising UK life insurance companies.

11. The roles of the Actuarial Function Holder, the With-Profits Actuary, the Reviewing

Actuary and the Appropriate Actuary.

12. The principles underlying the Solvency II regulatory regime.

(f) Describe the requirements for the design of life insurance contracts to be marketed in the UK

and determine appropriate methods and bases for pricing them.

(g) Describe the management of UK with profits business, including:

• the calculation and use of asset shares

• appropriate ways of determining surplus distribution policy• the determination of discontinuance and alteration terms

(h) Produce coherent advice and recommendations for the overall financial management of a life

insurance company.


level where appropriate analytical techniques may be used



conclusions

END OF SYLLABUS



Subject SA3

General InsuranceSpecialist Applications

Syllabus


1 J une 2012




Subject SA3 – General Insurance Specialist Applications


Aim

The aim of the General Insurance Specialist Applications subject is to instil in successful candidatesthe ability to apply knowledge of the United Kingdom general insurance environment and the

principles of actuarial practice to providers of general insurance in the United Kingdom.


Subject ST7 – General Insurance: Reserving and Capital Modelling Specialist Technical provides the

underlying principles of reserving and capital modelling techniques in general insurance upon which

this subject is based. It is assumed that candidates have a good understanding of the principles

covered in this Subject.

Subject ST8 – General Insurance: Pricing Specialist Technical provides the underlying principles of

premium rating techniques in general insurance upon which this subject is based. It is assumed thatcandidates have a good understanding of the principles covered in this Subject.

Candidates can expect to be examined in aspects of general principles developed in Subjects ST7 and

ST8 as well as the further aspects of general principles, and also the United Kingdom specific aspects,

developed in this subject.

Subject P3 – General Insurance UK Practice Module Specialist: the knowledge required to pass

Subject P3 is contained in this subject.

Objectives

On completion of this subject, the successful candidate will be able to:

(a) Define the principal terms in use in general insurance in the United Kingdom.

(b) (i) Describe the main features of the United Kingdom general insurance market.

(ii) Outline the key features of the Lloyd’s market.

(c) Describe the principal regulatory and supervisory requirements that affect general insurers

(including Lloyd’s) established in the UK, under:

•

Current insurance regulations• Prospective Solvency II regulation

(d) Describe the principal taxation requirements that affect general insurers (including Lloyd’s)

established in the UK.

(i) State the principles on which the taxation of a proprietary insurer is based.

(ii) Describe the technical reserves that can be taken into account in calculating the

taxable profits of a proprietary insurer.





(iii) Describe the principal differences in taxation treatment between a mutual and a

proprietary insurer.

(iv) Outline the principles of taxation within the Lloyd’s market.

(e) Describe the requirements of the professional guidance relevant to actuaries practising in or

advising United Kingdom general insurance companies and Lloyd’s syndicates.

(f) (i) Understand the particular considerations to be borne in mind when pricing large

commercial risks.

(ii) Describe the alternative approaches to rating such risks.

(g) Outline how to incorporate the return on capital in the calculation of premium rates.

(h) To understand the use of catastrophe modelling in non-life actuarial work:

(i) Understand the difference between catastrophe modelling and traditional actuarial

rating methods.

(ii) Outline the generic structure of a catastrophe model.

(iii) Understand the key perils modelled.

(iv) Describe the key uses to which a non-life actuary might put the output of catastrophe

models.

(v) Understand some key considerations in using the output of catastrophe models.

(i) Determine appropriate bases for valuing the insurance liabilities of a United Kingdom general

insurer in order to produce:

• Companies Act accounts and statutory returns

• Taxation accounts

• Management Accounts

(j) (i) Understand the reasons why different reserving techniques are required for latent

claims and disease claims.

(ii) Describe the alternative approaches to reserving for UK and US latent claims and

disease claims.

(iii) Understand the appropriate uses of each method.

(k) (i) Analyse the financial planning requirements of a general insurer and develop






(ii) Develop appropriate models for the purpose of financial planning to enable a general

insurer to develop and monitor its objectives at either the corporate or product level.

(l) (i) Understand the basic concepts of extreme value theory and its practical uses in a

general insurance environment.

(ii) Understand the application of the concepts of ruin theory in a general insurance

environment.

(m) (i) Outline the reasons why a general insurer may wish to transfer a portfolio of business

to another insurer.

(ii) Describe the alternative approaches to such a transfer, including the situations in

which each may be appropriate.

(n) Produce coherent advice and recommendations for the overall financial management of a

general business insurer.

