CHAPTER 2_THE CONTEXT OF ACTUARIAL WORK.pdf

CHAPTER 2_THE CONTEXT OF ACTUARIAL WORK.pdf

1. CHAPTER 2 : THE
CONTEXT OF
ACTUARIAL WORK
PREPARED BY: SITI NURASYIKIN SHAMSUDDIN

2. INTRODUCTION
•Inthischapter,wewillidentifycommonelementsofthecontextof
actuarialworkanddiscusshowtheseelementsaffectthe workwedoas
actuaries.
1)Actuarialworkalwaysoccurswithinacontextorenvironment(This
contextorenvironmentismadeupofa differenttypeofelements).
2)Thecontextisdifferentfromonecountrytoanother.
3)Andinthatonecountry,thecontextalsodifferentfromonesectorto
another.
4)Andinthatonesector, thecontextalsodifferentfromonecompanyto
another(andalsofromoneclienttoanother).
5)Thecontextchanges overtime.
•Example
•Supposeyouare aconsultant whoperformsactuarialreviewsforseveral
definedbenefit superannuationschemes.
-Youmustknowthecontextorenvironmentwithinwhichallofthe
schemeoperates(e.g.relevantlegislationand regulations,taxation,
economicconditionand trends,actuarialpractice etc)
-Youmustalsoknoweachschemeanditscircumstances(e.g.trust
deed,benefitstructure,size,demographicprofileofits members,
attitudeoftrustees,etc)
-Thiscontextorenvironment iscommontoallthe schemesthat youreview.
-So,thereisnostandard black-and-whiteguideforactuarialwork.

3. INTRODUCTION–COMPONENTS OFTHECONTEXT
No Broad Category Components
1 Professional context •Code of Conduct
•Practice Standards
2 Regulatory Environment
(Government , Legislation ,
Judiciary)
•Laws of the country
•Supervisory authorities
•Regulations
•Government Policy
•Taxation
•Political and judicial decisions
•Social assistance and social insurance
3 Physical Environment •Climate
•Natural perils (earthquake, storms, etc)

4. INTRODUCTION–COMPONENTSOFTHECONTEXT
NoBroad Category Components
4Economic and Social Environment•Economic structure, conditions and trends
•Demographic structure and trends
•Community values and attitude
•Cultural factors
•Work and employment patterns
•Industrial issues (labour union)
•Accounting standards and practices
•Technological developments
5Industry Environment •Range of products and services offered
•Convergence of financial institutions
•Product distributions and intermediaries
•Competitions
•Industry associations

5. PROFESSIONAL AND REGULATORY CONTEXT
1)Governmentoftenregulatesfinancialinstitutionsandtheiractivities.
2)Regulationmaybeimposedthroughacombinationoflegislation(lawspassedby
parliament)and supervisionbystatutorybodiesknownassupervisoryauthoritiesor
regulators,thataregivenspecific responsibilitiesandprocess.
3)Theregulatoryenvironmenthasamajorimpactonactuarialwork.
4)Importance:
a)Topromotehighstandardsofactuarialpracticeregardinginsurancesandfinances.
b)Couldbedonebypromotingcommonstandardsforexaminingtechnical
competence forprofessionalconductanddisciplinaryprocedures.
c)Actuarialprofessioniswellplacedtosupportregulatorinsafeguardingthe
interest of policyholders.

6. PROFESIONAL & REGULATORY CONTEXT

7. PROFESSIONAL AND REGULATORY CONTEXT

8. GOVERNMENT POLICY
1)Beingawareofgovernmentpolicyasitevolves,andunderstandingtheforcesshaping
it,canhelp anactuarytoadviseclientsoremployersonpossiblefuturelegislative,
regulatoryandotherchanges andtheirlikelyimpact.
2)Similarly,itcanbeusefultobeawareofthepolicyplatformofpoliticalpartieswhich
arenotingovernment,butwhichmaywingovernmentormayattainapositionof
influenceinthefuture.
3)Actuarialprofessionalassociationsmonitorgovernmentpolicydevelopment–they
oftenparticipate inpublicdebateonpolicydirectionsandprovideadviseto
politiciansandpublicservantsonissues relatedtoactuarialwork.
4)Actuariesoftenserveongovernmentadvisorybodies,committeeofenquiryand
boardsof regulatoryandsupervisoryauthorities-whereactuarialexpertisrelevant.

