MACQUARIE SEATNUMBER: ROOM UNIVERSITY ae This question paper must be returned Candidates are not permitted to remove OTHER NAMES. {any part of it from the examination room. ‘STUDENT NUMBER, SESSION 1 FORMAL EXAMINATIONS — JUNE/JULY 2014 [EXAMINATION DETAILS: | Unit Code: ‘AGSTA02 / 851 /891X | Unit Name: ‘Actuarial Control Cycle 1 | Duration of exam al feacina tie | yy, eS | oasioas ‘Thvee (3) hours pls ten (10) minutes reading time Total no. of questions: Seven (7) “Total no. of pages (incl ie cover ea Eight (8) INSTRUCTIONS: ‘The marks for this paper total 100. The number of marks for each question /sub-question is shown in parentheses atthe start of each question / sub-queston, Answer all questions. You have been supplied with seven (7) answer booklets. Label them Qt, Q2, 8, 4, 5, 6 ‘and Q7, thea answer each question in the corresponding separate booklet \rite your name and student ID atthe top ofthis question paper, as well as on each of your ‘answer booklets. Hand in this question paper and your seven answer booklets al the end of the exam, MATERIALS PERMITTEDINOT PERMITTED: ‘Students are not permitted to bring any notes / materials into the exam. No dictionaries permitted. 'Non-programmable calculators (no text retrieval capacity) permited ‘This examination is being held in a number of locations intemationally and itis 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. Ary breaches (either disclosing Information or receiving information) will be viewed as professional misconduct as wel ‘as an infringement of University rules and will be deait with accordingly. ‘cond oe ore oe rns ped ye ral nian operat mat hon fom ermine Ses cae eco ened nted none ‘naa mayo snr trad rat sys samen. A etl suber mle te nf cover ett i tiger se hve sence tne nso oy bo at ecaiatn e mass may So repae Be Oss Deas[14] Question + @ 15) 13) In his 2007 book “The Black Swan’, Nassim Nicholas Taleb defines a Black ‘Swan event as an event with the folowing three atributes: ‘+ First, it's an outer, as it les outside the reaim of regular expectations, ‘because nothing in the past can convincingly poin'to its possibilty, Second, it caries an extrame ‘impact. ‘= Third, in spite of its outlier status, human nature makes us attempt to velop explanations for its occurrence after the ‘act, making it explainable ‘and predictable. (a). Give an example of a Black Swan event that has occured in the past and ‘explain how it salistes Talebs three crteria, (b) Give an example of @ Black Swan event you think could occur inthe future ‘and explain how it would satisfy Taleb’s three criteria (©) How can a good Enterprise Risk Management Framework help a financial ‘services organisation deal with an unfavourable Baack Swan event? (a) How can @ good Enterprise Risk Management Framework help a financial, ‘services organisation benefit from a favourable Black Swan event?115] Question 2 4 @ i) 13) The Government of a country has recently established an Inquiry into ts financi! system, The Terms of Reference of the Inquiry include: ‘Tho. Inguity will refresh the philosophy, pinciples and objectives underpinning. the development of a well-functioning financial system, Including: ‘+ balancing competition, innovation, efficiency, stablity end consumer protection ‘+ how financial risk is allocated and systemic rist ls managed: ‘+ assessing the effectiveness and noed for fhancial regulation, including iis impact on costs, flexiiliy, innovation and industry, as well as among ‘+ the role of Government; and + the role, objectives, funding and performance of financial regulators ‘including an international comparison, Help your friend, who is journalist, to understand these Terms of Reference by ‘addressing the following issues and questions using non-technical language. (a) Briefly describe the four main sources of potential market failure. (b) When regulation is used to deal with sources of market fallure, what are the direct and indirect costs of such regulation? (€) Relating your answer to the banking, insurance ard superannuation sectors of the financial system, ouline the main features of a well-functioning financial system. (@)_Identiy and briety outine a key issue that you would expect the Inquiry to ‘consider for each ofthe five dot points in the Terms of Reference,[15] Question 3 (4 Win Resorts (WR’) has received approval to build a kxury resort and casino on ‘a waterfront site in an attractive oy in the Asta Pacific region. itis envisaged thal the project wil include nxury hotel accommodation, restaurants and bars, world: ‘lass shopping, a range of lessure activiles and an exclusive casino with high minimum bets, To be successful the resort wil need to attract wealthy intemational tourists. WR plans to construct the resort over the next four years folowed by a lavish ‘opening ceremony and an Intemational publicity campaign to attract the fst wave of guests. ‘Some decisions have not yet been made, These include the size of the resort, the proportion of space