IFoA Core Principles 2025: Actuarial Advice and Standards, Exams of Business Economics

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• Aspiring Actuaries IFoA Core Principles

Chapter 1: Actuarial Advice

Name some clients actuaries could advise - ANS-Policyholders

Prospective policyholders

Members of benefit schemes and their defendants

Employers

Employees

Insurance company - board of directors, shareholders, creditors

Trustees of benefit schemes

Sponsors of benefits schemes

Auditors of insurance companies

Auditors of the sponsors of benefit schemes

Investment fund managers

Members of investment schemes sponsors of capital projects

Banks.

Where an actuary is advising the board of directors of an insurance company that is planning a large expansion in business, what may the advice have an impact on - ANS-The level of benefits that the company's policyholders receive

The level of premium charged to the company's new and existing policyholders

The level of dividend that the shareholders of the insurance company receive

The volume of new business the company can write

The level of taxes that the Government receives on the profits earned by the company

Other insurance companies that are competing in the same market

Reinsurance companies through the level of reinsurance business that the company requires

The employees of the insurance company through the employment benefits they receive·

Job security for the employees of the insurance company the work of the regulatory authorities that monitor the insurance company

Other insurance companies who may be required by legislation to contribute to a compensation scheme that pays benefits to the policyholders of insurance companies that fail

Employed sales staff and independent intermediaries

Where an actuary is advising the trustees on the investment policy for the assets of a pension scheme, the main other stakeholders who could be impacted by that advice are: - ANS-The employer who sponsors the scheme

The providers of capital to the sponsoring employer

The members of the scheme

The dependents of the members of the scheme

The fund managers - responsible for implementing the policy and will consider issues such as their expertise and experience in the proposed investment style and the associated costs

Employees who are not members of the scheme - affected if their employer is faced with unanticipated pension scheme liabilities in the future as a result of the investment policy chosen

Creditors and customers of the sponsor of the scheme, who may be similarly affected if the employer faces unexpectedly large pension scheme contributions in the future.

What can actuaries advise the Trustees of a Benefit scheme - ANS-Management; managing the assets of the scheme,

paying the benefits promised under the scheme as they fall due, maintaining solvency.

What can actuaries advise the sponsors of a Benefit scheme - ANS-Provision; providing protection benefits that meet the needs of the members and their dependents, providing retirement benefits that meet the needs of the members

Management; managing the cost of providing the benefits meeting legislative requirements.

What actuaries advice will be of particular interest the employees - ANS-Provision; provision of protection benefits on death or sickness provision of pension benefits on retirement

Management; investment of surplus personal funds.

What can actuaries advise the sponsors of capital projects - ANS-Assessment; of the risks underlying the project, consideration of potential risk mitigation techniques, evaluation of the future cashflows.

What can actuaries advise the Government on - ANS-Management; setting legislation that impacts on the provision of financial products, schemes, contracts and transactions that Provision; provide benefits on future financial events

Assessment; monitoring the adherence to this legislation funding benefit provision by the State, monitoring the funding of benefit provision by the State

Outline examples of the key risks that an insurance company may highlight in its report and accounts. - ANS-Market risk - adverse changes in the prices of assets, liquidity risk, currency risk

Credit risk - defaults of assets, reinsurers, customers, suppliers

Insurance risk - longevity, mortality, morbidity, persistency, expense, reinsurance

Operational risk - fraud, IT, human resources, outsourcing, branding, reporting

External risk - catastrophes, war, regulation, tax.

List information that would be sought from a customer before advising on an appropriate savings vehicle. - ANS-Amount of funds to invest

Timing of investment, eg lump sum or regular investment risk appetite

Need for liquidity

Short / long-term plans / objectives

Age

State of health tax status

Amount of control desired over the investments other assets held

Inheritance issues / dependants liabilities

Need for flexibility

What areas might be covered in a regulated sales process - ANS-Types of product brought to the market

Who can sell (certain qualifications may be required) Information to be disclosed

Basis for any illustrations

Cooling-off period.

Indicative advice - ANS-giving an opinion without fully investigating the issues - such as in response to a direct oral question

Factual advice - ANS-based on research of facts, eg legislation

Recommendations - ANS-researched and modelled forecasts, alternatives weighted, recommendations made consistent with requirements, work normally peer-reviewed.

Aims of the Actuarial Quality Framework - ANS-MACE

Methods - reliability and usefulness of actuarial methods

Regulators - to ensure that regulatory requirements are met ̧ eg a required funding level

Auditors - to assess the extent of the future liability to pay benefits to verify that the accounts are true and fair

Tax authorities - to ensure that the pension scheme is not be used for tax evasion

Trustees - to manage the assets of the scheme to ensure security of benefits for members to maintain solvency in the scheme

A new company has recently been set up. Explain the areas on which actuarial advice may be beneficial to the employer - ANS-Provision of suitable employee benefits - pension payments or death or ill-health benefits

Capital: how to invest surplus capital, how to raise additional capital, quantification of the amount of surplus capital owned by the business

Protecting tangible or intangible assets

Meeting legislation

Managing the costs of running the business.

Explain the ways in which a pensions actuary may have interaction with the State. - ANS-Determining the funding requirement for the State's retirement benefit scheme

Monitoring the funding of the State's retirement benefit provision on an ongoing basis

Setting the legislation to apply to private pension schemes, for example funding requirements, disclosure requirements and winding-up provisions

Monitoring whether the legislation that has been set is being applied.

