IFoA SA2 cheat sheet

Life Insurance: Products, Risks and the SA2 Control Cycle

• The actuarial control cycle for a life insurer runs: specify the problem and business context; develop assumptions (demographic, economic, persistency); build the model and calculate results; test sensitivity and reasonableness; then monitor experience and feed deviations back into assumptions. SA2 questions usually ask which stage a described activity belongs to.

• Core life insurance risks: mortality/morbidity (including longevity for annuities, which is the opposite-side risk), persistency (lapse and surrender), expense and inflation, investment/market (interest rate, credit, equity, property), and operational risk including mis-selling and data error. For each product identify which risks are material and which are transferred or retained.

• Risk transfer instruments: reinsurance (yearly renewable term, quota share, surplus, stop-loss, catastrophe), hedging via derivatives (swaps, swaptions, forwards, options), securitisation of embedded value or mortality risk, and reinsurance of longevity via buy-in/buy-out or index-based swaps. State the cost (premium or spread) and the residual basis risk.

• Solvency capital under a risk-based regime is set against adverse deviation at a stated confidence level over a stated horizon; economic capital is the insurer's own internal view. Compare regulatory versus economic capital by purpose, calibration, diversification recognition and fungibility of surplus across legal entities.

• Asset-liability management for life funds: match duration and convexity for fixed liabilities, use cash-flow matching or immunization for annuities, and manage reinvestment risk for guaranteed products. Mismatch risk is largest where guarantees are long-dated and assets are shorter than liabilities.

• Embedded value = net assets + value of in-force business, where VIF is the present value of future shareholder profits after tax, allowing for the cost of capital and the cost of options and guarantees. New business strain arises where initial expenses and reserves exceed premiums received.

• Profit reporting: analyse movement in embedded value (expected return, experience variances, assumption changes, new business contribution) and reconcile to statutory accounting profit. Distinguish statutory, IFRS and EV bases; explain why the same year can show profit on one basis and strain on another.

• Product design decision rules: unit-linked transfers investment risk to the policyholder but leaves expense, persistency and operational risk; with-profits and universal life share risk via smoothing or credited rates; conventional without-profit guarantees concentrate investment risk on the insurer and must be charged for explicitly.