(i) Analyse more complex problems in terms of actuarial, economic and financial factors

to a level where appropriate analytical techniques may be used.

(ii) Integrate the results of such an analysis into a coherent whole, and

(iii) Evaluate critically and interpret the results in a wider context and draw appropriate

conclusions.

END OF SYLLABUS





Subject SA4 – Pensions and other Benefits Specialist Applications


Aim

The aim of the Pensions and other Benefits Specialist Applications subject is to instil in successfulcandidates the ability to apply knowledge of the United Kingdom pensions and employee benefit

environment and the principles of actuarial practice to providers of pensions and employee benefits in

the United Kingdom.


Subject ST4 – Pensions and other Benefits Specialist Technical: provides the underlying principles

upon which this subject is based. It is assumed that candidates have a good understanding of the

principles covered in subject ST4 – Pensions and other Benefits Specialist Technical.


Pensions and other Benefits Specialist Technical as well as the United Kingdom specific aspectsdeveloped in this subject.

Subject P4 – Pensions UK Practice Module Specialist: the knowledge required to pass Subject P4 is

contained in this subject.

Objectives

On completion of this subject the candidate actuary will be able to:

(a) Define the principal terms used in pensions in the United Kingdom.

(b) Describe the roles of each of the following parties who may be involved in the provision of

pensions in the United Kingdom:

• the State

• the Pensions Regulator

• employers or groups of employers

• individuals or groups of individuals

• trustees

• actuaries

• investment advisers

• other advisers

(c) Describe how the legal framework for pensions that applies in the United Kingdom, attempts

to:

• encourage appropriate non-State provision

• ensure security for non-State provision

• ensure adequacy of non-State provision





(d) Discuss the implications, for the parties in (b), of the environment in which United Kingdom

benefits are provided in terms of the effect of:

• different presentation and reporting of benefits and contributions

• accounting standards

• the generic Technical Actuarial Standards issued by the Board for Actuarial Standards on

Data, Modelling and Reporting

• the professional guidance for actuaries contained in Actuarial Profession Standards P1

and P2

and describe the subject matter of the specific Technical Actuarial Standard issued by the

Board for Actuarial Standards on Pensions.

(e) Describe the ways in which providers in the United Kingdom may be able to finance the

benefits to be provided in terms of:

• the alternatives that exist relating to the timing of contributions relative to benefit

payments

• the forms and characteristics of investment that are available if contributions are made

before benefits are due for payment

(f) Discuss the factors to consider in determining a suitable design, in terms of benefits and contributions in the United Kingdom, in relation to:


• the method of financing the benefits to be provided

• the choice of assets when benefits are to be funded

(g) Discuss the issues surrounding sponsor covenant in the United Kingdom in terms of:

• what is meant by sponsor covenant

• how to measure the willingness of the sponsor to contribute

• how to measure the ability of the sponsor to contribute

• when the other parties involved should consider the sponsor covenant

(h) Describe the risks and uncertainties affecting:

• the level and incidence of benefits

• the level and incidence of contributions

• the level and incidence of return on assets when benefits are funded

• the overall security of benefits

in the United Kingdom.





(i) Describe the problems that arise in relation to the transfer of pension rights in the event of a

company purchase or merger, including matters relating to:

• the different interests and responsibilities of the parties involved

• the terms that might be set out in the Pensions Clause of a Sale and Purchase agreement

(j) Determine an appropriate basis for the valuation of a United Kingdom defined benefit

scheme.

(k) Discuss the principles behind the determination of discontinuance terms in respect of benefits

from a United Kingdom occupational pension scheme, in relation to how the following may

be taken into consideration when determining discontinuance terms:

• rights of beneficiaries

• other benefit expectations

• the availability and selection of a method of provision of discontinuance benefits

• the level of available assets

(l) Discuss how to determine values for assets, future benefits and future contributions in a

United Kingdom environment, in terms of:

• the data requirements

• the need for placing values on assets, future benefits and contributions and the extent to

which values should reflect risk management strategy


• the reasons why the assumptions and methods used to place a value on guarantees and

options may differ from those used for calculating the reserves needed

• how sensitivity analysis can be used to check the appropriateness of the values

and be able to perform calculations to demonstrate an understanding of the valuation methods.

(m) Analyse the asset-liability matching requirements of a United Kingdom provider of pensions

and related benefits in relation to:

• the trade-off between risk and reward

• an awareness of adding value to the shareholders of the business

and describe how projection models may be used to develop appropriate strategies.

(n) Discuss the principles underlying the use of insurance, and the choice of insurance contract,

as a means of reducing some of the risks and uncertainties associated with the provision of

pensions in the United Kingdom.





