Institute and Faculty of Actuaries (IFoA) Exams Actuarial Risk Management and Modelling (CP1, CP2, CP3) Syllabus

Actuarial Risk Management and Modelling (CP1, CP2, CP3) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Actuarial Risk Management and Modelling (CP1, CP2, CP3) in Institute and Faculty of Actuaries (IFoA) Exams, not a summary of it.

1. 1

   The Actuarial Control Cycle

   3 topics

   • Specifying the problem
     • Stakeholders and their needs
     • External environment: regulation, economy, demography
   • Developing the solution
     • Modelling approaches and assumption setting
     • Product design and pricing principles
   • Monitoring the experience
     • Analysis of surplus and experience analysis
     • Feedback loop and assumption updates
2. 2

   Risk Identification and Management

   3 topics

   • Types of risk
     • Market, credit, liquidity and operational risk
     • Insurance, demographic and systemic risk
   • Risk control techniques
     • Diversification, hedging and reinsurance
     • Underwriting, policy conditions and limits
   • Capital management and provisioning
     • Economic and regulatory capital
     • Reserving bases and margins for prudence
3. 3

   Asset-Liability Management and Investment

   3 topics

   • Investment strategy
     • Matching assets to liabilities by nature, term and currency
     • Liability-driven investment
   • Valuation of assets and liabilities
     • Discount rate selection
     • Market-consistent valuation
   • Solvency and surplus management
4. 4

   Modelling, Communication and Professionalism (CP2 and CP3)

   3 topics

   • Building and documenting models (CP2)
     • Spreadsheet model design and validation
     • Data checks, reasonableness and audit trail
     • Documentation and summary reporting
   • Communication practices (CP3)
     • Tailoring technical content to the audience
     • Structuring written and verbal communications
   • Professionalism and ethics
     • Actuaries' Code and professional conduct standards
     • Technical Actuarial Standards (TAS)
     • Whistleblowing and conflicts of interest

Actuarial Risk Management and Modelling (CP1, CP2, CP3) flashcards for Institute and Faculty of Actuaries (IFoA) Exams

23 of 51 cards from the Actuarial Risk Management and Modelling (CP1, CP2, CP3) deck — real questions with worked answers.

1. What are the three main stages of the actuarial control cycle?

   (1) Specifying the problem, (2) Developing the solution, and (3) Monitoring the experience. The cycle operates within a general commercial and economic environment and relies on professionalism.

2. In the actuarial control cycle, what does the 'Specifying the problem' stage involve?

   Understanding and defining the problem: identifying the providers and the customers/beneficiaries, the risks involved, the needs of stakeholders, and the regulatory and contractual constraints before any solution is designed.

3. What does 'Monitoring the experience' achieve in the actuarial control cycle?

   It compares actual experience against the assumptions used. Divergences are analysed and fed back to update assumptions, models and solutions, closing the feedback loop of the cycle.

4. Define an actuarial 'model' in the context of CP1/CP2.

   A simplified mathematical representation of a real-world financial system, used to project future cashflows and outcomes so as to value liabilities, assess risk, or test the impact of decisions.

5. What is the difference between a deterministic and a stochastic model?

   A deterministic model uses fixed (single best-estimate) input values and produces a single output. A stochastic model assigns probability distributions to inputs, runs many simulations, and produces a distribution of outputs allowing assessment of variability and tail risk.

6. List the key operational risks of using a model that an actuary must guard against.

   Model error (wrong structure/relationships), parameter error (wrong assumptions), data error, spurious accuracy, lack of validation/documentation, and the model being used outside the scope for which it was designed.

7. What are the main categories of risk an actuary classifies in financial risk management?

   Market risk, credit risk, liquidity risk, business/operational risk, and insurance/underwriting risk (which subdivides into mortality, morbidity, longevity, persistency and expense risk).