9. GOVERNMENT POLICY

10. TAXATION
1)Governmentsometimesencouragescertainfinancialbehaviorofcorporationsorindividualsby
givingfavorable taxationtreatment –thisdoesnotmeana completeabsenceoftaxation.
2)Financialinstitutions,likeotherbusinessenterprises-aresubjecttothetaxationregimesofthe
countries/states inwhichthey operate.
3)Actuariesshouldbeawareofpossible future changestotaxationregimes.
4)Taxationcanaffect:
a)Productpricing
b)Valuingpolicy/schemeliabilities
c)Analyzingexpenses
d)Projectinglikelyfuturecashflow
5)Taxationconsiderationsisimportantforproductdesign–thecustomercanbenefitfromthetax
exemptionbythe governmentwhenpurchasingacertainproducts(providedthatthe
productwasdesigninthatwaywiththe collaborationwithgovernmenttaxationprocedures)

11. TAXATION

12. POLITICAL AND JUDICIAL DECISIONS
1)Changestothe country’slaw–indirectimpactonareaswhereactuariesinvolved.
•Example
•Theintroductionofcompulsorywearingofseatbeltsinmotorvehiclesortherandombreath
testing(checkingalcohollevels)ofmotorvehicledrivers.Theseactionshaveahugeimpactonthe
severityofMVA–motorvehicleaccident.Asaresult,thecostofmotorvehicleinsuranceclaimsare
affected.
2)Judicialdecisions–rulingsmadeby
judgesincourt oflaw. Thisisimportant
when newlegislationisenacted.
3)Theinterpretationofaninsurancepolicy’swordingmaybecomethesubjectofajudicialruling.
•Example
•ALifeInsurancecompanymarketsacriticalillnessinsurancepolicythathasbeenpricedonthe
assumptionthatitcoversonlyaspecifiedsetofmedicalconditionsandprocedures.Ifthatsetof
coveredconditionsisnotpreciselyandcarefullyworded,acourtmaysubsequentlyruledthatthe
policycoversaconditionthatthecompanyneverintendedtobeincluded.Theresulting
unanticipatedclaimscoulddamagethefinancialsoundnessofthatlifeinsurancecompany.

13. SOCIAL ASSISTANCE AND SOCIAL INSURANCE
1)Governmentsoftenprovidesocialsecuritybenefitprograms(butinsomecases,workersare
requiredtomakesomeindividualcontributiontowardsthecostofthebenefitprovided.Inother
cases,benefitsarefinancedfromtaxationrevenue):
a)Agepensions
b)Disabilitypensions
c)Freeorsubsidisedhealthcare
d)Unemploymentbenefits
e)Workinjurybenefits
2)Social assistancebenefits –designedto addressneedsand eligibility isbased onneed (theyusually
do notdepend on amountsorperiods ofcontribution,butmaybelinkedtolengthofresidencein
thecountry).
3)Theavailability,natureandextentofsocialsecuritybenefitscanimpactthedemandforfinancial
services.Fromtimetotime,governmentscomeunderpressuretodecrease(orincrease)the
relativelevelofsocialsecuritybenefits-Ifbenefitsarereduced,individualstendtoturnto
financialserviceproviderstoenhancetheirpersonalfinancialsecurityprogramsandviceversa.

14. SOCIAL ASSISTANCE AND SOCIAL INSURANCE
•Differentapproachestosocialsecurityhavebeenusedindifferentcountries.
•Example:
•InChina,untilthemovementtowardsfreeenterpriseinrecentyears,manymillionsof
peoplewereprotectedbyaso-calledcradle-to-gravesystemofsocialsecurity.Most
economicenterpriseswerestate-owned,andaccountedforaveryhighproportionof
thetotalpopulationsasemployees.EachState-Owned Enterprise(SOE)was
responsibleforthewelfareofitsownemployeesforlife.Thisincludedprovisionofold
agepensionstoretiredworkers.