(o) Identify the sources of surplus/deficit for a benefit provider in the United Kingdom and

discuss the factors that affect the application of this surplus/deficit.

(p) Describe how the financial significance of deviations from expectations, should be monitored

and assessed, in terms of:

• the reasons for monitoring



• the use of the results of to help develop solutions to the problems faced in pension

provision

(q) Produce coherent advice and recommendations for the overall financial management of a

provider of pensions and other benefits.


level where appropriate analytical techniques may be used.



conclusions.

END OF SYLLABUS



Subject SA5

FinanceSpecialist Applications

Syllabus


1 J une 2012






Subject SA5 – Finance Specialist Applications


(d) Demonstrate a knowledge of the legislative and regulatory framework for finance in the

United Kingdom.

• Corporate Governance

• Role of the listings authority

• Competition and Fair Trading controls

• Monopolies regulators

• Provision of financial services

• EU legislation

• Role and responsibilities of directors

(e) Show how actuarial techniques may be used to identify and measure financial and non-

financial risk.

• Interest rate risk

• Market risk

• Credit risk

• Off-balance-sheet activities

• Product, Operational and Technology risk

• Foreign Exchange risk

• Sovereign risk

• Liquidity risk

• Compliance risk

(f) Identify and describe means for transferring risk to a third party and identify the costs and

benefits of doing so.

(g) Identify and describe means for reducing risk without transferring it, and determine how these

may be evaluated.

(h) Describe how derivatives, synthetic securities and financial contracting may be used to reduce

risk or to assign it to the party most able to bear it.

(i) Discuss the assessment of Capital Adequacy:

(i) for risk control purposes

• Capital and insolvency risk

• Capital adequacy regulations (incl. CAD 1 and 2, Basel I and II)

• Risk Based Capital

(ii) for development purposes

• “War chest” capital

(j) Apply the concept of economic capital and describe methodologies for allocating capital

within a financial organisation.



Subject SA5 – Finance Specialist Applications


(k) Demonstrate a knowledge of the principal techniques of hedging using:

• Futures and Forwards• Options

• Swaps

• Credit Derivatives

• Securitisation and debt issuance

(l) Describe how financial risks and opportunities influence the selection of firm strategy.

(m) Determine the value of cash flows with embedded options:

• Determine the cost and price-yield relationship of an embedded option in a series of cash

flows

• Calculate option-adjusted spreads including the impact of prepay on Mortgage-Backed

Securities

• Apply option-adjusted pricing techniques to Mortgage-Backed Securities and other

financial instruments.

(n) Demonstrate a knowledge and understanding of the different methods of evaluating a credit

derivative.

(o) Demonstrate a knowledge and understanding of the main issues associated with corporate

finance:

(i) Capital structure and the cost of capital

• Describe the effect that the capital structure used by a company will have on the

market valuation of the company.

• Demonstrate an understanding of the competing views on “optimal” capital

structure.

• Describe how an optimal capital structure for a company to maximise shareholder

value might be determined.

• Analyse the effect of taxes on the value of a company.

• Describe how market imperfections and taxes will affect the optimal capital

structure for a company and discuss the practical difficulties involved.

• Discuss the direct and indirect costs associated with financial distress and

bankruptcy.

• Discuss how asymmetric information affects choices in financing.







Subject SA6

InvestmentSpecialist Applications

Syllabus


1 J une 2012




Subject SA6 – Investment Specialist Applications


Aim

The aim of the Investment Specialist Applications subject is to instil in successful candidates theability to apply knowledge of the United Kingdom investment environment and the principles of

actuarial practice to the selection and management of investments appropriate to the needs of

investors.


Subjects ST5 – Finance and Investment Specialist Technical A and CA1 – Actuarial Risk

Management: provide the underlying principles upon which this subject is based.

Candidates can expect to be examined in aspects of general principles developed in these subjects as

well as the United Kingdom specific aspects developed in this subject.

Subject P6 – Investment UK Practice Module Specialist: the knowledge required to pass Subject P6 is

contained in this subject.

Objectives


(a) Demonstrate a knowledge of the legislative and regulatory framework for investment

management and the securities industry in the United Kingdom.

(i) Describe the framework of regulation of the United Kingdom investment industry.

(ii) Discuss the relevant professional guidance for actuaries working in the investment

field.

(iii) Describe how members of the Institute and Faculty of Actuaries are regulated in the

conduct of investment business under the Financial Services and Markets Act 2000.

(iv) State the circumstances in which actuaries require authorisation under the Financial

Services and Markets Act 2000.

