2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Mock Examination - Actuarial Control Cycle 1 Page 1 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Instructions 2 Hours 15 Minutes Attempt All 5 Questions Total of 50 Marks Page 2 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Question 1 A law firm (The Firm) in Sydney has about 50 lawyers under its employment. In the normal times, they work in a building in the CBD of Sydney. Since the spread of the coronavirus (COVID-19) has become a public health issue, The Firm has done the following preliminary analysis: Context Coronavirus, objective: stop the spread of the virus amongst the lawyers working for The Firm. Identify risk What can happen? One person in the office who got the virus can spread the virus to other workers. Analyse risk Review control, likelihood, consequence, level of risk. There is no much control in the office since the office is crowded. Likelihood of cross infection is high. Consequence may include having to shut down the whole office. Evaluate risk Cost of shutting office will be extremely high. There will be no income. Treat the risk Identify options. Select best responses, de- velop risk treatment, implement. The Board decides that we have to mitigate the risk of cross infection. to ask all the lawyers to work from home. The lawyers will keep on using the laptops issued by The Firm they already have, except that they are to work from home. However the Board is concerned about cyber security when working from home is on such a large scale. It is worried about the confidentiality of the various legal documents, the possibilities of someone hacking into the system to steal highly confidential documents. Even though you as an actuary have been in a role of Chief Risk Officer of an insur- ance company before, you are no IT expert. The Firm approaches you to be the Chief Risk Officer to manage all the risks relating to this working from home arrangement. (a) Which sections of the new Code of Conduct would give you guidance as to what you should do? Please quote the section/sub-sections clearly and why you think they are relevant. [2 marks ] (b) Suppose you decide to accept the job of Chief Risk Officer for The Firm. Page 3 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Describe a plan to identify all the risks involved in this working from home arrange- ment. [3 marks ] (c) You do not need to be an IT expert to identify some of the risks relating to the working from home arrangement. List and briefly describe what can go wrong while all the lawyers are working from home. [4 marks ] (d) For the items listed in Part (c), plot these on a severity-likelihood graph, giving a brief explanation of the relative positions of the plotted items. [1 mark ] [Total 10 marks ] Page 4 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Question 2 Your Company (The Company) operates in Australia only, and offers only one financial product to small investors, typically self-funded retirees: The customer deposits a lump sum $L at the start. At the end of one year, the Company pays the customer $L(1+i%), where i% is a fixed interest rate. The Company usually invests the deposits in a mixture of Australian Government bonds (which are considered to be risk-free) and corporate bonds of various credit ratings. The business model is that this portfolio of bonds will yield j% pa and the interest margin (j-i)% is used to pay for expenses and profit. Its current projection looks like this: Current assumptions: j% = 1%, i%=0.5%. $’000 (thousands of dollars) Funds under management 100,000 Interest income from bonds 1,000 Interest paid to customers -500 Company’s over head cost -100 Company’s staff salary cost -200 Profit per year 200 Company’s equity capital 1,000 Suppose that the Australian Government does not require capital to cover Australian Government bonds, but requires different levels of capital to cover default risks for non-government bonds relating the different credit ratings of the companies which issue the bonds. (a) How do you rate the Company’s model as indicated in the above Table. Does it have all the attributes of a good model? Give a brief argument to justify your answer. [2 marks ] (b) Due to the spread of the COVID-19 virus, on Thursday 19 March 2020, the Re- serve Bank of Australia (RBA) set the interest rate to be 0.25% pa. For the existing book of business, the impact on profit is probably very minimal, be- cause all of the fund has already been invested in Australian Government bonds, and the yield is locked in. You (an actuary) are hired as a consultant to The Company. Page 5 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Under the new ultra low interest rate environment, The Company asks you to make a new projection of a possible yearly profit(or loss) of the new policies sold after 20 March 2020. You are asked to produce a table like Table 1 above. State your assumptions clearly. Your new assumptions should at least include assumptions about fund under man- agement, interest rate earned by the Fund, and interest rate paid to customers. [2 marks ] The Company’s management requires you to justify your assumptions, taking into account the new environment after 20 March 2020. (c) Explain how and why you have chosen those new assumptions. (Hint: don’t forget the reason why RBA lowered the interest rate on 20 March 2020.) [3 marks ] (d) If the Company decides to invest more in corporate bonds, because those bonds earn higher interest rate, what are the risks in taking this action? [3 marks ] [Total 10 marks ] Page 6 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Question 3 A life insurance company (The Life Office) is currently considering creating a product solely to cover the risk of death from coronavirus COVID-19; that is, a sum-insured will be paid out to the policyholder’s estate in case the policyholder is verified to have died from the COVID-19 virus. Deaths from other causes are not covered in this policy. Currently The Life Office is selling mainly life insurance products such as yearly re- newable term insurance, disability income insurance, lifetime annuities. (a) What must the senior management of The Life Office consider when deciding whether or not to go ahead with developing this product? [3 marks ] (b) To reduce the cost of claims for this proposed product, suggest three policy condi- tions which would provide some protection for The Life Office against anti-selection. [2 marks ] (c) If the Life Office decides to go ahead with the project, what sort of data will it need and what are the assumptions it will need to make? [2 marks ] (d) The senior management of The Life Office acknowledges that the company is taking a high level of risk in deciding to sell this product. What further measures that The Life Office can put in place to protect its solvency position? [1 mark ] (e) How would the situation be different if a general insurer currently selling only travel insurance wants to add a rider benefit covering specifically death due to COVID-19 virus; that is, if the policyholder dies from contracting the COVID-19 virus during travel, the policyholder’s estate will be paid the sum insured after it is verified that the policy- holder has indeed died from the COVID-19 virus? [2 marks ] [Total 10 marks ] Page 7 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Question 4 The Australian Monday 16 March 2020 The Australian Government has announced the Latest Response (to the coronavirus): • 14-day self isolation for all international arrivals, including Australians; • 30-day ban on cruise ships from foreign ports; • No handshakes and 1.5m self-spacing recommendation; • Restrictions on aged-care homes visits; • School closures and lockdown of suburbs under review; • No restrictions on domestic flights; • Those who ignore self-isolation rule and groups who hold non-essential gatherings of more than 500 subject to penalties; • Travel bans remain for foreign nationals travelling from China, Iran, South Korea and Italy; • Australians should reconsider all non-essential overseas travel. For each of the following business sectors, describe and briefly comment on the (both positive and negative) impacts of the above-mentioned measures to their business [1 mark each]: • Airlines, such as Qantas, Jetstar, Virgin; • Tourism related companies such as Flight Centre, • Casinos such as Crown, Star; • Supermarkets such as Coles, Woolworth, Aldi; • Mining companies such as BHP, Rio Tinto, Woodside Petroleum; • Fast food restaurants such as McDonalds, Dominos; • Banks such as Commonwealth Bank of Australia, ANZ, NAB, Westpac; • Pharmaceutical companies; • Health Insurers such a Medicare Private, Bupa, NIB, etc; • Basketball Australia, Rugby Union, etc; [Total 10 marks ] Page 8 of 9 2021 MAY SEMESTER (212) MOCK EXAMINATION ACSC71-400 ACTUARIAL CONTROL CYCLE 1 Question 5 (i) Define the terms: (a) systematic risk (b) specific risk [2 marks ] (ii) A government is concerned that consumers of financial services are exposed to significant risks because the way financial markets operate could lead to the failure of financial service providers. Discuss the range of measures the government could take to improve protection for consumers of financial services. [8 marks ] [Total 10 marks ] END OF PAPER Page 9 of 9