IAI SA2 common mistakes
IAI SA2 · Understand the traps and how to avoid them.
Answering a capital-management question with a single solvency ratio (e.g. 'the company should hold more capital') instead of distinguishing regulatory capital, economic capital, rating-agency capital and internal target capital, and showing how the required capital is derived from risk.
Candidates memorise the headline formula and the minimum ratio but never practise the derivation, so under time pressure they collapse several distinct capital concepts into one number and lose the analytical marks.
What to do instead
Before writing, state which capital lens the question asks about and the risk basis (market, credit, insurance, operational). Show the required-capital build-up, the available-capital treatment of subordinated debt and surplus, and the resulting ratio. Then compare the four lenses explicitly and explain which binds the dividend or growth decision.
Treating an asset-liability management question as a pure duration-matching exercise, calculating Macaulay duration and concluding 'match durations, problem solved', without addressing convexity, cashflow timing, liability uncertainty (options, guarantees, policyholder behaviour) or the reinvestment risk between asset cashflows and liability outflows.
Duration is the one ALM technique candidates can compute quickly, so it becomes a comfort blanket; the examinable judgement is precisely about when duration matching fails.
What to do instead
Structure the answer as: liability cashflow profile and its uncertainty, then the matching technique (cashflow, duration, immunisation, cashflow-driven investing), then the residual risks. Quantify duration and convexity where data allow, and always state the conditions under which the chosen match breaks down (yield curve shifts, lapse acceleration, reinvestment rates).
Describing a with-profits or unit-linked contract in generic terms without specifying the mechanism under examination-e.g. discussing 'smoothing' without explaining how the smoothing account, the asset share, the bonus reserve and the estate interact, or discussing unit-linked charges without separating initial, renewal, fund-management and surrender charges.
Product knowledge is often learned at a marketing level rather than a contractual and financial level, so candidates write plausible prose that never engages the actual cashflow mechanics the marker is testing.
What to do instead
For each product type, rehearse the cashflow story: premiums in, charges and expenses out, asset share or unit fund accumulation, guarantees and options, and how surplus or unit price is determined. Use the correct technical vocabulary for that product and link each mechanism to the policyholder and shareholder outcome.
Presenting a valuation answer as a single figure (embedded value, or 'the reserves should be X') without stating the basis, assumptions and methodology, and without reconciling the result to the accounting or regulatory balance sheet.
Candidates focus on arithmetic because it feels objective, but valuation marks in this exam sit in the choice and justification of basis (discount rate, mortality, persistency, expenses, tax, risk margin) and in explaining why different bases give different numbers.
What to do instead
Always write the basis first: methodology (e.g. deterministic vs stochastic, gross premium vs net premium), key assumptions and their sources, and the treatment of risk and options. Then give the figure and a reconciliation bridge showing what moves between bases. Where assumptions are uncertain, state sensitivity direction and magnitude.
Answering an M&A or restructuring question by listing synergies and 'cultural fit' without working through the transaction mechanics: consideration structure, due diligence findings, embedded value vs appraisal value of the target, financing and its effect on the acquirer's solvency, and the accounting treatment of goodwill and acquired intangibles.
Strategy language is easy to generate and fills space, so candidates drift into narrative and never demonstrate the financial and actuarial analysis the question rewards.
What to do instead
Adopt a deal sequence: strategic rationale, target valuation on more than one basis, due diligence red flags specific to life insurers (reserving adequacy, guarantee costs, distribution agreements, orphan estate), consideration and financing, pro-forma capital and earnings impact, integration risks. Quantify where possible and state what would make the deal value-destructive.
Writing about risk management as a list of risk categories (market, credit, liquidity, insurance, operational) with no reference to the risk process-identification, measurement, monitoring, reporting, limits, mitigation and governance-and no linkage to the specific business decision in the question.
Risk taxonomies are the easiest thing to recall, so answers become definitions rather than applied risk management, and the candidate never shows how a control or limit would change the decision.
What to do instead
For every risk answer, name the risk in the context of the scenario, state how it is measured (e.g. stochastic projection, stress test, scenario analysis), who owns it, what limit or appetite applies, how it is mitigated (reinsurance, hedging, diversification, matching), and what would trigger escalation. Anchor each element to the decision the company faces.
Ignoring the reporting framework when discussing life company accounts-mixing IFRS measurement (contractual service margin, risk adjustment, fulfilment cashflows) with regulatory solvency reporting and with embedded value, and treating a change in one as if it flowed identically into the others.
Candidates learn each framework in isolation and then write the first one that comes to mind, producing answers that are internally inconsistent about what is being measured and for whom.
What to do instead
At the start of any accounts or reporting answer, identify the audience and framework (shareholders under IFRS, regulator under solvency regime, analysts under embedded value). Then describe recognition, measurement and disclosure for that framework only, and if comparison is asked, build an explicit bridge between frameworks rather than blending them.
Pricing a contract by computing expected present value of premiums minus claims and expenses and stopping there, omitting the profit margin, the cost of capital and guarantees, the required return to shareholders, and the sensitivity of the price to lapse, mortality and interest assumptions.
The expected-value calculation is mechanical and satisfying, so candidates submit it as the answer and never address the risk-adjusted return the pricing is meant to deliver.
What to do instead
Present pricing as: expected cashflows, then a risk-adjusted return test (e.g. IRR or profit margin on the regulatory or economic capital consumed), then sensitivities and the break-even assumptions. State the pricing objectives (volume, margin, competitive position) and show how the premium changes if the required return or the lapse assumption moves.
Giving a strategy or management answer that recommends an action without assessing feasibility-no analysis of capital constraints, distribution capability, systems, regulatory approval, or the competitive response-and with no criteria for judging success.
Candidates treat strategy questions as invitations to give opinions, and under time pressure they produce recommendations that sound sensible but are never tested against the company's actual position.
What to do instead
Use an explicit framework: current position and constraints, options with pros and cons, evaluation criteria (capital, risk, return, strategic fit, execution risk), recommendation, implementation steps, and metrics that would show success or failure. Acknowledge the main reason the recommendation could fail and how management would detect it early.
Treating professional and ethical questions as a request for a personal opinion ('I would act with integrity and put the policyholder first') rather than identifying the specific parties, the conflicting duties, the relevant standards and the escalation route.
Ethics is often revised as slogans, so candidates write aspirational statements that contain no analysis of the actual dilemma, the actuarial standards engaged, or the practical steps a professional must take.
What to do instead
Structure the answer as: facts, the parties affected and their interests, the duties and standards engaged (actuarial code, regulatory obligations, fiduciary and policyholder duties), the conflict, the options, the recommended course, disclosure and documentation, and escalation to the appropriate body if the concern persists. Be specific about who is told what and when.