(b) Outline the taxation treatment of different forms of investment for individual and institutional

investors resident in the United Kingdom.

(c) Discuss the principles and objectives of investment management and analyse the investment

needs of a United Kingdom investor.

(i) Analyse the particular liability characteristics, investment requirements and the

influence of the regulatory environment on the investment policies of the following

United Kingdom institutions:

• a life insurance company transacting mainly with profits business

• a life insurance company transacting mainly unit-linked business





• a general insurance company

• a health and care insurance company

• a self-administered defined benefit pension fund • a self-administered defined contribution pension fund

• a pure fund manager

(ii) Discuss the investment vehicles which may be particularly attractive to an individual

investor in the United Kingdom taking into account taxation, expenses and other

relevant considerations.

(d) Demonstrate knowledge of the investment indices which may be relevant to a global investor

based in the United Kingdom.

(e) Demonstrate a knowledge and understanding of the principal techniques in portfolio

management including risk control techniques.

(i) Describe and discuss the principal active management “styles” (value, growth,

momentum, rotational).

(ii) Describe and discuss passive fund management.

(f) Demonstrate a knowledge and understanding of the techniques used for investment

management assessment and selection.

(i) Describe and discuss methods of organising the investment management of a large

portfolio.

(ii) Demonstrate a knowledge of the structure of an institutional investment department.

(iii) Describe the function of a performance measurement service.

(g) Demonstrate a knowledge and understanding of the characteristics of the principal investment

assets and the markets in such assets with particular reference to the needs of a United

Kingdom investor.

(i) Outline the processes of dealing, transfer and settlement processes in the main United

Kingdom equity, bond and derivative markets.

(ii) Outline the differences in the processes of dealing, transfer and settlement processes

in the main overseas equity, bond and derivative markets of interest to a United

Kingdom investor.

(iii) Indicate the likely levels of charges, expenses and dealing spreads for an institutional

investor in the main United Kingdom securities markets.

(iv) Outline the main features of the capital markets in the United States, Japan, Germany

and France.





(v) Outline the main features of the structures of the economies of the United States,

Japan, Germany and France.

(vi) Describe the main features of the historic behaviour of markets and indices and

discuss their relationships to each other and to price and earnings inflation.

(h) Demonstrate a knowledge and understanding of the characteristics of specialist investment

assets and the markets in such assets with particular reference to the needs of a United

Kingdom investor.

• asset-backed securities

• unquoted equities, including venture capital (“private equity”) investment

• property finance and development

• UK derivatives markets

(i) Produce coherent advice for the overall management of an investment portfolio and for the

proper management of assets, having regard to the liabilities.

(i) Analyse more complex problems in terms of actuarial, economic and financial factors

to a level where appropriate analytical techniques may be used

(ii) Integrate the results of such an analysis into a coherent whole, and

(iii) Evaluate critically and interpret the results in a wider context and draw appropriate

conclusions.

END OF SYLLABUS



Subject P0

Generic UK Practice Half Module

Syllabus


1 J une 2012




Subject P0 – Generic UK Practice Half Module


Aim

The aim of this module is to provide a knowledge of UK business practice, regulation, legislation and professional guidance notes relevant to the work of an actuary in financial services in the UK.

P0 consists of generic material for all actuaries practising in the UK.

P1–P6 are subject specific and are offered for a choice of specialisms.

Generally P0 will be taken at the same time as one of P1–P6 but they may be taken separately.


Subjects CT2 and CA1, in particular, introduce the concepts and knowledge considered in this

subject.

The material introduced in P0 underpins the material in the specialist P1–P6.

Objectives

On completion of P0 the candidate will be able to:

1. Know and understand the purpose and structure of UK financial services industry and

regulations.

2. Know and understand the powers of the regulators of financial services and their impact upon

firms and individuals, including how the regulatory rules affect the control structures of firms

and their relationship with the regulators and the approach to ethical conduct by firms and

individuals.

3. Identify key organisations, institutions and people in the industry and the roles they play in the

provision of financial services products.

4. Know and understand the role of the main consumer protection bodies in UK financial services.

5. Explain what is meant by advice, including monitoring and review arrangements, and state the

rules that apply to the different types of advice.

6. Know and apply the basic principles of business ethics and integrity.

7. Know and understand the requirements of the major codes of practice relevant to retail financial

services.

8. Know and understand the nature of business fees and commission.

9. Know and understand the rules, regulations and procedures relating to the handling of client

money.



