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 Australian School of Business Actua rial Th eory & Pract ice A - Wee k 2 The professional in the commercial environment  Anthony Asher 2015

4001 Lecture 2

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 Australian School of Business

Actuarial Theory & Practice A - Week 2

The professional in the

commercial environment

 Anthony Asher 2015

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2

 Agenda

Tests of professionalism

Technical standards

The general environment

The facts have changed ...

Managing the changes

Activity Details Hours

Preparation:Read lecture and consider

discussion topics1

Attendance: 3

Reading: UAM 3 and 5 1½

Institute’s code of conduct ½

Three readings from

references in Chapter 52

Exercises From UAM 1

Prepare presentation 1

TOTAL 10

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TESTS OF PROFESSIONALISM

 Apply the tests of professionalism

a) Identify the principles of professionalism and relate them to the actuarial profession

b) Outline the main features and functions of the professional association, its code of conduct,

professional standards and major guidance notes

c) Discuss the responsibilities of actuaries individually and in statutory roles

d) Demonstrate an understanding of the need for, and application of, materiality and peer review

e) Identify situations where actuarial expertise may be insufficient, and analyse what consequent

actions might then be appropriate

Part II syllabus

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OVERALL APPROACH

Discuss and Apply an Actuarial Control Cycle in a Variety of Practical Commercial Situations

a) Identify the elements of the Control Cycle and how the elements interrelate in an actuarial context

b) Recognise the various stakeholders involved in a variety of situations involving medium and long-

term commercial decisions and demonstrate how the use of the Control Cycle can add value in

resolving issues between the stakeholders

c) Demonstrate how the Control Cycle can be applied in a variety of practical commercial situations

Part II syllabus

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Errors

Suggestions:

Need to spend over 30% of the

time testing – best to becontinuous

Reduce the memory load byusing short formula andmodular structure.

Do not rush!

+ Take time to consider anddocument model assumptions,testing if necessary with others

“Thinking is Bad: Implications of Human

Error Research for Spreadsheet Researchand Practice” Raymond R. Pankohttp://arxiv.org/ftp/arxiv/papers/0801/0801.3114.pdf 

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TECHNICAL STANDARDS

The UK actuarial profession has issued generic technical standards for reporting, modelling and data.http://www.actuaries.org.uk/regulation/pages/technical-actuarial-standards-tass-online-learning-materials

They can be summarised:

 An actuarial report shall include sufficient information to enable its users to judge its relevance to them.

It should explain the nature of the underlying calculations, the source of data, as well as the nature

and significance of material risks and uncertainties. The material underlying assumptions and any risks

margins should be adequately discussed. If one of a series of regular reports, it should indicateprojected results in the future.

Internal documentation shall contain enough detail for a technically competent person, with no

previous knowledge of the particular model, to assess the judgements made. This documentation

should include justification:

• of the actuarial models used, the material underlying assumptions, with an account of their

calibration and any risks margins incorporated

• for the selection and grouping of the data used, with an account of the checks made

Read Technical Actuarial Standard D: DATAhttp://www.frc.org.uk/getattachment/1d08e3b5-00bc-4793-b457-284162f002af/TAS-D-Data-version-1-Nov-09.aspx

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Discussion topic 2

 Are the UK technical standards important?

 Are they well written and helpful?

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GENERAL ENVIRONMENT

Relate the main features within the general environment to medium and long term commercial

decisions

a) Interpret how the present economic conditions and the social, demographic, and economic trends

within a community can affect medium and long-term commercial decisions

b) Discuss the impact of technological changes on the economic environment

c) Demonstrate an understanding of the different types of investment and investment theories

Part II syllabus

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Technical change

Higher incomes

Longer and healthier? lives

Generous pensions &tax concessions

Earlier retirement

Less manual work

Mothers in workplace

Fewer births

Less work by men

Less poverty amongst agedAgediscrimination

Higher house prices

Increased crime

OECD economic and demographic trends

Familybreakdown

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Higher house prices

Increased crime

World economic and demographic trends

Higher incomes

Longer and healthier? lives

Generous pensions &tax concessions

Less poverty amongst agedAge

discrimination

Familybreakdown

Technical change Earlier retirement

Less manual? work

Mothers in workplace?

