IAI SA2 cheat sheet

Product families: term (pure protection, no cash value), whole life (level premium, guaranteed cash value), endowment (maturity payout), unit-linked (benefit tied to fund value), annuity (decumulation), and income protection/CI riders.

Level premium whole life funds the rising cost of mortality with a reserve; the reserve is a policyholder liability, not shareholder surplus.

Unit-linked products transfer investment risk to the policyholder; the insurer retains mortality, expense, and persistency risk unless reinsured.

Regulatory conduct regimes typically require product approval or notification, disclosure of charges, and fair treatment of customers across the product lifecycle.

With-profits business: premiums build up in a with-profits fund; bonuses (reversionary and terminal) distribute surplus subject to smoothing and estate rules.

Guaranteed surrender values and paid-up values constrain asset strategy: the insurer must hold assets that can fund guarantees if premiums cease.

Key regulation concepts: policyholder reasonable expectations, treating customers fairly, and disclosure of commission and charges.

Solvency regimes (e.g., risk-based capital) treat guaranteed benefits as a liability and require capital for options and guarantees embedded in products.

Tax treatment varies by jurisdiction; products often receive tax relief on premiums or tax-free proceeds, which affects competitive positioning.

Gross premiums written less reinsurance ceded equals net premiums written; changes in unearned premium reserve adjust earned premium for protection business.

Life insurance technical provisions include mathematical reserves (gross premium or net premium valuation) plus unexpired risk and claims reserves.

Statutory accounts and IFRS accounts differ: IFRS 17 measures insurance contracts using fulfilment cash flows plus a contractual service margin.

Under IFRS 17, the CSM is released to profit as coverage is provided; changes in assumptions adjust the CSM or hit P&L depending on whether they relate to future or past service.

Embedded value = adjusted net worth plus value of in-force business; new business contribution and expected return on in-force are shown separately.

Analysis of surplus reconciles opening and closing surplus by source: mortality, morbidity, expenses, investment return, and new business strain.

New business strain arises when acquisition costs and required reserves exceed the first-year premium load; it reduces distributable surplus.

Expense analysis separates fixed, variable, and per-policy costs; unit costs are a key driver of competitiveness in protection products.

Regulatory returns typically require a balance sheet, solvency capital calculation, and asset-liability breakdown by currency and asset class.

Gross premium = expected claims (mortality/morbidity) + expenses + profit margin + cost of capital, discounted at the pricing rate.

Net premium valuation: reserve = PV(benefits) − PV(net premiums), using valuation mortality and valuation interest; gross premium valuation includes future expenses.

Mortality assumptions use a base table adjusted for selection, underwriting class, and expected future improvement.

Pricing must include a risk margin or explicit cost of capital for non-hedgeable risks; guarantees and options require stochastic valuation.

Unit-linked pricing: charges (bid-offer spread, fund management charge, policy fee) must cover expenses and profit while remaining competitive and disclosed.

Adverse selection and anti-selection are controlled through underwriting, waiting periods, exclusions, and claims definitions.

Premium rate structures: level, increasing, decreasing, single, and regular; each must match the benefit pattern and persistency assumptions.

Sensitivity testing: vary mortality, lapse, expense, and interest assumptions to measure impact on profit and required capital.

Profit signature: the timing of emergence of profit across the contract term determines new business strain and shareholder return.

Solvency capital requirement = economic capital needed to absorb losses at a defined confidence level (e.g., 99.5% over one year) under a specified shock set.

Available capital (own funds) is split into tiers by loss absorbency; only high-quality capital counts toward the SCR.

Risk-based capital modules typically cover market, credit, life underwriting, health underwriting, and operational risk, aggregated with correlation matrices.

Embedded value = net assets + PV of future shareholder profits from in-force business, discounted at a risk-adjusted rate.

Appraisal value = embedded value + value of new business (franchise value).

Market-consistent valuation discounts cash flows at the risk-free curve and adds a risk margin for non-hedgeable risk.

Matching adjustment or volatility adjustment can reduce the discount rate for illiquid liabilities, subject to eligibility and regulatory approval.

Lapse and option risk are significant for savings products: policyholders may surrender when rates rise, forcing asset sales at a loss.

Solvency testing includes deterministic stress scenarios and stochastic projection of the balance sheet over the business plan.

Duration gap = asset duration − (liability duration × liability value / asset value); a zero gap immunises against small parallel rate shifts.

Convexity matters: for large rate moves, matching duration alone leaves residual interest rate risk.

Life insurers hold long-dated bonds and, where permitted, infrastructure and private credit to match long-dated liabilities.

Guaranteed annuity and with-profits liabilities require assets that hedge the embedded interest rate and equity options.

