question about paper two of the specimen 2019

[Smith]

Assignment 1
question 1
referring to the solution, it mainly focus on the data itself, i think the financial impact analysis for any change in the mortality assumption might also make sense for the question. in addition, in the background information, the actuarial director also require understand options to manage risk, but not included by the solution. in the context of exam, if I write these points, can it be credited well?

question 7
the question is how to fund, does it ask the answer from the capital management tools point of view?

Assignment 2
question 2
explain the role of the government in regulating, can I understand that the government is the regulator here? then, refer to the solutions, it answer the aim of regulation (section 1 of chapter 3), why is not the function of regulator (section 4 of chapter 3)?

question 5&6
refer to the solutions, it seems actually the two questions asking the same point - capital management tools, how to understand it?

 

[Lindsay Smitherman]

Hi - I'll have a go at answering these points, however bear in mind that the IFoA were not originally going to produce Solutions for the Paper 2 Specimen Paper, but did so not long before the April 2019 exam date after receiving requests for them. Hence I don't believe they went through the same process that marking schedules would go through (not guinea-pigged etc) and may therefore not be as robust or comprehensive as might otherwise be the case. Let me take each of your questions in turn.

Assignment 1
question 1
referring to the solution, it mainly focus on the data itself, i think the financial impact analysis for any change in the mortality assumption might also make sense for the question. in addition, in the background information, the actuarial director also require understand options to manage risk, but not included by the solution. in the context of exam, if I write these points, can it be credited well?

It's possible that credit would be given for additional points. However, we need to make sure we are being careful to answer what has been asked.

Question 1 here is asking about how an analysis of mortality experience would be done in order to set reserving assumptions. The solution therefore needs to focus on the process of performing the experience analysis, including the data that would be used, and the adjustments that would need to be made in order to end up with assumptions that are relevant to what we expect to happen in the future.

Although the company might well then perform an analysis of the impact the change in mortality assumption would have on the reserves after setting the new assumptions, it isn't necessarily good practice to turn that back and use that as part of the assumption setting process itself. If you believe that the assumptions need to be changed, based on past experience and what you expect to happen in the future, then you should change the assumptions - the fact that it might make a big difference to the reserves shouldn't stop you using assumptions that you believe in. So we need to focus on setting the assumptions (as per the specifics of the question), not what happens afterwards.

The point about the options to manage risk and how they would be allowed for in the valuation come up in the next question parts, not this one.

 

[Lindsay Smitherman]

question 7
the question is how to fund, does it ask the answer from the capital management tools point of view?

This question is about how the sponsoring company could fund a significant deficit in a pension scheme.

There are two angles to think about here:

Firstly, the funding method that the company could use (increase regular contributions? one-off lump sum payment?) - as described in Chapter 23 in relation to benefit scheme financing strategies.

Secondly, if the company has to find a significant amount of cash to make a payment into the pension scheme, how is it going to fund that? Capital management tools could be considered in order to generate liquidity (cash funds) in order to make the payment. So Chapter 35 on capital management is also relevant here.

It is worth looking out carefully for opportunities to bring different parts of the course together in an answer - this is particularly key for the case study questions.

 

[Lindsay Smitherman]

Assignment 2
question 2
explain the role of the government in regulating, can I understand that the government is the regulator here? then, refer to the solutions, it answer the aim of regulation (section 1 of chapter 3), why is not the function of regulator (section 4 of chapter 3)?

Regulatory bodies typically report directly to the government and their regulatory powers and rules / policies are set and approved through the government. So can we can loosely talk about the 'government' and 'regulator' in the same context.

The question specifically asks for an explanation of the government's role 'in regulating insurance companies'. This is one example of a regulator's functions, as set out in Section 4 of Chapter 3: direct supervision or regulation of financial services organisations and how they conduct their business. Other functions involve things like involvement with government policy, authorising individuals to sell business, and providing information to consumers and the public - but these wider functions are not what is specifically being asked about here. The key role is to achieve the principal aims of regulation, as set out in Section 1 of that chapter.

 

[Lindsay Smitherman]

question 5&6
refer to the solutions, it seems actually the two questions asking the same point - capital management tools, how to understand it?

When there are two question parts like this, where the margins are rather blurred in terms of what each is looking for, then there would probably be cross-marking between the solutions. In other words, if you wrote about something for 5 rather than 6 and if it was equally valid there, it would likely get the marks even if they are listed under the solution for 6.

There is a slight distinction between the two questions here: 5 is asking about how the company could fund making changes to its motor insurance - so we should be focusing on ways in which the company could raise / find cash and/or reduce the cost of the changes. Part 6 is asking more widely about capital management techniques: not all of these would generate additional cash (and/or are not directly related to the legislative changes being proposed) and so wouldn't be relevant to 5.

Hope that helps.

 

[Smith]

that's fine! thanks a lot!