15. SOCIAL ASSISTANCE AND SOCIAL INSURANCE

16. CLIMATE AND NATURAL PERILS

17. ECONOMIC CONDITIONS AND TRENDS
1)Actuariesemployersorclientsareoftenfinancialinstitutionsorschemeswhose
futureexperiencewillbegreatly affectedbyeconomicconditionsandtheir
changes overtime.
2)Toforecastfuturecashflowsarisingfromthebusiness,assumptionsareneededfora
rangeoffactorsofeconomic variables (thiswillinfluence choiceofassumptions):
a)Currenteconomicconditions
b)Likelyfuturetrends
c)Investmentearningrates
d)Inflationrates
e)Investmentreturns
f)Savingsproducts
g)Salaryinflationfordefinedbenefitsuperannuationschemes
h)Expenseinflationforlong-termfixedpremiuminsurance policies

18. ECONOMIC CONDITIONS AND TRENDS
•Examples:
a)Insuranceclaims–significantlyaffectedbytheeconomic factors
b)Changingdemandandsupplyconditionsaffectsthepricesofgoodsand
services–affectedthecostofinsurer’s claimsfortherepairorreplacementod
damagedorstolenproperty
c)Intimesofrecession,leadtounemployment,claimcostforpersonalinjuryunder
workerscompensationinsurance mayrise –because injuredemployeescannotbe
broughtbacktoworkonalternativeduties.
d)Intimesofrecession, leadtobusinessfailuresandhigherinterestrates–encourage
more theft,fraudandarson.
•3)Economicstructureofthecountry’spopulation–importantaspect
•Example:
•Countrieswithahighproportionofmiddleincomefamilieswillsupportadiversityof
financialserviceproviders–whereconsumerswilllikelymoveintohigherincomebands
(thisgroupwillhavedifferentandincreasingneedsduring theirlifetime).

19. ECONOMIC CONDITIONS AND TRENDS
4)Exchangeratemovement –canaffectcostof claimsonpropertyinsurancepolicies.
•Example:
•MotorvehicleinsuranceinMalaysiawhoinsurecarimportedfromGermany,
Sweden,France,JapanandItaly. Malaysianinsurerswillbefacedwithclaimbased
onrepaircostthatdependoncurrencyexchangerates–because replacement
partsfromtheimported vehicleswill alsohavetobeimportedfromoverseas.
5)Economicconditions–arealsorelatedtodemographic trends.
•Example:
•Researchershave reportedthatmortalityratesappeartoincrease when
incomesfallfollowing aneconomiccrisis Mortalityrates increasedfortheelderly
and forthevery young.
•Theysuggestthateconomiccrisisleadstoreducedincomes,whichmeansless
spendingonfood,medicalservicesand medication–leadingtopoorer nutritionand
healthand higher mortality.

20. DEMOGRAPHIC STRUCTURE AND TRENDS
1)Demographicstructureandtrendsinfluencethetypesofproductandservicesthatfinancial
institutionscan
•market.
2)Demographicstructureandtrendsaffectthechoiceofassumptionsforactuarialprojectionsoffuture
cashflows. Example:
•Nationalsuperannuationscheme–wheninvestigatingthefinancialcondition,actuarytakeinto
considerationsimportant
•factorssuchas fertility,migration,mortality,disabilityandunemployment.
3)Acurrentdemographictrendoftenmentionedis–ageingpopulation(seenasanimportantissueinmost
developed countries).
•Insuchcountries,fertilityratesandmortalityratesarefalling.Peoplearelivinglongerandinfuture
therewillbe relativelyfewerpersonintheworkingagegroupsandmoreintheretiredagegroups.So
onecansaythat,ifcurrent economicandsocialsecuritystructurescontinueunchanged,thecostofage
pension,healthcareandagedcarewillgrow andtaxrevenuewillfall.(Extracosttogovernmentsifthis
occursandtherewillbeimplicationsforallareaswhere actuarieswork).
•Example:
•Governmentshavemovedtoequalisemaleandfemaleeligibilityageforcommencement ofage
pensions.Increasing graduallyfrom55 to58 orfrom60 to65.

