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7/23/2019 4001 Lecture 2
http://slidepdf.com/reader/full/4001-lecture-2 1/28
Australian School of Business
Actuarial Theory & Practice A - Week 2
The professional in the
commercial environment
Anthony Asher 2015
7/23/2019 4001 Lecture 2
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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
19
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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