The actuarial control cycle and the business context
Domain 2 tests the Actuarial Control Cycle (ACC) and the commercial setting in which actuaries apply it - strategy, stakeholders, capital and profit.
The control cycle
- Specify the problem: define the decision, stakeholders, constraints, data and assumptions.
- Develop the solution: build the model, select assumptions, price or reserve, test sensitivity, recommend.
- Monitor: compare actual with expected, investigate deviations, feed results back into assumptions and design.
The cycle is iterative, not linear; monitoring one generation of policies informs the next.
Business context
Actuaries must understand the entity's strategy, risk appetite, capital position, distribution, competitors and external environment (economic, demographic, social, regulatory, technological). Profit measures - new business strain, embedded value, return on capital - drive decisions as much as technical reserves do.
Worked example
A term portfolio has 10,000 policies in force and expected q = 0.002, so 20 expected deaths; actual deaths were 34. The standard deviation is sqrt(10,000 × 0.002 × 0.998) = 4.47, so the deviation is (34 − 20)/4.47 ≈ 3.1 standard deviations. That is unlikely to be random, so the monitoring stage requires investigation: data quality, underwriting, selection or genuine deterioration. A 20% deviation, by contrast, would not justify repricing.
Traps
Jumping straight to modelling; treating monitoring as a report rather than a feedback loop; quoting A/E ratios without a significance test; pricing without expenses, lapses and capital.