‘SEAT NUMBER: ROOM:
MACQUARIE
UNIVERSITY FAMILY NAME.
This question paper must be returned. OTHER NAMES.
(Candidates are not permitted to remove
‘any part oft from the examination room. STUDENT NUMBER.
SESSION 2 FORMAL EXAMINATIONS ~ NOVEMBER/DECEMBER 2014
EXAMINATION DETAILS:
Unit Code: [AGST403 and ACSTES2
Unit Name: ‘Actuarial Control Cycle 2
uration of exam ———
(aang tne appa | 2 OU pi en mines reading time a
Total no. of questions: [7 :
Total no. of pages i J a a S|
nck his cover eee):
INSTRUCTIONS:
Please answer every question
‘The number of marks allocated for each question is shown in brackots |] atthe start ofthe
question. The number of marks for each subquestion is shown in brackets (] at the end of the
subquestion. The total number of marks is 100
‘You have been supplied with 7 answer booklets, Please write your name ard student id number
‘on each booklet. Label the booklets as Q1, G2, Q3, 4, 5, Q6, Q7. Answer each question in a
‘separate booklet,
Please write your name and student id on this paper and hand itn (along with your answer
booklets) a the end of the examination,
This examination is being held in a number of locations intemationally and it is inevitable
that there will be differences in timing of up to several hours. You are absolutely
prohibited from doing anything that may lead to other students gaining information about
this exam paper before sitting for the examination, Any breaches (either disclosing,
information or receiving information) will be viewed as professional msconduct as well as
an infringement of University rules and will be dealt with accordingly.
(MATERIALS PERMITTED/NOT PERMITTED:
No dictionaries are permitted.
'Non-programmable calcustore which do not havea text retrieval capacity ere permitted.
——
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‘Seesaw bd Been oan bm ae er, be matey Sra ty Br Eas Question 1 [18 marks}
‘You are estimating the outstanding claims and premium lables fora general insurance company
atthe end of its financial year. Its afew days after year end and you.are making preliminary
estimate for reporting to the parent company.
‘Two weeks before year end, a major hurricane caused widespread storm damage and flooding in
‘areas where the company has many customers. The company has received some claims and
enquiries from customers but the company’s claims team expect many more claims to be made as.
customers return home and assess the damage to ther properties
(a) Describe three (3) Important components ofthe company’s outstanding claims and,
premium lables [3 marks)
{b) Explain ow your liabilty estimates for each ofthe three components willbe affected by
aims from the huricane. (3 marks}
() What practical issues will you need to consider in estimating the liabilities forthe hurricane
aims? ([4marks)
(4) Weather catastrophes occur from time to time, What steps can you take now to help the
‘company's actusril tear make better clims estimations after future catastrophes?
[3 marks}
(e) The insurer’ risk modeling team has also analysed the claims asng rom the hurricane. As
‘result they have recommended an increase Inthe Insurance concentration component of
the capital requirements. As aresut ofthis change, the company’s capitals now well below
‘the target capital set by the Board, although stil above the regulatory minimum, You have
been asked to make suggestions for dealing with this prablem over a two year time frame.
Suggest some alternatives, pointing out any possible disadvantages for each suggestion.
[5 marks] ‘Question 2 [13 marks]
Inthe United States, Money Market Funds (MMFs) are managed investment funds which specalise
in investing in short term fixed interest securities with terms of ess than 3 years. Different MMS
have different investment strates, 8. some only invest in state and Federal government
securities; others invest in a wider range of secures, including securities issued by AAA rated
corporations (called "commercial paper).
Most MMs allow investors to withdraw their money at anytime; investors commonly recelve the
{uil amount of thelr intial Investment plus interest upto the date of withdrawal
‘Anyone can invest in MMs: some Investors ace real customers, some are large companies.
‘The MMFs provide investors with the opportunity to earn rates of retin which are slightly higher
than the rates earned on bank accounts, witha high level of security and liquidity. Many of the
MMs ace subsicares of major banks
MMs are popular investment. Just prior tothe Global Financlal sls, MMs held more than $25
trillon in assets
In September 2008, after the collapse of Lehman, there was a run on some large MMFs - hundreds
of billions of dollars was withdrawn over the next two months.
(a) Which MMs would be most likely to face liquidity problems? (2 mars}
(6) Since so much money was withdrawn by worried customers, the MMFs had @ negative cash
flow and stopped buying new secures. This meant that many corporations could no longer
ralse money by issuing commercial pape, i. they lost an Important source of funding
\Which they needed to run thelr businesses. To solve this problem and prevent runs on the
MMS, the government considered offering government guarantees on ll money invested
in MMFs, Can you dently any problems which might arse 2s a result of guaranteeing the
Mes? (3 marks)
(c)__Afterthe crisis was over, the government suggested that the MMs should take steps to
Irnprove their iquidty risk management. Suppose that you are the rsk manager for an
[MMF. Uist the steps you would tate to manage your MMF'sliquldty risk. Also identify any
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