You are on page 1of 10
‘This question paper must be SEAT NUMBER: Room: Feturmed. Candidates are not pert "4 toromove any part FAMILY NAME: {fit rom the examination room. Unie: Time Allowed: OTHER NAMES: ‘STUDENT NUMBER: MACQUARIE UNIVERSITY SESSION 2 EXAMINATIONS - NOVEMBER 2012 ‘ACST403/832/832X ACTUARIAL CONTROL CYCLE 2 Three (3) hours pls ten (10) minutes reading ime ‘Total Number of Questions:Seven (7)in total ‘Total Marks for this Paper: 100, Instructions You should answer all questions. The number of marks for each ‘question is shown in parentheses atthe star ofthe question ‘You have been supplied with soven (7) answer booklets, Label them Q1, 2, 03, O4, QS, Q6 and Q7 respectively, then answer eich «question in the corresponding separate booklet. Write your name and student ID at the tap of this question paper, as ‘well a5 on each of your answer booklets Hand inthis question paper and your seven answer booklets atthe end the exam, Materials Not Permitted: Dictionaries, including translation dictionaries, are not permitted, Calculators are permitted but machines shat have a textretieval capacity, specifically those with a full slpabet on the keyboard, re not allowed. ‘This examination is being held in a number of locations internationally and i is inevitable that there will be differences in timing of up to several hours, You are absolutely prehibited from doing anything that may lead to other students gaining information about this exam paper Deforestting forthe examination. Any breaches (ether isclosng information oF recetving information) willbe viewed as professional misconduct as well as an infringement of University rales and wil be dealt with accordingly. ‘Question 1 [17 marks] @ o Liquidity problems are often triggered hy economic ishhility. Give ONF example to ‘show how economic fetors (such as a stock market eras or an increase in interes rates) ‘an flow through to create liquidity problems fora bank, ie insurer, or superannuation fund, [4 marks) Global banking regulators are planning to introduce nes liguiity requirements for banks, Banks will be required to keep higher amounts of liquid assets, where the amount required will vary depending onthe liquidity risks ofthe bank's sagt ad nbilities. Under the new requirements, banks will have to assess the “stickiness” of different sources of funds (such as deposits). A sticky customer is defined as a customer who is unlikely to withdraw hisher funds during a liquidity eunch, List five factors which ‘would affect the stickiness of dffeeat sources of funds (25 marks] ‘What willbe the impact ofthe new liquidity requiremens on the banking industry? Tow ‘do you think that banks are likely to respond to the new iquidity requirements? ([4marks} ‘Under the new rales, banks will be required to havea ligaidity transfer pricing system (LTPS). What does this mean? Why is it desirable to have an LTRS? (2.5 marks} ‘Banks willbe required to have contingency plans for managing a lquidity crisis, What should be included ina bank's contingency plan? [4 marks) Question 2 [15 marks} Ina particular country, general insurance companies are required to produce financial statements ‘ith asets shown at market values and with outstanding claims libilities shown asthe Central Estimate determined by the Appointed Actuary of each company. The Accounting Standards Authority ofthe country has announced that, in future yetrs,outstinding lim labltes must be calculated at a level which has a 75% probability of sufficiency (75% POS). This isto reflect the high levels of uncertainty about the amount of future clams payments. ‘The general insurance industry has responded by opposing this proposal on the grounds that the approach will distort profit results and therefore make it harder for general msurance companies to ‘aise capital on the stock exchange. Your frend Kim isa newspaper journalist and has asked for your help to explain this debate to readers of the newspaper. Kim has asked you to explain in simple terms: (a) What i a “Central Estimate"? How ie this determined? Parts} (©) Lunderstand that ascets ad liabilities should be valued consistently. [fasse are valued swing Market Value, how can labiliies be valued consistently? P2marks} (6) What i meant by a “75% probability ofsufliency” and how would an actuary estimate this value? DB marks] (@ How wil she new accounting standards affect reported profs? How could tis cause Astortions in profs for some companies? [4 marks] (©) Company ABC and company XYZ are both in the same line of business, insuring factories ‘against fre and storm damage. But Ihave noticed that ‘© forcompany ABC. the 75% POS is 15% abave its Central Estimate, but «Jor company XYZ the 75% POS is only 10% above its Cenral Estimate. This seems odd. What could cause this discrepancy?” [marks] raf en email which you dink wil help Kim, Ouestion 3 115 marks} Fortress Life (“PL isa ie insurance company tht sels mainly yearly renewable term life insurance policies trougl financial planners, Yearly renewable term life insurance policies provide ‘benefit equal to the sum insured in the event of death ofthe life insured. Premiums increase each year with the age ofthe life insured ‘Unfortunately FL has mace a series of had investments and does not have sufficient capital to meet he requirements set bythe regulator. FL has been unable to raise more capital so the regulator has {decided to appoint a judicial manager for FL in accordance with the legislation, {A senior partner atthe accountng fir you work for has been invited by the regulator to tend for the role of judicial manager. Knowing that you have recently studied the judicial management of ‘Occidental and Regal, thepariner as asked you to provide some sctuaril perspectives onthe role. Draft an email to the partner listing the major isues you see inthe judicial management, including (@) Describe the role ofa judicial manager. [2 marks} () Describe the four most important steps the judicial manager will need to take inthe fist few ‘months ofthe judicial management [6 marks} (6) Explain any issues you forese arising fom the nature ofthe produets and distribution (rough financial planners. [3 marks) (@ Suggest one approsch to dealing withthe business that you thnk wil result in a good ‘outcome forthe customers. + Givetwo advantages fr your proposed approach, + Idenify two difficulties which you might encounter in implementing your proposed approach. [+ maris) (Question 414 marks} ‘You are the valuation actuary for Protection Life (“PL a life insurance company specialising in providing disability income insurance polices for professional and smal business owner customers ‘hough financial planners. The policies provide a monthly income of upto 75% of pre-sabilty ‘earings to customers who are unable to work in ther usual occupation because of accident oF sickness, When a customer qualifies for a benefit the benefit continues until the claimant returns to work, reaches age 6 or dies. When calculating the liabilities fr future claim payments you make assumptions about the “recovery rates” - hat is, the probity that claiments return to work within = specified time Valuation actuaries working fr other companies have nid you that they have noticed a significant reduction in recovery ates in cent times. So you decdod to make an investigation ofthe recovery rates for PL's portfolio ‘The result of your analysis confirmed thet PL's experience hasbeen similar o olher companies: there have been significant reductions in recovery rates. When you revised your best estimate assumptions for Margin on Services liability and profitrepoting you found tat the present value of ature profits for this portfolio has become negative, Provide your report to PL's Appointed Actuary setting out {a} The steps you used to make the recovery ate investigation, explaining how you applied each step in your investigation [6marks} () The consequences for PL’s reported profits, this year and inthe future, using the Margin on Services methed, [Bmarks} (6) Your suggestions of possible actions PL might take to return the busines to an appropriate level of profitability [Smarks} Question 5 [15 marks] The Performance Pus Investment Fund (*PPIE") is a pooled investment fund designed to provide a diversified portfolio of investments for retail customers, Customers purchase and redeem investments in the fund at unit prices which ae calculated daily (nto fees and taxes) ‘The investment mandate for the PPIF is to invest only insecurities listed on the securities exchange ‘ofthe country in which PPIF is base, However the manager fs permited to hold up to 20% in cash for market timing and liquidity reasons. Some accountng information for PPIF for the year ending 30 une 2012 i given below: [Statement ofincome na Espen For the year ending 30 June 2012 (6M) Income Expenditure Iovesmensfomcusomers 5 Redempons bycusomes 46 Inet nd divides 2 Fees pido mangers 3 Reale capil pins 6 Teco 2 Total expenses s “otal Income 1 Increase in cestomers funds 62 CCutomers fund at art of yar 23 385 (Customer funds at start of you ws ats Unite on issue 