IFoA SA1 cheat sheet

Beveridge model: tax-funded, state-owned provision (e.g. UK NHS); Bismarck model: social insurance funds financed by payroll contributions (e.g. Germany, Netherlands); national health insurance model: single public payer contracting private providers (e.g. Canada).

Community rating forbids pricing by individual health status; experience rating prices by group claims history; risk equalisation transfers funds from low-risk to high-risk insurers to limit cream-skimming.

Adverse selection arises when buyers know more about their risk than insurers; compulsory membership, open enrolment, waiting periods and subsidies are standard countermeasures.

Moral hazard: third-party payment reduces the marginal cost to the patient, raising utilisation; tools include deductibles, co-insurance, gatekeeping and prior authorisation.

Supply-side cost control: prospective payment by DRG, global budgets, capitation and pay-for-performance shift financial risk from payer to provider.

Regulatory capital and reserving for health insurers typically follow a solvency regime (e.g. Solvency II SCR) plus local conduct rules on premium review, renewability and disclosure.

NICE-style cost-effectiveness thresholds (e.g. GBP 20,000-30,000 per QALY in England) determine public reimbursement; QALY = years of life x utility weight.

Demand drivers: ageing population, medical technology, income growth and supplier-induced demand; supply constraints include workforce, capital and waiting lists.

PMI (private medical insurance): indemnity or full reimbursement, usually annually renewable with age-rated premiums; morbidity (claim incidence x average cost) is the core pricing driver.

Critical illness: pays a lump sum on first diagnosis of a covered condition; pricing needs incidence by age/sex, survival after diagnosis, and anti-selective take-up assumptions.

Income protection: replaces a percentage of earnings (commonly 50-75%) after a deferred period; key assumptions are claim inception, termination (recovery/mortality) and occupation class.

Long-term care: pays for care needs assessed by ADL dependency; pricing must allow for morbidity improvement/ deterioration, longevity and lapse.

Group risk products (group life, group income protection, group PMI) are experience-rated with renewals reflecting pooled claims, scheme size and credibility.

Unit-linked and with-profits designs shift investment risk to the policyholder; guaranteed products require explicit reserves for the guarantee cost.

Pricing formula: premium = expected claims + expenses + risk margin + profit, discounted at the risk-adjusted rate; gross premium valuation uses best-estimate assumptions plus margins.

Product design levers: excess/deductible, co-insurance, benefit limits, waiting periods, exclusions and no-claims discounts; each changes expected claim cost and anti-selection risk.

Decrement table: l(x,t) survivors at age x and duration t; qx = 1 - l(x+1)/l(x); multiple decrements combine independent rates as 1 - product(1 - q_i).

Sickness/inception rate i(x) and termination rate r(x) give the number of claims in force: claims = sum over durations of in-force x i(x) x survival to that duration.

Recovery, death, lapse and expiry are competing decrements; a claim termination rate is often modelled as a function of claim duration (select period).

Graduation: fit a smooth curve (e.g. Gompertz-Makeham, splines) to crude rates; test with chi-square, standardised deviations and runs tests.

Standardised mortality ratio (SMR) = observed deaths / expected deaths; directly standardised rate = sum(w_i x m_i) with a standard population weight w_i.

A/E (actual-to-expected) analysis by age, duration and cause is the core monitoring tool for morbidity experience.

Mortality improvements: use cohort or period projections (e.g. CMI-style), and allow for the difference between population and insured lives (selection, underwriting).

Data issues: small numbers, credibility (limited fluctuation and Bühlmann), late-reported claims (IBNR) and exposure measured in policy-years.

Best-estimate reserve = expected present value of future claims and expenses less future premiums, discounted at the risk-free curve; add a risk margin for non-hedgeable risk.

IBNR (incurred but not reported): estimate via chain-ladder, Bornhuetter-Ferguson or expected-loss methods; test sensitivity to development factors.

Solvency II SCR = value at risk of basic own funds over one year at 99.5%; modules include non-life underwriting, life underwriting, health underwriting, market, counterparty and operational risk.

Health underwriting risk splits into similar-to-non-life (e.g. PMI), similar-to-life (e.g. CI) and epidemic risk; aggregation uses correlation matrices.

Risk margin = cost of capital (6% CoC) x present value of future SCRs; technical provisions = best estimate + risk margin.

