Are there any rules of thumb that may be used to help understand what the examiner is looking for?

With regards to questions that require a written answer, I'm struggling to understand the scope of the points that an examiner is looking for.

As an example, question 1.iv of the September 2020 SP6 paper asks;

"Propose how the insurer could monitor its liquidity risk relating to the use of derivatives"
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Within the mark scheme for this paper, the following responses earned marks:

• Liquidity risk arising from derivatives should be monitored as part of the insurer’s liquidity risk management framework ie liquidity risk should be assessed holistically [1⁄2]
• As liquidity is a significant threat to the functioning of the insurance company, it would be expected that the board or executive function would have to review and sign-off the liquidity risk management strategy.
• Any changes to the derivative portfolio, collateral requirement or discounting approach may impact the derivative portfolio’s liquidity needs. [1⁄2]
• Appropriate systems and processes should be put in place to ensure that the derivative portfolio is being monitored. [1⁄2]
• Assessing the hypothetical liquidity needs of its derivative portfolio (alongside the wider liquidity needs) under a series of stressed market conditions will enable the insurer to develop a robust liquidity risk management plan. [1]
• To measure the liquidity risk it is likely that the insurer will use liquidity scenario/stress testing. [1]
• To monitor liquidity risk, the insurer must first set its liquidity risk appetite – this is the amount of liquidity risk it is willing to accept. [1⁄2]

I've not sat an exam that requires many written answers before, and all of the above marks confused me. I interpreted the question at face value - "how can liquidity be measured" - and gave reference to measures such as the bid-ask spread. The above points (which constitute the majority of the marks for this question) I totally overlooked as they don't really seem to answer the question actually asked. The first point, for example, goes without saying, but (to me) it doesn't answer the question of how liquidity can be monitored.

In order not to overlook points such as the above, how can I know exactly what the examiner is looking for? Are there rules-of-thumb regarding what sorts of points are within the scope of the question asked?

 

I agree with you that some of those points aren't addressing the question precisely. I would argue stress and scenario testing quite directly addresses the question though, as does setting a liquidity risk appetite because this is an important part of a framework for monitoring liquidity risk.

Regardless, this is something I also struggled with throughout the actuarial exams. Having come from a maths background, I was used to (and indeed, even took pride in!) answering questions very precisely. However, I find a more 'holistic' approach is appropriate for actuarial questions - and in fact a lot of professional actuarial work that I've done!

I found the most useful things to get used to the actuarial exams - at least coming from a maths background - were:
1) plenty of past papers and diligently absorbing the style of the answers in the examiners reports, to learn what sort of style and answer format is appropriate 'by osmosis'
2) tips from the ActEd tutors

Tips from tutors (from tutorials) were generally things like word association and brainstorming for idea generation, and remembering that you're trying to impress upon the examiner the fullness of your understanding of the material.

For this question, I'd be tempted to think about an answer like: "in order to monitor liquidity risk, first you need a framework which sets out xyz, part of this framework would specify governance and escalations (requires board sign-off), another part would include how to set limits / appetite... then to monitor liquidity risk against the appetite you need to measure it (e.g. examples of how to measure it), and if limits are breached escalate according to the policy/framework...". In this way you're telling the story of how to think about monitoring liquidity risk, almost like you're teaching the examiner about it. Rather than throwing out things like "bid / offer spread" which is correct but perhaps does not demonstrate full understanding in the same way. First take a step back and think "how can I take a step back and explain this to someone that doesn't know anything about monitoring risks at all, let alone liquidity risk?"

Something else to bear in mind is, marks can be awarded for things not on the examiners report. I used to mark myself very strictly against examiners reports and in the actual exams usually ended up getting 10+ marks more than in any of the past papers. I think this was mainly because I never gave myself credit for reasonable additional points if they weren't on the examiners report, but in the actual exam markers would have given credit for these. It could be the case that your other suggestions, such as monitoring spreads (which sounds reasonable to me) would have scored marks, so don't be too dispirited.

Finally, I often found myself surprised with how many marks you can get for writing things that feel a little tangential to a question. So if you have time it's always worth putting down ideas you're not 100% sure will get you marks. Things like definitions, or introductions to your answer giving some more background, or further examples, and so on.