Fewer births

Less work by men

Population growth

Environmentaldegradation

Failed states

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THE FACTS HAVE CHANGED.

Technology

Manufacturing capacity greatly increased by automation

Electronic distribution costs effectively zero – software, music and news distribution costs

 Artificial intelligence will put some knowledge workers out of work

Big data …

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Technical

and social

changes

http://www.hamiltonproject.org/multimedia/charts/cost_of_computin

g_power_equal_to_an_ipad2/

http://www.people-press.org/2009/12/21/current-decade-rates-as-worst-

in-50-years/

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13http://democracyranking.org/wordpress/?page_id=738#

The facts have changed: Democracy

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14http://democracyranking.org/wordpress/?page_id=831#prettyPhoto

The facts have changed: Democracy

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15http://democracyranking.org/wordpress/?page_id=738#

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The facts have changed – interest rates

http://www.fandc.com/FundNets_FileLibrary/f 

ile/uk_it_quarterly_EAT.pdf (no longer

available) &

Government interest ratesare the lowest ever

recorded.

The Dutch series shown

here is the longest recorded.

Some interest rates are now

negative!

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The facts have changed? National debt is rising

http://www.econbrowser.com/archives/2012/08/

how_long_can_ja.html

Debt levels have risen significantly, but not to historic highs. –

even if there are more “off balance sheet” liabilities in the form of

unfunded pension fund liabilities for the public service and

national pay-as-you-go retirement and old age care schemes

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The facts have changed? House prices

Steve Keen blog

http://www.debtdeflation.com/blogs/2008/03/0

3/steve-keens-debtwatch-no-20-march-2008-

double-or-nothing/

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The facts have changed - Population growth

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The facts have changed? Population aging

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The facts have changed - Water conflicts

Source: UN. World Water Development Report 4. World Water Assessment Programme (WWAP), March 2012.

21

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The facts have changed – oil prices last year 

Jeremy Grantham (2011) Time to wake up: Days of abundant resources and falling prices are over forever

http://www.theoildrum.com/node/7853

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The facts have changed? All commodity prices

Jeremy Grantham (2011) Time to wake up: Days of abundant resources and falling prices are over forever

http://www.theoildrum.com/node/7853

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http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review-

2014/BP-statistical-review-of-world-energy-2014-full-report.pdf 

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Discussion Topic 2

What are likely to be the most important changes to the context for:• Life insurance companies operating in Asia

• General insurance companies operating in Australia

• Banks operating in Australia and Asia

• Superannuation funds investing in international markets?

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The contextGovernment policy

• Valuation and accounting standards• Legal decisions may change contracts (superimposed inflation) retrospectively

• Competition policy affects mergers and acquisitions

• Policy may limit business methods (bans on commission, discrimination)

Social attitudes• May lead government policy changes

• May lead to reputation losses (sexual harassment)

Technological changes• Internet and automation may reduce costs and offer new means of marketing or new products

(ATM)

• Medical advances and longevity

• New sources of energy, climate control

Natural events• Worse because of global warming or population growth

Economic cycles and structural changes• Unemployment and different life choices

• Increases to house and other prices means less for other purchases

Competition• New competitors enter market for a variety of reasons

• Existing competitors may change their strategies

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Management of these Factors

These factors can change the company’s ability to mobilise resources (people and finance) the cost ofclaims and administration, investment returns, ability to attract new business and retention of in force

business, ability to optimise pricing.

Response includes:• Robust design of capabilities and market strategy

• Use ACC to avoid or transfer the risks or increase capital to absorb them

• Maintain integrity and good relationships with government and the community

Company’score

capabilities

Marketneeds

Provides products

and services

Pays for product

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Discussion Topic 3

There are three types of risks:• Known (you have a good idea of the frequency & severity)• Unknown (you know the risk exists but are uncertain about

frequency or severity)• Unknowable (you can’t predict)

How do these fit in the table above?How would you manage each of these in a general insurancecompany?

TYPES OFKNOWLEDGE

Known Unknown

Aware Explicit knowledge Uncertainty

Unaware Tacit knowledge Ignorance