21. WORK AND EMPLOYMENT PATTERNS
1)Intheolddays,countrieslikeUK,US,CanadaandAustraliausedtohaveemployeesworkingwith
onlyoneemployer throughouttheirlifetime.Butrecently,wecanseetrendstowardsjobmobility
–forpeopletoworkindifferent organisations(forlowerskilledandunskilledworkers,togainwider
experienceorpreparingforthelikelihoodof corporatedownsizingetc)
2)Duetothisupcomingtrends,thetraditionaldefinedsuperannuationschemes,designedtofita
workinglifetime withoneemployerfailedtomeetthe need ofmobileworkers,lowerskilledand
unskilledworkers.
3)Therefore,inresponsetothisneed(mobilityworkers)-Highvesting(earntherightforfuture
payments), compulsorypreservationandindustry-basedsuperannuation schemeshavebeen
introduced.
4)Employmentpatterns–encouragingworkerstopostponeretirement(byincreasingthe
retirementage)isa tacticusedbygovernmentsseekingwaystoreducethe impactofpublic
financesofanageingpopulation.

22. SOCIAL FACTORS AND TRENDS
1)Listedbelowareexamplesofhowsocialfactors(communityvalues&attitudes
andculturalfactors)andchangesin themimpactactuarialwork:
a)Preferencesbytheretirees–optforlumpsumretirementbenefitratherthan
incomebenefit=Thisaffects the designofsuperannuationschemes.
b)Communitydisapproveproductdesignwithdiscrimination–basedonsex,
maritalstatus,religion,disability, raceandotherfactors=Thisdiscrimination
factorscannotbeusedasratingfactorsindesigninginsurance.
superannuationschemesfinanceinstruments.
c)Recognitionofde-factopartners(notmarriedbutlivingtogether–
bersekedudukan@zina)andsame-sex partners(lesbian, gay -lgbt)–for
benefitspayabletospousesfromthesuperannuationschemes.
d)Constraintsonthetypesofquestions thattheinsurerscanasktheapplicantsfor
insurance–sexualorientation orsexual preference.

23. SOCIAL FACTORS AND TRENDS
e)Theshiftofthewesternculturethatfocusontherightsandwelfareofan
individualsinsteadofthetraditional systemsofpoolingand sharing.
f)Attitude of the community towards insurance –thinking thattheir premium paid
were actuallybeing accumulatedforthemby theinsurerandtheyexpectto
getit back=insomeformofoverstatedloss etc.
g)Attitudeofthecommunitythatbelievebyunder-insuredtheirpropertyisa
methodtoreducetheirexpenses= insuringthe property foralowervalue.
h)Attitudeofthecommunity–conductingcriminalactivity:burglary,other
theft,fraud,treason,arson,etc= impact thegeneralinsuranceclaims.

24. INDUSTRIAL ISSUESS
Industrial issues are matters over
which there is dispute between
employers and representatives of
employees (labourunion –
kesatuanpekerja) = An actuary
may be asked to advise one or
other of the parties to the dispute or
to recommend a solution which
acceptable to both parties.
The disputes may be industry-wide
or restricted to a particular business
enterprise.
Employee benefits -such as
superannuation, death or disability
insurance and medical or dental
cover, private clinics or hospitals
may be the subject of negotiation
from time to time.
Industrial pressure from labour union
can lead to government increasing
the minimum wages, or giving out
an overtime minimum pay-outs,
and change to salary levels =
impacts on the cost of
superannuation schemes.