Subject P0 – Generic UK Practice Half Module


10. Apply the main requirements of the Data Protection Act 1998, anti money laundering

regulations, Conduct of Business Rules, Proceeds of Crime Act 2002, Bribery Act 2010 and the

laws of agency and contract in dealing with customers.

11. Know and understand the financial services regulators’ complaints handling requirements.

12. Know and understand the main features of the financial services regulators’ policy regarding

financial promotions.

13. Understand the concepts and principles underpinning insurance contracts.

14. Know and understand the financial services regulators’ requirements relating to market abuse.

15. Know and apply the principles of asset ownership to retail financial services.

16. Know and understand the importance of financial planning and describe the factors that affect

financial needs throughout life.

17. Understand and apply the principles and concepts of risk associated with financial planning.

18. Be aware of the purpose of the professional guidance for actuaries.

END OF SYLLABUS



Subject P1

Health and CareUK Practice Module

Syllabus


1 J une 2012








Subject P1 – Health and Care UK Practice Module


• equality legislation

• statutory actuarial roles

(e) Describe the principles underlying the requirements of the professional standards and

guidance relevant to actuaries practising in or advising UK health and care operations.

(f) Understand how to design and price health and care insurance products to be sold by UK

insurers, including:

• policy conditions

• capital requirements and return on capital

• marketability, competition and distribution

• management of the risks

•

underwriting• reinsurance

• investment policy

• the renewal process and options

(g) Understand the principles and practices in specific areas of evaluation:

• assessment of the market for a new company launch

• assessment of overseas markets

• assessment of a company or portfolio for takeover

• embedded value analysis

(h) Evaluate the uses and benefits of reinsurance support in health and care insurance:

• control of risks

• financing

• technical assistance

• reinsurance impact

• badging

(i) Analyse the asset-liability matching requirements of a UK health and care insurer and develop


(j) Analyse the experience of a health and care insurer.

(k) Develop appropriate strategic recommendations for a health and care insurer following an

analysis of experience.

(l) Understand the considerations underlying the provision of national healthcare systems:

• the importance of healthcare provision

• different healthcare systems worldwide

• different approaches to financing healthcare

• QALYs (quality adjusted life years)



Subject P1 – Health and Care UK Practice Module


(m) Understand areas of best practice in UK health and care provision, including the ABI

guidelines.

END OF SYLLABUS



Subject P2

Life InsuranceUK Practice Module

Syllabus


1 J une 2012




Subject P2 – Life Insurance UK Practice Module


Aim

The aim of this module is to provide a knowledge of UK business practice, regulation, legislation and professional guidance notes relevant to the work of an actuary practising in Life Insurance in the UK.

The Core Reading for the Life Insurance Specialist part of this module is contained within the Core

Reading for Subject SA2 – Life Insurance Specialist Applications. There is separate Core Reading

for the generic part of this module.

Part A: Generic

This part is generic module P0 and may be taken on its own with a 45 minute test.

1. Know and understand the purpose and structure of UK financial services industry and regulations.




individuals.








services.


9. Know and understand the rules, regulations and procedures relating to the handling of clientmoney.

















18 Be aware of the purpose of the professional guidance for actuaries.

Part B: L ife Insurance Specialist

(a) Define the principal terms used in life insurance in the UK.

(b) Describe the major products of UK life insurance companies, additional to the generic

coverage in Subject ST2, and whether currently sold or not, in terms of:



•

the purpose and risks of the products to the policyholder and the insurer

The products under this syllabus objective are:

• term assurance

• income protection

• critical illness

• conventional with profits

• accumulating with profits

• property linked

• index-linked

• mortgage endowment

• single premium bonds

• personal pension, including self-invested personal pension

• group personal pension

• stakeholder products

• annuities

• deposit administration

• life insurance products related to occupational pension schemes

• wraps

• variable annuities

• equity release products





• Takaful insurance

(c) Describe the general business environment for life insurance companies in the UK, includingthe risks involved, in terms of:

• new business

• distribution of products

• the wider competitive environment

• the principles of treating customers fairly


• corporate finance

• outsourcing

• securitisation

•

mergers and acquisitions• demutualisations

• closed funds

(d) Describe the principles of UK contract and trust law as they affect life insurance, including

reference to Unfair Contract Terms legislation, the Financial Ombudsman Service, and the

impact of equality legislation.

(e) Describe, in terms of the following, the regulatory environment for UK life insurance

companies, and how this environment affects the way these companies carry out their

business in practice, including the related analyses and investigations:

1. The taxation of the UK business of life insurance companies and the effect of taxationon the benefits and premiums paid under UK life insurance contracts.

