question paper must be SEAT NUMBER recs ROOM: roturned. Candidates are not ‘oft from the examination room. FAMILY NAN OTHER NAMES. ‘STUDENT NUMBER... MACQUARIE UNIVERSITY SESSION 1 EXAMINATIONS - JUNE 2012 Code and Name: Date: ‘Time Allowed: ‘Total Number of Questions: ‘ACST402/831/831X ACTUARIAL CONTROL CYCLE 1 Friday, 15 June 2012, 8.50 am “Three (3) hours plus ten (10) minutes reading ime Seven (7) in total. The number of marks for each question Is ‘shown in parenthotee atthe sta of the question ‘The marks for this paper tolal 100. You stould answer all questions, You have been supplied with seven (7) answe: booklets. Label them Q1, Q2, 03, 4, Q5, O6 and G7 respectholy, then enswer ‘each question inthe conesponding separate booklet \Wiite your name and student ID atthe top ofthis question paper, ‘8s well as on each of your answer booklets. Hand in this question paper and your seven answer booklets at the endaf the exam, Students are not permitted to bring any notes intothe exam, No dictionaries permitted Non-programmable calculators (no text retievel capacty) permit. ee This examination is being held in a number of locations internationally anditis inevitable that there will be differences in timing of up to several hours. You are absokitely prohibited from doing anything that may lead fo other students gaining information about this exam paper boforo siting forthe ‘examination. Any breaches (either disclosing information or recelving information) willbe viewed as professional misconduct as well as an infringement ‘of University rules and will be deak with accordingly.Question 4 (13 marks) Every year Australian private health insurers are required to submit proposed changes in the prices of their producs for approval by the Minister for Health and Ageing. The products provide coverage for the costs of admission and treatment as a private patient in hospital and for reimbursement of costs incurred for a variety of services provided outside hospltals by health professionals including dentists, opticians, physiotherapists and pharmacists. The appointed actuary of each health insurer Is required to certly the suitability of the assumptons and modelling that is used to produce the financial projections accompanying these pricing submissions. Give with reasons the main contextual factors that you believe the actuary needs to consider in this annual certification process. ‘Question 2 (16 marks) Ina particular county there is a well-established superannuation Industry regulated by & prudential regulator. Superannuation is compulsory forall employees and employers must Contribute 10% of salaries toa superannuation fund chosen by each employee. ‘There are a number of superannuation funds which compete to attract employees to become members, All superannuation funds are mutual funds with no shareholders. Each fund is governed by a trustee with a fiduciary responsibilty to look after the interests of ‘members. All benefits are defined contribution type, that is, members’ benefits are the accumulation ofthe contriutions made on their behaif together wth investment earings less deductions for expenses of running the funds and for tax. Until now there have been no prudential capital requirements for these funds, The regulator has Just proposes the introduction of a new capital requirement which will apply to all funds, The announcement from the regulator said “The new capital recuirement will improve the safely of the superannuation system for all members by introducing a risk-based capital requirement to cover the operational risks of funds. The capital requirement for each fund will reflect the operational risk of the individual fund with a minimum amount of 0.26% of funds under management.” (2) [Remember to answor each question in a new booklet] Explain in your own words the meaning of operational risk and give two (2) examples (of operational risks for superannuation funds. [8 marks} (b) Explain how the (mutual) superannuation funds will meet the new capital requirements and the advantages and disadvantages for fund members. [6 marks] (©) Outline the advantages and disadvantages of the proposed regulation as a means of meeting the objective of “improving the safety of the superannuation system’ 16 marks} (@) Suggest steps the tnisiee of a fund should take to ensure that the new capital requirements are meton an ongoing basis, 2 marks] Question 3 is over the pageQuestion 3 (15 marks) Max and Min are married with two adult chiéren. They have been close friends of your family for many years, ‘They are now approaching retirement and nave Visited @ financial planner tor help jn ‘organising their finances. The financial planner is employed by a large bank which ‘considered financially strong. The planner carried out an analysis of the needs of Max ‘and Min and prepared a writin statoment of advice for them, ‘The planner has recommended that thelr investment funds should be invested in a shares. ‘rust and a mortgage trust, both mavaged by a subsidiary ofthe bank. The shares trust i invested in a diverse portfolio of shares listed on the slock exchange. The mortgage trust 's Invested in morigage loans secured by residential and commercial property. Units in both trusts can be Lough from the manager at any time and sold back to the manager at ‘ price which reflects the value ofthe underlying investments, Max and Min are meeting with the planner next week and have asked for your help to ‘make sure they ask the fight questions. Write down the important issues you will raise with them under the following headings: (@) What customer needs are met by obtaining financial advice from the planner and hat risks do customers face in taking such advice? [4 marks] (©) What customer needs are met by each ofthe two unit trusts and what are the risks to ‘customers investing in such unit trusts? [6 marks) ()_ List five (6) important issues in relation to Max's and Mins personal circumstances. that they should consider before implementing the plan proposed by the planner, ‘and explain each issue. (Do not repeat points already covered in (a) and (b)) 15 marks} ‘Question 4 (14 marks) The sales director of a large insurer has proposed the introduction of an innovativa Insurance product that wil compensate people