SOA - Examination and Other Requirement Details

Spring 2007 Basic Education Catalog

Examination and Other Requirement Details

Advanced Finance/ERM Exam Spring 2007

This examination consists of six hours of written-answer questions. A read-through time will be given prior to the start of the exam, 15 minutes in the morning session and 15 minutes in the afternoon session.

Learning Objectives:

  1. Product Knowledge
    Learning Outcomes
    The candidate will be able to:

    1. Explain why an insurance institution would develop certain products, and provide an analysis of product-development process, including the effects of taxation and regulation on product design.
    2. Identify all risks, including all hidden and embedded risks, categorize, and evaluate potential sources of risk in products offered by both insurance companies and other financial institutions.

      1. Define insurance risk as related to product design and pricing risk, mortality risk, morbidity risk, lapse risk, liquidity risk, and expense risk.
      2. Identify exposure triggers of the sources of risk. (i.e. what do you need to watch)
      3. Identify the direct and indirect consequences of risk

    3. Describe how and why risks are correlated. (re product risks vs. firm)
    4. Describe the management of product design and pricing risk in consideration of actuarial standards and regulatory guidelines. (insurance and non-insurance, e.g. banking)
    5. Describe the use of underwriting and reinsurance policies and procedures to determine insurability and to manage exposure

  2. Capital Funding and Structure
    Learning Outcomes
    The candidate will be able to:
    1. Calculate the cost of capital for a venture using the most appropriate method for given circumstances and justify the choice of method
    2. Evaluate various profitability measures including IRR, NPV and ROE, etc.
    3. Identify regulatory capital requirements and describe how they affect decisions. (Note: includes Basle)
    4. Identify the goals and methodologies of rating agencies and how their rating activities affect financial institutions

    5. Capital Structure

    6. Describe how rating agencies affect the choice of capital structure.
    7. Describe how behavioral characteristics and biases of users and providers of capital affect the capital structure.

    8. Capital Sources

    9. Describe the process, methods and uses of financial reinsurance (surplus relief) and recommend a structure that is appropriate for a given set of circumstances.
    10. Describe the process, methods and uses of insurance securitizations and recommend a structure that is appropriate for a given set of circumstances.

    11. Capital Uses

    12. Identify amounts of capital in excess of what is required.
    13. Describe potential uses of excess capital including reinvestment in new business, shareholder dividends, debt retirement and share repurchase and recommend a course of action for a given set of circumstances.
    14. Describe the process, methods and effects of a potential acquisition or reinsurance of a business including its effect on capital structure, return on equity, price/earnings multiples, and share price.

  3. Financial Reporting
    Learning Outcomes
    The candidate will be able to:

    1. The candidate will be able to analyze a specific company financial situation by demonstrating advanced knowledge of balance sheet and income statement structures.

  4. Measuring Value
    Learning Outcomes
    The candidate will be able to:

    1. Compare and contrast different approaches to the fair value of insurance liabilities
    2. Apply an appropriate fair value methodology in a given situation.
    3. Describe the concept of economic measures of value (e.g. EVA; embedded value) and their uses in corporate decision-making process.
    4. Describe how the performance of a given firm or venture may be evaluated against its objectives including total returns

  5. Risk Management
    Learning Outcomes
    The candidate will be able to:

    1. Identify and describe means for transferring risk to a third party, and to identify the costs and benefits of doing so.
    2. Identify and describe means for reducing risk without transferring it (internal hedges)
    3. Demonstrate how derivatives, synthetic securities, and financial contracting may be used to reduce risk or to assign it to the party most able to bear it.
    4. Describe how the performance of risk transference activities may be evaluated.
    5. Describe how financial risks and opportunities influence the selection of product strategy.
    6. Compare and contrast the risk in the pension plan itself vs. the risk of a pension plan on the corporation.
    7. Apply the elements of risk assessment, reduction, and transfer to new product/project proposals based on a cost/benefit analysis.

  6. Enterprise Risk Management Framework
    Learning Outcomes
    The candidate will be able to:

    1. Define Enterprise Risk Management.
    2. Describe the fundamental concepts of financial and non-financial risk management and evaluate a particular given risk-management framework.
    3. Describe various regulatory/industry frameworks: Basle II, Sarbanes-Oxley Act, OSFI Supervisory Framework, OSFI Standard of Sound Financial and Business Practices, UK FSA guidelines, and COSO.
    4. Understand the perspectives of regulators, rating agencies, stock analysts, and company stakeholders and describe how they evaluate the risks and the risk management of an organization.
    5. Describe how an organization can create a risk management culture including: risk consciousness, accountabilities, discipline, collaboration, and communication.
    6. Articulate risk objectives and a risk philosophy.
    7. Describe a desired risk profile and appropriate risk filters.
    8. Describe and assess the elements of a successful risk management function and recommend a structure for an organization's risk management function.
    9. Describe and apply a risk control process such as the Risk Management Control Cycle or other similar approach.