25. ACCOUNTING STANDARDS AND PRACTICES
1)Companyaccountshave tobe prepared inaccordancewithaccounting
standards.
2)Accountingstandardsaffectallaspectsofactuarialwork.
3)Accountingstandards set outthegeneralassumptionsto bemadewhen
performing a valuationof almostanything whosevalueisincludedinfinancial
statements–includeliabilitiesofthesuperannuationfundsandtheoutstanding
claimsofinsurancecompany.
4)Example:
•InAustralia,theaccountingstandardAAS25specifiesthetypesofassumptions
thatmustbeusedinliabilityandasset valuationsshowninsuperannuationfund
accounts=Anactuarymaychoosetousedifferentassumptionsin
performinganactuarialreviewforfundingpurposes.Buttheactuarywillneedto
explaintothetrusteesand sponsoringemployerwhythe accountsshowdifferent
valuestothose intheactuary’sreport.
5)Accountingstandardsmayaddressthewaygeneralinsurancecompanies
reporttheiractivity–definitionsof premiums,accountingfordeferredacquisition
costs,accountingforreinsurancepayments,management expensesand
determiningoutstandingclaimliabilities=ifregulatorssaidtohavedifferent
approachinestimatingoutstandingclaim liabilities,then thevaluedwillbe
determinedfrom that appearinginthepublished accounts.

26. TECHNOLOGICAL DEVELOPMENTS
1)Technologicaldevelopment,especiallyincomputingandcommunicationshashadamajor
impactinactuarialwork since the early1970s.
2)Manydevelopmentinactuarialsciencewerefocusedonfindingbetterwaystocalculate
thepresentvalueof expectedfuturecashflows.
3)Improvementsinstoragecapacity,processingspeedandcostofcomputersandthe
developmentofeasy-to-use softwarelikespreadsheetshasmeantthatwhatwasoncethe
cornerstoneofactuarialwork(commutationfunctions, assurance,annuityfunctionsand
complexsystemofsymbolicnotation)hasbeenmadealmostredundant(nolonger
needed).
4)Technologicalchangeinfluencesproductdesignandproductdevelopment–the
inventionofunit-linkedlife insurancepolicies=regularrevisionofunitpricesandtheiruse
indeterminingthenumberofunitspurchaseby additionalpremiumsand incalculating
policycashvalues.

27. TECHNOLOGICAL DEVELOPMENTS
5)Marketingandsalestechniqueshavealsobeengreatlyaffectedby
technologicaldevelopments–thedirect marketingoffinancialproductsaims
toreducenewbusiness acquisitioncosts.
6)Technologicalchangehaveamajoreffectonmortalityandmorbidity
(conditionofsufferingfromadiseaseor medicalcondition)–the
developmentofnewdrugscan significantlyreducerisksofsickness, disability
anddeath.New machinesfordiagnosis,forsurgicalprocedures,fortreatments
wereinvented=thisledtoincreaseinaggregateclaim costsformedicaland
hospitalexpensesinsurancebecausenewertechnologiestends tobemore
expensive.
7)Technologicaldevelopmentmakenew physicalassetstobeinsured(space
satellitesandvehicles)andchallengesfor insurancepricingand
underwriting–createsdifficultiesinvaluationandreplacementfor
insuranceclaims management.

28. RANGEOFPRODUCTSANDSERVICES OFFERED
Long-Term Savings Product

29. RANGEOFPRODUCTSANDSERVICES OFFERED
•Other Savings Product

30. RANGEOF
PRODUCTS
AND
SERVICES
OFFERED
Other Savings Product
•Life Insurance
•Term insurance/ Whole life Insurance
•General Insurance
•Car, aviation, motor, personal accidents,
marine, fire, flood, liability
•Retirement Income.
•Provide income during retirement
•Involve a trade-off between protecting
against longevity risk
•E.g.: EPF,SOCSO

31. RANGEOF
PRODUCTS
AND
SERVICES
OFFERED
Other Savings Product
•Disability Insurance ( Permanent Health Insurance )
•Can be total or partial
•Lump-Sum disability –can only paid after
permanent disability is proven.
•Waiver of premium –pays premium on life insurance
policy in event of disability of policy owner who is
•responsible for the premium payments.
•Unemployment Insurance
•Replace a portion of lost income can be provided
to cover unpredictable and unimaginable events.
•Medical costs Insurance
•Intended to supplement the medical services
provide by state.

