Actuarial Risk Management (Subject CA1)
Actuarial Risk Management (Subject CA1)
This domain tests how candidates identify, measure, manage and monitor risk within an insurer or pension scheme, and how the actuarial control cycle links assumptions, experience and capital. Expect questions on risk classification, risk appetite, governance and stakeholder communication.
Core rules and concepts
- Risk is uncertainty about outcomes; pure risk has only downside, speculative risk can produce gain or loss.
- Classify by source: insurance, market, credit, liquidity, operational and strategic. Also separate diversifiable and non-diversifiable risk.
- Risk appetite states how much risk the board accepts; risk tolerance sets limits.
- The control cycle: identify, quantify, manage, monitor, review. The actuarial control cycle applies this to assumptions and product design.
- Controls include underwriting, reinsurance, hedging, limits, capital and contingency planning.
Worked example
An insurer sells five-year guaranteed annuity business. Longevity risk rises if annuitants live longer; interest-rate risk rises if reinvestment yields fall. In a risk register, measure longevity with a one-year mortality improvement shock and interest risk with a 100 bp yield fall. Controls: reinsure longevity, match duration with bonds, hold capital, monitor mortality. Do not treat diversification as removing systemic longevity risk.
Traps
Confusing risk with uncertainty, listing controls without measurement, ignoring correlations in stress tests, and claiming diversification eliminates all risk. Also failing to link risk appetite to limits and escalation.