2. The supervision of the UK business of life insurance companies under the relevant

Prudential sourcebooks with regard to:

A the valuation of the assets

B the valuation of the liabilities, including appropriate methods and bases taking

account of the nature of the assets

C realistic balance sheets

D individual capital assessments

E the supervisory reports to be submitted

F transfers of surplus, including the requirements of surplus distribution systems

3. The capital requirements of a life insurance company, including:

• the reasons for projecting solvency





• determining methods and appropriate bases for assessing the current and future

solvency of a UK life insurance company, bearing in mind

– the risks the company is taking, and the use of risk based capital approaches to

assess the impact of these risks

– the company’s ongoing business strategy, including the impact of writing new

business

– the impact of the regulatory capital requirements

- why a company holds capital

- sources of capital

• the principles of asset-liability management, including the use of derivatives

4. The transfer of liabilities from one life insurance company to another.

5. An analysis of surplus on a supervisory basis – reasons for carrying out the analysis,

how to do it, and using the results.

6. Profit and value reporting under the Companies Act legislation, EU approved IFRS, and

embedded values, including market consistent embedded values.

7. An analysis of the change in the embedded value of a proprietary UK life insurance

company, using the results to reassess the design of the company’s contracts or

actuarial bases.

8. The Conduct of Business rules with regard to Treating Customers Fairly, disclosure

and, for with profits business, the Principles and Practices of Financial Management

(“PPFM”), including the Consumer Friendly PPFM.

9. The management and controls to be exercised by a life insurance company in order to

conduct its affairs responsibly and effectively with adequate risk management systems

including coverage of the following specific categories of risk:

• Credit risk

• Market risk • Liquidity risk

• Operational risk

• Insurance risk

• Group risk

10. The principles underlying the requirements of the professional standards and guidance

relevant to actuaries practising in or advising UK life insurance companies.

11. The roles of the Actuarial Function Holder, the With-Profits Actuary, the Reviewing

Actuary and the Appropriate Actuary.





12. The principles underlying the Solvency II regulatory regime.

(f) Describe the requirements for the design of life insurance contracts to be marketed in the UK and determine appropriate methods and bases for pricing them.

(g) Describe the management of UK with profits business, including:

• the calculation and use of asset shares

• appropriate ways of determining surplus distribution policy

• the determination of discontinuance and alteration terms

END OF SYLLABUS



Subject P3

General InsuranceUK Practice Module

Syllabus


1 J une 2012




Subject P3 – General Insurance UK Practice Module


Aim

The aim of the General Insurance Specialist Applications subject is to instil in successful candidatesthe ability to apply knowledge of the United Kingdom general insurance environment and the

principles of actuarial practice to providers of general insurance in the United Kingdom.


Subject ST7 – General Insurance: Reserving and Capital Modelling Specialist Technical provides the

underlying principles of reserving and capital modelling techniques in general insurance upon which

this subject is based. It is assumed that candidates have a good understanding of the principles

covered in this Subject.

Subject ST8 – General Insurance: Pricing Specialist Technical provides the underlying principles of

premium rating techniques in general insurance upon which this subject is based. It is assumed thatcandidates have a good understanding of the principles covered in this Subject.

Candidates can expect to be examined in aspects of general principles developed in Subjects ST7 and

ST8 as well as the further aspects of general principles, and also the United Kingdom specific aspects,

developed in this subject.

Subject P3 – General Insurance UK Practice Module Specialist: the knowledge required to pass

Subject P3 is contained in this subject.

Objectives

On completion of this subject, the successful candidate will be able to:

(a) Define the principal terms in use in general insurance in the United Kingdom.

(b) (i) Describe the main features of the United Kingdom general insurance market.

(ii) Outline the key features of the Lloyd’s market.

(c) Describe the principal regulatory and supervisory requirements that affect general insurers

(including Lloyd’s) established in the UK, under:

•

Current insurance regulations• Prospective Solvency II regulation

(d) Describe the principal taxation requirements that affect general insurers (including Lloyd’s)

established in the UK.

(i) State the principles on which the taxation of a proprietary insurer is based.

(ii) Describe the technical reserves that can be taken into account in calculating the

taxable profits of a proprietary insurer.





(iii) Describe the principal differences in taxation treatment between a mutual and a

proprietary insurer.

(iv) Outline the principles of taxation within the Lloyd’s market.

(e) Describe the requirements of the professional guidance relevant to actuaries practising in or

advising United Kingdom general insurance companies and Lloyd’s syndicates.

(f) (i) Understand the particular considerations to be borne in mind when pricing large

commercial risks.

(ii) Describe the alternative approaches to rating such risks.