26 301 Vai price 131 1a (2) Batimate the money weighted return (net offs and taxes) cared by the PPIF forthe year ‘ending 30 June 2012. You may assume that cash flows to and fom customers occur at 31 December on average, i in the middle ofthe financial yer. (3 marks) (©) Calculate the time weighted retwn (net of fes and taxes) eared bythe PPIF forthe year ending 30 June 2012, (2 masks) ‘Thisausonconeson th next page () nerpet your results from (0) and (). [3 marks} (@) What benefit would you expect from carrying out an attribution analysis on these results? (3 marks) (6) Tue manager of PPIF wants to “reduce the riskiness ofthe invesiment returns without reducing the expected investment retus". You have been asked to provide advice on mectng this goal ‘What would you do? Include recommendations you would make about choice of appropriate securities, (4 marks} ‘Question 6 (17 marks} Ina particular country there isa well-established superannuation industy regulated by a prudential ‘regulator, Superannuation is compulsory for ll employees and employers must contribute 10% of | salaries toa superannuation fund chosen by each employee. ‘Thece area numberof superannuation finds which compete to attract employees to became ‘members, Allsuperannuation funds are mutual funds with no shareholders. Bach fund is governed by 2 rustee witha fiduciary responsiblity to look after the interests of members, All benefits are defined contribution type Until now there have been no prudential capital requirements for these funds. The regulator has just proposed the-ntroduction of «now capital requirement which will apply to all ands, The ‘announcement from the regular si: “The new capital requirement will improve the safety ofthe superannuation system for all ‘members by inroducing a risk-based capital requirement to cover the operational rsks of funds The requirement for each fnd wil reflect the actual operational risks in the nd with ‘minimum ‘evel of 0.25% offs under management ("FUM"). The capital requirement must be Im place by 1 January 2015, “The trustee ofthe Best-and-furest Fund ("BE") has concluded thai wll need to hold operational risk capital under the new rules of 0.72% of FUM. At present the find has no capital. The trustee ‘must advise members how it will deal with the new requiremens and is considering thee proposals to build up the required level of capital by 1 January 2015 ‘© Make an administration charge of $360 per member in December 2014 (the average FUM pet _memiber is expected to be $50,000) ‘Reade the investment earnings rate for December 2014 by 0.72% of FUM ‘+ Reduce the investment eamings rte foreach month January 013 through December 2014 by 005% of FUM ‘The trustee has asked your advice onthe following points, Draft your advice tothe tse (@) Briefly describe three (3 tots used by actutries to determine whether a proposal is equitable that ‘may be hepful in this context (S mars} (&] Explain wth reasons which ofthe thre options provides the most equitable outcome for members of BF. [6 masks) (©) The requirement of 0.72% is high compared to other funds. How could BF improve its ‘management of operational risks? [smasis) (Poor management of unit pricing ean create operational risk. Identify tree unit pricing problems ‘which might cause losses for BF. [3 marks Question 7 [7 marks] 1m August 2012 the President ofthe Institute of Actuaries of Australia wrote: Historically our Code of Conduct restricted what ve could do and how we had to do our jo. It required uso write detalled report that allowed te results o be recreated, it also required us tobe impartial at all tmas. But ou cients often dn’ value those Tong technical reports, they ‘want ou opinions and to advocate for them. The 2009 rewrite of the Code removed those resiricuons and replaced them with requirements ov professional Behaviour that are consistent ‘with the expectations of society without puting us ck a competitive disadvantage fo other professions. The Code now permis us to tackle a wider range of work more easily und to write ‘reports that met the requirements of our cients. Asa member of the Institute of Actuaries in Australia: {) Describe te circumstances in which you ae required by the 2009 Code of Professional Conduct (o give advice that i impartial, and when you may sve actuarial advice that i not impartial [3 marks} (8) What measures would you take to ensure you compsied withthe 2009 Code if you know your advice will be wed to advocate a particular point of view in a legal dispute? [4 marks) [END OF EXAMINATION