Currency matching: assets should be held in the currency of the liabilities unless hedging is in place.

Liquidity management must cover surrender spikes, collateral calls on derivatives, and margin requirements.

Credit risk concentration limits and counterparty exposure limits constrain asset allocation.

ALM reporting compares projected asset and liability cash flows under base and stress scenarios, including credit spread widening.

Reinvestment risk arises when assets mature before liabilities; it is managed by laddering and matching cash flow profiles.

Risk categories: market (interest, equity, property, spread, FX), credit, underwriting (mortality, morbidity, lapse), operational, and strategic risk.

The risk register records each risk, owner, likelihood, impact, mitigation, and residual exposure.

Own risk and solvency assessment (ORSA) links risk profile to capital needs and the business plan; it is a board-owned process.

Three lines of defence: business units own risk, a risk function oversees, and internal audit provides independent assurance.

Reinsurance mitigates mortality and morbidity risk; quota share, surplus, and stop-loss treaties transfer different risk profiles.

Catastrophe and pandemic risk can be modelled stochastically; extreme mortality bonds or swaps transfer tail risk to capital markets.

Lapse risk is asymmetric: mass lapse events force asset liquidation and crystallise losses on front-loaded products.

Operational risk includes outsourcing, IT failure, fraud, and mis-selling; scenario analysis quantifies the largest exposures.

Risk appetite statements set tolerance limits that feed into capital allocation and product approval decisions.

Capital sources: equity, subordinated debt, surplus notes, and hybrid instruments; each has different eligibility under solvency rules.

Capital is allocated to business units using risk-based measures such as required capital or economic capital; return on capital drives product decisions.

Capital efficiency improves through reinsurance, hedging, and product design that reduces required reserves.

Dividend policy balances shareholder return with the need to maintain solvency buffers above the regulatory minimum.

Capital management plan projects capital needs against the business plan and stress scenarios over a multi-year horizon.

Free surplus = available capital − required capital; it is the amount available for distribution or new business investment.

Capital fungibility across legal entities and jurisdictions is constrained by local regulation and ring-fencing.

Hybrid capital must defer coupons or absorb losses to qualify as tier 1 or tier 2; terms are scrutinised by regulators.

Stress and reverse stress testing identify the scenarios that would breach capital thresholds and inform contingency plans.

Valuation approaches: embedded value, appraisal value, price-to-book, and discounted cash flow; the choice depends on the target's product mix.

Due diligence covers reserves adequacy, asset quality, reinsurance recoverables, litigation, and regulatory status.

Embedded value multiples are commonly used for life insurers; the multiple reflects growth prospects and risk.

Synergies include expense savings, distribution access, reinsurance scale, and capital diversification; they must be quantified and validated.

A merger of life insurers requires regulatory approval, policyholder protection, and often a court-sanctioned transfer of engagements.

Run-off or closed-book consolidation: acquiring a portfolio in run-off requires capital for guarantees and expense base.

Demutualisation converts a mutual into a stock company; policyholders receive shares or cash and the entity gains access to equity capital.

Restructuring may include divesting non-core units, reinsuring blocks, or transferring liabilities to a specialist consolidator.

Integration risk: culture, systems, and product legacy differences can erode expected synergies.

Distribution channels: tied agents, independent brokers, bancassurance, direct, and digital platforms; each has different cost and persistency profiles.

Product strategy must align with the insurer's risk appetite, capital position, and target customer segments.

Expense management: fixed costs are spread over policy volume; scale advantages favour larger insurers in protection business.

Customer retention: lapse rates are a key driver of profitability; persistency bonuses and service quality reduce lapse.

Digital transformation: automated underwriting and claims improve cost ratios and customer experience.

Strategic options include organic growth, acquisition, partnership, and reinsurance of legacy blocks.

Key performance indicators: new business margin, value of new business, return on embedded value, expense ratio, and persistency.

Regulatory strategy: engaging early with supervisors on product approvals and capital plans reduces execution risk.

Board governance: the board sets strategy and risk appetite and oversees the ORSA and capital management plan.

Actuaries must comply with professional standards, including objectivity, integrity, and competence.

Conflicts of interest must be disclosed and managed; advice to policyholders and shareholders can diverge.

Actuarial work must be documented so that another competent actuary can review and replicate it.

Assumptions must be selected transparently with justification; cherry-picking favourable assumptions is a breach of professional standards.

Whistleblowing: actuaries should report material concerns about solvency or conduct to the appropriate authority.

Data protection and confidentiality: policyholder data must be handled lawfully and securely.

Treating customers fairly requires clear communication of product features, charges, and risks.

Professional scepticism: challenge management assertions and verify data sources rather than accepting them at face value.

Continuing professional development is required to maintain competence as regulation and techniques evolve.