(g) Outline how to incorporate the return on capital in the calculation of premium rates.

(h) To understand the use of catastrophe modelling in non-life actuarial work:

(i) Understand the difference between catastrophe modelling and traditional actuarial

rating methods.

(ii) Outline the generic structure of a catastrophe model.

(iii) Understand the key perils modelled.

(iv) Describe the key uses to which a non-life actuary might put the output of catastrophe

models.

(v) Understand some key considerations in using the output of catastrophe models.

(i) Determine appropriate bases for valuing the insurance liabilities of a United Kingdom general

insurer in order to produce:

• Companies Act accounts and statutory returns

• Taxation accounts

• Management Accounts

(j) (i) Understand the reasons why different reserving techniques are required for latent

claims and disease claims.

(ii) Describe the alternative approaches to reserving for UK and US latent claims and

disease claims.

(iii) Understand the appropriate uses of each method.

(k) (i) Analyse the financial planning requirements of a general insurer and develop






(ii) Develop appropriate models for the purpose of financial planning to enable a general

insurer to develop and monitor its objectives at either the corporate or product level.

(l) (i) Understand the basic concepts of extreme value theory and its practical uses in a

general insurance environment.

(ii) Understand the application of the concepts of ruin theory in a general insurance

environment.

(m) (i) Outline the reasons why a general insurer may wish to transfer a portfolio of business

to another insurer.

(ii) Describe the alternative approaches to such a transfer, including the situations in

which each may be appropriate.

END OF SYLLABUS



Subject P4

PensionsUK Practice Module

Syllabus


1 J une 2012




Subject P4 — Pensions UK Practice Module


Aim

The aim of this module is to provide a knowledge of UK business practice, regulation, legislation and

professional guidance notes relevant to the work of an actuary practising in Pensions and other

Benefits in the UK.

The Core Reading for the Pensions Specialist part of this module is contained within the Core

Reading for Subject SA4 — Pensions and other Benefits Specialist Applications. There is separate

Core Reading for the generic part of this module.

Part A: Generic



regulations.




individuals.








services.



money.









12. Know and understand the main features of the financial services regulators’ policy regardingfinancial promotions.








Part B: Pensions Specialist

1. Define the principal terms in use in pensions in the United Kingdom.

2. Identify the key stakeholders in the provision of pensions in the UK and the main features of the

UK pensions market, including the historical development, current structure and purpose of the pensions industry in the UK.

3. Describe the main types of pension benefit provided in the UK.

(a) State the main types of pensions benefits provided by the state, employers and individuals.

(b) Know the principal forms of state pension related benefits and the conditions applying to

them and how the main types of state benefit have an impact on pensions planning.

(c) Know and understand the different types of pre-retirement and post-retirement

arrangements.

(d) Know and understand the main features of death benefits under retirement contracts.

(e) Know and understand the main factors relating to benefits payable on ill health and early

retirement.

4. Understand the socio-economic and other factors that impact on the UK pensions industry and

its products.





5. Describe the principal tax, legislative and supervisory controls that affect the provision of

pensions in the UK.

(a) Apply the main requirements of the Pensions Act 2004 and associated legislation relevant

to the provision of pension schemes.

(b) Know and understand the main aspects of retirement planning taxation.

(c) Know and understand the requirements of the accounting standards that apply to pension

provision in the UK.

(d) Know and understand the main approaches to pension sharing on divorce.

6. Be aware of the content of the professional guidance for actuaries contained in Actuarial

Profession Standards P1 and P2 and the subject matter of the specific Technical Actuarial

Standard issued by the Board for Actuarial Standards on Pensions .

7. Be aware of any proposed changes in legislation or professional guidance that will require

action by UK pension providers, and their expected effective date of implementation.

8. Be aware of the main areas of risk and uncertainty in relation to UK pension provision.

(a) Know and understand the different types of risk and attitudes to them.

(b) Understand and apply the principles and concepts of risk associated with financial

planning for retirement and the provision of income in retirement.

(c) Analyse the economic risks associated with the main types of investment when retirement

planning.

9. Understand the purpose of retirement planning and identify the principal characteristics of

investment methods used to provide an income in retirement.

10. Understand the asset liability matching requirements of a UK pension scheme and be aware of


END OF SYLLABUS



Subject P5

FinanceUK Practice Module

Syllabus


1 J une 2012




Subject P5 – Finance UK Practice Module


Aim

The aim of this module is to provide a knowledge of UK business practice, regulation, legislation and

professional guidance notes relevant to the work of an actuary practising in Finance in the UK.