  7. ERM Fundamentals
    Learning Outcomes
    The candidate will be able to:

    1. Describe how risk and opportunity influence the selection of a firm's vision and strategy.
    2. Describe how ERM is able to contribute to shareholder value creation.
    3. Identify potential sources, categories, and consequences of risk.
    4. Define risk metrics to quantify major types of risk exposure, and explain how each can be incorporated into the risk monitoring function as part of an ERM framework.
    5. Describe means for managing risks and measures for evaluating their effectiveness.
    6. Describe operational risks and governance issues including market conduct, audit, and legal risk.
    7. Describe enterprise-wide risk aggregation techniques incorporating the use of correlation

  8. Credit Risk
    Learning Outcomes
    The candidate will be able to:

    1. Define and evaluate credit risk as related to fixed income securities
    2. Define and evaluate spread risk as related to fixed income securities as well as high yield bond analysis
    3. Describe best practices in credit risk measurement, modeling and management
    4. Describe the use of credit and underwriting policies, diversification requirements
    5. Define credit risk as related to derivatives. Define credit risk as related to reinsurance ceded counter party risk . Describe the use of comprehensive due diligence and aggregate counter-party exposure limits
    6. Describe risk mitigation techniques and practices: credit derivatives, diversification, concentration limits, and credit support agreements
    7. Describe the role of rating agencies in evaluating credit risk.

Textbooks on Advanced Finance/ERM Exam

  • Insurance Industry Mergers and Acquisitions, Toole, J., Herget, T., 2005, SOA, Chapters 1-4
  • Investment Guarantees-Modeling and Risk Management for Equity-Linked Life Insurance,Hardy, M., 2003, John Wiley and Sons, Chapters 4 , 6, 8, 9 (pp.157-169 only), 12, 13
  • Life, Health and Annuity Reinsurance,Tiller, J.E., Tiller, D.F., Third Edition, 2005, ACTEX, Chapters 5, 16, 17
  • The New Corporate Finance: Where Theory Meets Practice,Chew, D., Third Edition, 2001, Irwin/McGraw Hill, Chapters, 3, 6, 9, 14, 27, 29
  • Risk Management,Crouhy, M., Galai, D., Mark, R., 2001, Irwin/McGraw Hill, Chapters, 2, 3, 5, 7-10, 12, 13, 17

The following textbooks are covered in the in the syllabus but may be available as study notes. Check this page for updates.

  • Corporate Finance Theory,Megginson, W.L., 1997, Addison Wesley, Chapter 6: FE-C116-07
  • Group Insurance,Bluhm, W.F., Fourth Edition, 2003, ACTEX, Chapter 42: FE-C100-07
  • Integrated Risk Management,Doherty, N., 2000. McGraw/Hill, Chapters 1, 7, 8, 16: FE-C117-07
  • Life Insurance Products and Finance,Atkinson, D., Dallas, J., 2000, SOA, Chapters 2, 3: FE-C115-07
  • Real Options, Trigeorgis, L., 1996, MIT Press, Chapters 1, 2, 4 (excluding 4.8): FE-C132-07

Advanced Finance/ERM Online Readings

The Online readings listed below are part of the required Course of Reading for this Exam. These readings are articles that are available online from the SOA, CCA, CIA, AAA and the ASB.

Advanced Finance/ERM Study Note Listing

The study notes listed below are part of the required Course of Reading for this exam. These Study Notes are not available electronically and must be ordered by using the
pdfStudy Note Order Form located on the Study Note Information page. Candidates should be sure to check this site periodically for additional corrections or notices.