Principal stakeholders; advising a country's government on a new type of savings regime as a way of encouraging the population of the country to save more for retirement - ANS-The Government - may be looking to maximise the amount of savings in order to minimise dependence on the State, eg for reasons of managing public sector finances, political reasons, or improving standards of living. Also want the regime to have favourable macroeconomic effects (since increased saving will potentially have a big impact on the investment markets and levels of economic activity).

Prospective customers of the new products are likely to want attractive, understandable products that meet their needs (eg products that are flexible when customers' situations change).

Prospective product providers are likely to want a regime that enables them to design and sell marketable products that meet customers' needs and also generate appropriate returns for the provider.

The regulator may be interested in the clarity of the rules in the new regime and how it will be implemented and monitored. They will consider policyholder issues, eg fair products, appropriate selling, checks on the financial strength of the product providers.

Principal stakeholders; advising an insurance company on whether to offer motor insurance only to a subset of drivers who meet some criteria enabling them to be classified as 'low-risk' driver - ANS-Current and potential future policyholders are likely to find the cost of insurance cheaper if they satisfy the 'good driver' criteria. They will no longer be able to obtain insurance with the company if they do not meet the criteria.

Competitors - might find that, unless they introduce a similar categorisation, they attract mainly worse drivers (as the good drivers may obtain cheaper cover with the company introducing the scheme).

The insurance company's shareholders - If the business is profitable and the volumes sold are good, their profits may increase.

The regulator may have a view on the proposed scheme. In the country where the insurer operates, there may be legal or regulatory requirements to offer cover to all drivers, at least to some minimum level.

Principal stakeholders; advising the management group of a government hospital on whether a new hospital wing should be entirely government built and financed or built and financed in conjunction with a private sector company - ANS-The Government (and the management group as the representative of the Government) are likely to be critically interested in the levels of cost of the two options and how the 'sharing' of the second option would operate (eg sharing of costs and risks). Wider political implications. The general public may be concerned about the quality of care and buildings.

The employees of the hospital will be affected by whether or not the private sector is involved. There may be issues of future job security for certain employees.

Potential private sector partners and sponsors will be interested in risk vs return.

Principal stakeholders; advising the sponsor of a benefit scheme on the level of their contribution to the scheme. - ANS-The sponsor may want to minimise their contribution subject to meeting their aims in providing the scheme and depending on their available resources. They may be keen to manage the contribution pattern so that they are contributing at the optimum time.

Investment strategy

Commission levels

Constraints, eg ease of access to funds

Flexibility, eg changing investments, amount invested

Risk levels

Financial strength of providers

Tax treatment.

A pension scheme is being designed with the objective 'that it gives the best pension payments'. Explain what 'best' might mean to each of the following stakeholders:

(i) pensioners - ANS-Most secure

Maintain standard of living

High chance of additional discretionary benefits

A pension scheme is being designed with the objective 'that it gives the best pension payments'. Explain what 'best' might mean to each of the following stakeholders:

(ii) members with deferred benefits - ANS-Most secure

Predictable benefits

Pays high transfer values

Provides protection benefits (eg ill-health or death benefits if die before retirement)

A pension scheme is being designed with the objective 'that it gives the best pension payments'. Explain what 'best' might mean to each of the following stakeholders:

(iii) current members of the scheme working for the sponsor - ANS-Likely to lead to highest benefits without jeopardising the likelihood of the sponsor continuing (so the member still has a job)

Predictable benefits

Portable

Flexible

Provides protection benefits (eg ill-health or death benefits if die before retirement)

A pension scheme is being designed with the objective 'that it gives the best pension payments'. Explain what 'best' might mean to each of the following stakeholders:

(iv) future employees of the sponsor - ANS-Not too much money paid into scheme so security of sponsor and ability to offer work is paramount

Not too much paid into scheme so sponsor is not wary about continuing to support it in the long run

Outline the three types of advice that an actuarial consultant may provide to an insurance company seeking help in determining an appropriate investment strategy. - ANS-Factual advice - giving an opinion on the appropriate strategy based on research of the facts, ie available asset classes and historical returns.

Indicative advice - giving an opinion on suitable investments without investigating the issues.

Recommendations - giving an opinion based on researched and modelled forecasts, perhaps carrying out an asset-liability modelling exercise. This will include sensitivity and scenario testing with recommendations supplied based on research of the facts.

Outline the framework for the actuarial standards of the UK actuarial profession. - ANS-The professional framework - comprises professional conduct, ethical and technical standards.

The IFoA's requirements - professional conduct standards are set out in the Actuaries' Code. Professional skills and detailed consideration of the Actuaries' Code are covered in an online post- qualification course. Actuaries subject to the continuing professional development scheme are required to keep their professional as well as their technical skills up to date.

Ethical and professional best practice and standards are also under the IFoA- apply to all members of the profession, regardless of the territory or area of work in which they operate.

Actuaries are also subject to Technical Actuarial Standards (TASs), which are set and maintained by the Financial Reporting Council (FRC). These can be on either specific or generic topics. The TASs apply to work done in relation to UK operations of entities and any non-UK operations which report in the UK. The aim of the TASs is to ensure that users for whom actuarial information is created can place a high degree of reliance on the information's 'relevance, transparency of assumptions, completeness and comprehensibility'.