devoted to each of the planned activities, the method of funding the development (that Is, equity or debi) and the arrangements with tour ‘companies who will source the quests and transport them tothe resort, {@) List four (4) important socio-economic contextual issues you think might affect the success of the new resort, and briefly explain your choices. (b) WR management are concemed about the eamings variabilty from the sind because come guests are likely to place very large bets which can Win oF lose by chance. Suggest a model that will felp WR lo understand this, ‘eamings risk (e) Explain how @ cash flow model might be used fo assist WR in making other ‘business decisions relating to the project including the decisions that have rot yet been made. (@) Suggest possible sources of data that will assist he development of such a Cash flow model.114) Question 4 [4] (a) Describe what is meant by the macroeconomic cyele, and give, with ‘reasons, your estimate of where in that cycle the Australian economy is 16] (b) Give three practical examples relevant to the ausiness of an insurance ‘company, of how the estimate in (a) would influence your assumptions for financial projections over the nex! five years. [4] (6) Explain with reasons whether you believe now is a good time to match ‘assets and lables to immunise for interest rate changes, and describe any alternatives you would consider.14) m 3) 6 Question 5 (a) tb) ©) (@) e) In. establishing prudential capital requirements for general insurance Companies, what is meant by insurance risk and why would a prudential regulator require general insurance companies to hold capital to cover this ‘isk? ‘What principles would you expect a prudential regulator to consider when. defining the capital requirements for insurance risk for general insurance companies? In. establishing prudential capital requirements for general insurance ‘companies, what is meant by insurance concentration risk? \What principles would you expect a prudential reguiator to consider when defining the capital requirements for insurance concentration risk for ‘general insurance companies? In the case of insurance risk, explain why @ prusential regulator might set ‘ifferent capital requirements for life insurance companies compared to ‘general insurance companies, and outine the principles the regulator would be expected to consider when defining the capital requirements. for Insurance risk for fe insurance companies.[14] Question 6 A large financial services company offers a variety of reall products that provide both wealth accumulation and insurance benefits payable on death, disabllly and trauma. All these products are currently sold and distrsuted by intermediarios to whom the company pays commissions. The directors and senior management 3r@ Now considering selling and distributing products to retal customers directly, especially using the internet What differences in product design will need to be considered? What difficulties might atise from using different sales and distribution channels, and how can these be managed? Do you believe the company shoud simply adapt its existing products or would it be better to develop entirely diferent products for direct sale ‘and distribution? Discuss this for both wealth accumulation and insurance Products, and give your reasons in each case,(14) (0) O Question 7 ‘The Super Duper Fund (‘SDF is a large industry superannuation fund which acts as the default superannuation fund for a large number of employers and is also a public offer fund, so individual employees may choose to join SDF and have their contributions paid into the fund. SDF is a mutual fund with no shareholders and all benefits are defined contribution type. ‘At present SDF charges the following fees to all members ‘Administration ~ $80 per annum Investment ~0.7% per annum of the account balance of each member “The Chief Executive ((CE") of SDF is concerned tht members who accumuiate larger benefits are moving their balances to other funds, often self-managed superannuation funds. The CE would lke to retain these members because ‘members with larger benefits make a higher contribution to the operational costs of SOF than members with smaller balances. “The CE has proposed that the fee structure be changed to ‘Administration - $20 per annum Investment —for each member: 0.7% pa. of the frst $250,000 of account balance, plus (0.35% p.a. ofthe next $250,000 of account balance, plus Nilfor excess account balances above $500,000 ‘with the objective of attracting and retaining more members with higher account balances. ‘You are the consulting actuary to SDF and the CE has asked you for advice on the pricing process you suggest for analysing and reviewing this significant change in pricing (a) Prepare your notes on the pricing process for discussion with the CE. (b) Consider the postion of SDF immediately ater the proposed pricing change. What are the risks to SDF and how migh they be managed? END OF THE EXAMINATION