who are unable to work due to liness or accident with a lump sum payment, calculated according to income and the expected uration off work based on the diagnosis and estimates of the “normal course of recovery’. This produc is intended io complement the insurer's existing trauma insurance and disability Income benefits ‘The proposal is now being considered in genoral terms before the organisation commits ‘major resources to its development. You have been asked to prepare a report identifying and describing the actuarial processes that would be naeded to develop the new product ‘and bring it in completed form to the market. (Your report should focus on actuarial processes rather than processes that would be considered by non-actuarial departments, ‘such se, for example, marketing). Draft a brief outline of your report. Question 5 is over the pageQuestion 5 (15 marks) Global Insurances (‘GI’) is an Intemational general insurance group with operations in many counties. You have recently joined Gl as an analyst working In the head office and you have been asked to review the various models that have been usec within Gl to estimate the staistical distribution of total claims for the group as a whole and for Individual products and subsidiaries. A number of the existing models use Monte Carlo simulation methods. Once you have reviewed the existing models you will take responsibilty for the governance of these models, ensuring that the models are robust and used consistently. GI has recently established an Enterprise Risk Management framework throughout the Group and is working with regulators to adopt an intemal modelling approach for regulatory capital requirements in a numberof countries. Prepare notes for members ofthe head office actuarial team on how you will proceed with this assignment, including the following points: (a) An explanation of Monte Carlo methods and how such methods can be used 10 {generate the distribution of total claims from a portfolio. {8 marks} (©) A description ofthe main steps you wil take to perform the Monte Caro simulations, ‘aquired for each subsidiary. [5 marks] (@) An outline of four (4) diferent practical uses you can see for this analysis, including {ses for determining regulatory capital and for implementing an ERM framework within Gl, [4 marks} (a) description of the practical issues you expect to encounter in managing the governance of these models (mans) Question 6 is over the pageQuestion 6 (14 marks) You are the pricing actuary for a life insurance company which specialises in Ife risk products such as term life and lifetime annuities. Your employer is an established Company with a moderataly large existing portfolio of policies. The markot is compottive ‘and there are a couple of small companies aggressively seeking to Increase their market shares, Like other companies, your employer has always used gender as a rating factor, 20 females pay lower premiums for term life than males, but higher premiums for lifetime ‘annuities. Population and industry studies have shown that females experience lower ‘mortality rates than males. The government has just announced that in order to remove gender-based discrimination all life insurance companies will be required to offer the same premium rates for males land females for new policies sold from the start of next year. Your employer is keen to assess the effect ofthis change on pricing for these products. Write memo to the executive committe of the company to outline your initial thoughts ‘on the following: (@) The mode! you will use to develop the new premium rates, [3 marks) (b) How you propose to choose the mortality assumptions to be used in the pricing of the new polices. [4 marks} (c) How the company should manage the risk that your pricing assumptions prove to be overly optimistic, [marks] (@) The general and contextual issues that may arise from the change that would affect pricing ofthe new policies, 4 marks} Question 7 is over the pageQuestion 7 (13 marks) The Lantana Shire Council is located in regional Australia. The Cound area has a population of about 12,000 people and covers a huge land area centred on the town of Lantana, The main industries in the Shire are agriculture and mining, CChris Farmer, the Chief Executive Officer of the Council, is keen to improve the Counci’s ‘management of risks. You are a risk management consultant and Chris has asked for your advice on this project. ‘The Council is govemed by seven elected Councilors including the Mayor. Chis said that the Councillors generally represent the interests of the community but have litle ‘appreciation of financial management or risk management. Councilors are paid a modest allowance for what is often a time-consuming role and offen seek election to the Council to pronote their own politcal ambitions. and/or their own business interests. The next CCoundl election Is due in three years’ time, The Council has an annual income, mainly from rates, of $7 millon, and has 58 ‘employees in total including office staf, engineers and maintenance workers. The finance ‘employees are the Finance Manager, reporting to Chri, and a bookkeeper. The Finance Manager is. well respected and presents clear and accurate financial reports. for ‘management and the Couneillors.. ‘One major financial risk for the Council relates to budgeting. Chris said that operational expenses have exceeded operational income for the past five years, resulting in @ depleton of the Counci's surplus funds. Councilors approve the budget at the start of ‘each year but subsequently they often promise and approve new Council facilities and ‘Services that are not included in the budget. Chris said “We are not a big bank and it would not be feasible for us to adopt an Enterprise Risk Management ("ERM") framework or processes as sophisticated as those. you vould find in a big bank. But we need to introduce ERM in a way that's appropriate for the Counci To begin the project Chris has asked you to prepare notes on: (2) The steps you suggest to manage the budget risk described above, (7 marks) (b) The steps you suggest to introduce an ERM framework for managing all the risks of ‘the Council in a manner appropriate to the circumstances of the Counci. {6 marks) END OF THE EXAM