Capital for guarantees and options in unit-linked business requires stochastic projection; run-off and going-concern bases give different answers.

Free surplus and own funds: excess of assets over technical provisions and SCR; MCR is a lower floor (typically 25-45% of SCR).

Reserve adequacy testing: run-off solvency, stress tests and scenario analysis (e.g. pandemic, mass lapse, interest rate shock).

Duration gap = asset duration - liability duration; immunisation requires matching present values and durations (and ideally convexity) across the yield curve.

Short-tail health liabilities (PMI, CI) suit liquid short-dated bonds and cash; long-tail liabilities (IP, LTC, annuities) suit longer-dated fixed income.

Unit-linked assets are held to match unit liabilities; the insurer bears only expense and guarantee risk, not market risk on the units.

Interest rate risk: a fall in yields raises fixed-income asset values but also raises discounted liabilities; the net effect depends on the duration mismatch.

Credit risk and liquidity: hold a buffer of high-quality liquid assets to meet claims spikes and collateral calls; avoid concentration in a single issuer.

Currency risk: match assets and liabilities by currency or hedge with forwards/swaps; unhedged FX creates a mismatch in the SCR.

ALM monitoring: cash-flow projection, duration/convexity, key rate durations and scenario testing (parallel and non-parallel shifts).

Reinvestment risk: short-dated assets roll at unknown future yields; match cash-flow timing to expected claim payments to limit it.

Risk register: identify, measure, manage and monitor risks; classify as insurance, market, credit, liquidity, operational and strategic.

Reinsurance types: quota share (proportional), surplus, excess of loss (per risk or per event), stop loss and aggregate covers; each transfers a defined layer of risk.

Reinsurance pricing: expected loss x (1 + loading) plus a risk margin; the ceding commission and profit share affect the net cost.

Capital allocation methods: standalone, marginal (incremental), Euler and Shapley; marginal allocation sums to total capital and rewards diversification.

Risk-adjusted return: RAROC = risk-adjusted profit / allocated capital; compare with the hurdle rate to decide whether to write business.

ERM framework: risk appetite statement, limits, stress and scenario testing, and ORSA (own risk and solvency assessment).

Catastrophe and pandemic risk: model frequency x severity, use reinsurance and capital buffers; pandemic risk is often excluded from standard treaties.

Liquidity risk: mismatched claim timing under stress (e.g. mass lapse plus claim surge) can force asset sales at a loss.

Fee-for-service: payer bears cost risk, provider is paid per service; incentivises volume and can drive supplier-induced demand.

Capitation: fixed payment per enrolled member per period; provider bears utilisation risk, creating an incentive to under-provide (hence quality monitoring).

DRG/prospective payment: fixed price per episode by diagnosis group; shifts cost risk to the hospital and encourages efficiency and coding accuracy.

Bundled payment: single price for an episode of care across providers; aligns incentives but requires clear attribution and risk adjustment.

Shared savings / accountable care: provider and payer share savings against a benchmark, often with quality gates and downside risk.

Pay-for-performance: payment tied to quality metrics (e.g. readmission rates, screening uptake); risk of gaming and metric distortion.

Risk adjustment: adjust capitation for member morbidity (e.g. HCC or ACG models) to prevent favourable selection and under-funding of high-risk members.

Provider risk-sharing requires adequate capital, credible data and stop-loss protection; otherwise insolvency risk shifts to the payer.

Actuaries' Code (IFoA): integrity, competence and care, impartiality, compliance, and speaking up; apply the standards to every piece of advice.

Actuarial Profession Standards (APSs) and Technical Actuarial Standards (TASs, e.g. TAS 100 for insurance) set out required content, data quality and reporting.

Conflicts of interest: identify, disclose and manage; decline the engagement if the conflict cannot be managed.

Peer review and sign-off: material advice should be reviewed by a suitably qualified actuary independent of the work.

Communication: state purpose, scope, data, assumptions, methods, uncertainty and limitations; make the advice understandable to a non-actuary board.

Whistleblowing: report material breaches of regulation or professional standards to the appropriate authority.

CPD: maintain and record continuing professional development; keep technical skills current and reflect on ethical dilemmas.

Advice to policyholders and regulators must be impartial; disclose any financial interest in the outcome and document the reasoning.