8. Distinguish between diversifiable (specific) risk and non-diversifiable (systematic) risk.

   Diversifiable (specific) risk is independent across exposures and can be reduced by pooling/diversification, so the relative variability falls as the portfolio grows. Non-diversifiable (systematic) risk affects all exposures together (e.g. market-wide moves) and cannot be removed by pooling.

9. Define operational risk.

   The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It includes fraud, IT failure, legal/compliance failures, and human error.

10. What is liquidity risk?

    The risk that an entity, although solvent, has insufficient liquid (readily realisable) assets to meet its obligations as they fall due, or can only realise assets at a substantial loss.

11. What is moral hazard, and how does it differ from anti-selection (adverse selection)?

    Moral hazard is the change in a policyholder's behaviour once insured, making a loss more likely or larger. Anti-selection is the tendency for those most likely to claim to take out (or take more) insurance, because the insurer cannot fully distinguish risks at underwriting.

12. Name the four broad responses to a risk (the main risk control techniques).

    Avoid the risk, reduce/mitigate the risk (control likelihood or severity), transfer the risk (e.g. insurance/reinsurance/hedging), and retain/accept the risk (with capital held against it).

13. What are the principal methods of transferring risk available to an insurer?

    Reinsurance, derivatives/hedging, securitisation (e.g. catastrophe bonds), and contractual transfer (e.g. policy terms, options to alter benefits).

14. Distinguish proportional from non-proportional reinsurance.

    In proportional reinsurance (quota share, surplus) the reinsurer takes a fixed share of premiums and claims. In non-proportional reinsurance (excess of loss, stop loss) the reinsurer pays only the part of claims above an agreed retention/threshold.

15. What is a quota share reinsurance arrangement?

    A proportional treaty in which the reinsurer accepts a fixed percentage of every risk in the portfolio, receiving the same percentage of premiums and paying the same percentage of all claims.

16. What is an excess of loss reinsurance arrangement?

    A non-proportional treaty in which the reinsurer pays the amount of an individual claim (or event) that exceeds an agreed retention, up to a stated upper limit. It protects against large individual or catastrophe losses.

17. Why does a provider of financial services need to hold capital?

    To absorb unexpected adverse experience, to meet regulatory solvency requirements, to give confidence to customers and counterparties, to support new business strain, to allow investment freedom, and to smooth results and bonuses.

18. Distinguish between a best-estimate reserve and a prudent (margin-loaded) reserve.

    A best-estimate reserve uses assumptions with no deliberate bias (expected value). A prudent reserve adds margins for adverse deviation, increasing the reserve so there is a greater than even chance it will be sufficient.

19. What is 'new business strain'?

    The negative impact on free assets in the first year of writing new business, when initial expenses, commission and the setting up of reserves and required capital exceed the premium and income received in that year.

20. Define the 'risk margin' under a market-consistent valuation framework such as Solvency II.

    An additional amount, above the best-estimate liability, representing the cost of holding capital to support non-hedgeable risks until run-off, so the total technical provision equals the amount a third party would require to take over the obligations.

21. State the cost-of-capital formula for the Solvency II risk margin.

    $$\text{Risk Margin} = \text{CoC} \times \sum_{t \geq 0} \frac{SCR_t}{(1+r_{t+1})^{t+1}}$$ where CoC is the cost-of-capital rate (6%), $SCR_t$ is the projected Solvency Capital Requirement for non-hedgeable risks at time $t$, and $r_{t+1}$ is the risk-free rate.

22. What is the difference between the SCR and the MCR under Solvency II?

    The SCR (Solvency Capital Requirement) is the capital needed to withstand a 1-in-200-year loss over one year (99.5% VaR). The MCR (Minimum Capital Requirement) is a lower floor; breaching it triggers the most serious regulatory intervention (loss of authorisation).

23. What confidence level and time horizon define the Solvency II SCR?

    A Value-at-Risk over one year calibrated to a 99.5% confidence level, i.e. enough capital to survive a loss expected no more than once in 200 years.

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