32. RANGEOF
PRODUCTS
AND
SERVICES
OFFERED
Other Savings Product
•Critical illness insurance
•Hospital cash –paying a fixed sum each day the insured
spends in hospital
•Long-term care insurance-cover the cost assistance with
the need of everyday living
•Money or transaction services.
•Bank notes/ coins
•Cheques
•Debit cards
•Borrowing Instrument
•Hire purchase
•Mortgage
•Credit card
•Overdraft

33. CONVERGENCE OF FINANCIAL INSTITUTIONS

34. PRODUCT DISTRIBUTION AND INTERMEDIARIES
Financialproductsand servicesare made availableto consumersthrough a range ofdistributionchannels.
NoDistribution Channels Description
1Sole Agents 1)Sale intermediaries who represent and sell the products of just one product
provider.
2)They also known as – Tied Agents or Captive Agents.
3)They are extensively trained by the company they represent and are paid
largely by commission basis (in proportion to the amount of new business they
sell)
2Multi-Agents 1)Individuals or Firms who are authorized to sell the products of a number of
product providers.
2)Normally successful tied-agents make the move to set up their own multi-
agency practice.
3)Because of their successful past performance enables them to obtain agency
agreements with several companies.
4)Multi-agents also receive commissions from companies whose products they
sell.

35. PRODUCT DISTRIBUTION AND INTERMEDIARIES

36. PRODUCT DISTRIBUTION AND INTERMEDIARIES
Financialproductsand servicesare made availableto consumersthrough a range ofdistributionchannels.
NoDistributions Channels Description
4 Direct Distribution 1)Any distribution method that does not involve an intermediary is known as
direct distribution.
2)No commission payment required rewarding an intermediary for time and
effort.
3)The cost of selling the product can be significantly reduced.
4)Direct Distributions has THREE (3) basic forms:
a)Personalized contact – targeted to an individual (direct email, outbound
telemarketing calls)
b)Advertising designed to elicit a response (poster in a bank branch, a print
media advertisement inviting customer to ‘ring this number’)
c)Customer-initiated contact – general brand advertising, word-of-mouth
advertising, convenience of branch location,

37. INDUSTRY ASSOCIATIONS
Industry-based associations of companies have been formed in the finance sector to promote the role
and collective interests of their members to government, to the media and to the community. On
behalf of their member, these not-for-profit organizations take part in debates on public policy,
make submissions to government on matters like regulations and taxation, liaise with regulators and
publish research reports.
NoCountry Industry Industry Bodies
1AustraliaBanking Australian Banking Association (ABA)
Life Insurance, Reinsurance and
Fund Management
Investment and Financial Services Association (IFSA)
General Insurance Insurance Council of Australia (ICA)
Insurance Education and TrainingAustralia and New Zealand Institute of Insurance and Finance
Superannuation Association of Superannuation Funds of Australia (ASFA)
2Canada General Insurance Insurance Bureau of Canada (IBC)
Life Insurance and Health InsuranceCanadian Life & Health Insurance Association (CLHIA)
Banking Canadian Bankers Association (CBA)

38. INDUSTRY ASSOCIATIONS
NoCountry Industry Industry Bodies
3Hong KongGeneral Insurance, Life Insurance
and Retirement Provision
Hong Kong Federation of Insurers (HKFI)
4Malaysia Islamic Banking Association of Islamic Banking Institutions Malaysia
Banking Association of Banks in Malaysia (ABM)
Takaful National Association of Malaysian Life Insurance and Family
Takaful Advisors (NAMLIFA)
Life Insurance Life Insurance Association Malaysia (LIAM)
General Insurance Persatuan Insurans Am Malaysia (PIAM)
Insurance Education and TrainingMalaysian Insurance Institute (MII)
Superannuation Employees Provident Fund (Malaysia) – KWAP & KWSP
Investment Malaysian Investment Banking Association (MIBA)