The Core Reading for the Finance Specialist part of this module is contained within the Core Reading

for Subject SA5 – Finance Specialist Applications. There is separate Core Reading for the generic

part of this module.

Part A: Generic



regulations.




individuals.








services.



money.









12. Know and understand the main features of the financial services regulators’ policy regardingfinancial promotions.







18. Be aware of the purpose of the professional guidance for actuaries contained in the Professional

Conduct Standards and the Guidance Notes.

Part B: Finance Specialist

1. Demonstrate a knowledge and understanding of the financial markets with particular references

to the needs of the UK user.

2. Demonstrate a knowledge of the influences over the UK commercial and economic

environment from the Bank of England and Government policy.

3. Demonstrate a knowledge of the personal and corporate taxation framework in the UK.

(a) Describe the basic principles of UK Income Tax.

(b) Describe the basic principles of UK Capital Gains Tax.

(c) Describe the basic principles of UK company taxation.

(d) Outline the taxation treatment of capital asset depreciation in the UK.

(e) Describe the different systems of UK company taxation from the points of view of an

individual shareholder and the company.

(f) Define franked investment income.

(g) Outline the basic principles of double taxation relief.





(h) Outline the basic principles of the taxation of a UK life insurance company.

(i) Outline the basic principles of the taxation of a UK general insurance company and other

companies in the UK which are classified as “traders in securities”.

(j) Outline the taxation treatment of different forms of investment for individuals and

institutional investors resident in the UK.

4. Demonstrate a knowledge of the legislative and regulatory framework for finance in the UK.

(a) Corporate Governance.

(b) Role of the listings authority.

(c) Competition and Fair Trading controls.

(d) Monopolies regulators.

(e) Provision of financial services.

(f) EU legislation.

(g) Role and responsibilities of directors.

5. Know and understand the impact of capital adequacy regulations in the UK.

6. Describe the requirements of the professional guidance relevant to actuaries practising in or

advising in corporate finance.

7. Be aware of any proposed changes in legislation or professional guidance that will affect thework undertaken or advice given by actuaries working in the corporate finance field, and their

expected effective date of implementation.

8. Understand the major areas of risk and uncertainty associated with corporate finance in terms

of:

• the nature and extent of the risks

• the factors that will affect these risks

• measures which can be adopted to manage risk and uncertainty efficiently

9. Outline the external influences on mergers and acquisitions, including government policy,

regulation and controls.

END OF SYLLABUS



Subject P6

InvestmentUK Practice Module

Syllabus


1 J une 2012




Subject P6 – Investment UK Practice Module


Aim

The aim of this module is to provide a knowledge of the UK business practice, regulation, legislationand professional guidance notes relevant to the work of an actuary practising in Investment in the UK.

The Core Reading for the Investment Specialist part of this module is contained within the Core

Reading for Subject SA6 – Investment Specialist Applications. There is separate Core Reading for

the generic part of this module.

Part A: Generic



regulations.




individuals.








services.



money.


















Part B: Investment Specialist

1. Know and understand the characteristics of the principal investment assets and the markets in

such assets covering the main equity, bond, commodity and derivative markets.

2. Know how an institutional investor might provide funds for the finance of a property

investment or development.

3. Know and understand the main features of the historic behaviour of markets and indices and

discuss their relationships to each other and to price and earnings inflation.

4. Know the legislative and regulatory framework for investment management and the securities

industry, including:

• The framework of regulation in the investment industry.

• How members of the actuarial profession are regulated in the conduct of investment business

under the Financial Services and Markets Act 2000.

• The circumstances under which actuaries require authorisation under the Financial Services

and Markets Act 2000.

5. Know the taxation of investments for typical investors in the UK, including:

• individual investor • health and care insurer

• life insurance company

• general insurance company

• pension scheme

6. Describe the requirements of the professional guidance relevant to actuaries practising in or

advising in the investment field.




7. Be aware of any proposed changes in legislation or professional guidance that will affect the

work undertaken or advice given by actuaries practising in the investment field, and their

expected effective date of implementation.

8. Understand the investment needs of particular investors, in particular:

• the investment requirements and regulatory constraints for key institutional investors

• the appropriate investments for an individual investor

• the risks faced by investors and how an investor’s risk profile is determined

9. Know and understand the principal techniques in portfolio management including risk control

techniques, performance assessment, overall management of assets to meet the investors’

liabilities.

10. Understand the asset liability matching requirements and be aware of appropriate strategies in

relation to the following institutions in the UK:

• health and care insurer

• life insurance company

• general insurance company

Documents

iandfall2013syl syllabus for all subjects 2013.pdf