FE-C05-07Introductory Study Note
FE-C13-07Case Study
FE-C100-07Chapter 42 of Group Insurance
FE-C101-07Principles of Taxationformerly 5-23-00
FE-C102-07General American Life Can't Pay Investors, Looks at Suitorsformerly 8FE-306-01
FE-C103-07The Missing Risk In Pricing Of Equity-Based Productsformerly 8FE-322-04
FE-C104-07Insurance OP Risk: The Big Unknownformerly 8E-708-04
FE-C105-07The Longevity Bondformerly 8E-714-06
FE-C106-07Mapping of Life Insurance Risks AAA Report to NAICformerly 8E-704-04
FE-C107-07The Purpose of Regulationformerly 5-22-00
FE-C108-07The Cost of Capital for Financial Firms
FE-C109-07Solvency Measurement for Property-Liability Risk-Based Capital Applicationsformerly 8FE-100-00
FE-C110-07Preparing for C-3 Phase II RCB-From Development to Implementation
FE-C111-07Standard & Poor's Insurance Liquidity Model for 2000formerly 8FE-406-02
FE-C112-07Standard & Poor's Life Insurance Earnings Adequacy Model Revised for 2001formerly 8FE-407-02
FE-C113-07New Insurance Capital Model Embraces Trends in Risk Managementformerly 8E-702-04
FE-C114-07Financial Decision-Making in Markets and Firms: A Behavioral Perspectiveformerly 8F-402-00
FE-C115-07Chapters 2 and 3 of Life Insurance Products and Finance
FE-C116-07Chapter 6 of Corporate Finance Theory
FE-C117-07Chapters 1, 7, 8 and 16 of Integrated Risk Management
FE-C118-07Securitization of Life Insurance Assets and Liabilitiesformerly 8FE-414-05
FE-C119-07Are You Paying Too Much for that Acquisition?formerly 8F-501-04
FE-C120-07Insurance Mergers & Acquisitionsformerly 8F-502-04
FE-C121-07Financial Reporting Developments Accounting For Derivative Instruments and Hedging Activities: A Comprehensive Analysis of FASB Statement 113, as Amended and Interpreted (Overview and Appendix C only)formerly 8FE-412-05
FE-C122-07FASB Statement of Financial Accounting Concepts No. 5- Recognition and Measurement in Financial Statements of Business Enterprisesformerly 8F-500-04
FE-C123-07Chapter 4 of The Fair Value of Insurance Businessformerly 8FE-320-01
FE-C124-07Performance Measurement Using Transfer Pricingformerly 8V-314-01
FE-C125-07Total Return Approach to Performance Measurementformerly 8F-307-01
FE-C126-07Risk Management by Insurers: An Analysis of the Processformerly 8FE-203-00
FE-C127-07Asset-Liability Management for Insurersformerly 8FE-319-02
FE-C128-07Asset/Liability Managementformerly 8FE-316-03
FE-C129-07Principles for the Management of Interest Rate Riskformerly 8E-707-04
FE-C130-07Hedging with Derivatives in Traditional Insurance Productsformerly 8E-712-05
FE-C131-07Creating Value in Pension Plans (or, Gentlemen Prefer Bonds)formerly 8V-320-05
FE-C132-07Chapters 1, 2 and 4 of Real Options: Managerial Flexibility and Strategy in Resource Allocation
FE-C133-07Internal Control-Guidance for Directors on the Combined Codeformerly 8E-700-04
FE-C134-07Supervisory Framework-1999 and beyondformerly 8E-701-04
FE-C135-07Financial Oversight of Enron: The SEC and Private-Sector Watchdogs (pages 97-127 only)formerly 8FE-408-03
FE-C136-07Enterprise Risk Management and Risk Assessment
FE-C137-07Moody's Looks at Risk Management & The New Life Insurance Risks, October 2000formerly 8E-705-04
FE-C138-07Managing The Invisible: Measuring Risk, Managing Capital, Maximizing Value
FE-C139-07No Assurance of Good Governance: Observations on Corporate Governance in the U.S. Insurance Sectorformerly 8E-715-06
FE-C140-07Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates (exclude appendices)
FE-C141-07Letter To SEC Regarding Fitch Ratings' View on the Role and Function of Rating Agencies in the Operation of Securitiesformerly 8FE-411-03
FE-C142-07Theory and Practice of Model Risk Management
FE-C143-07Dynamic Financial Models of Property-Casualty Insurersformerly 8FE-403-01
FE-C144-07Disciplined Decisions Aligning Strategy with the Financial Marketsformerly 8F-313-01
FE-C145-07Dynamic Financial Analysis Handbook (Chapters 1[background only], 8 and Appendix A)formerly 8F-400-00
FE-C146-07High-Yield Bond Analysis: The Equity Perspectiveformerly 8V-124-04
FE-C147-07Derivatives: Practices and Principlesformerly 8V-114-00
FE-C148-07Update to Principles-Based Reserves for Life Products Model Regulation
FE-C149-07Use of Stochastic Techniques to Value Actuarial Liabilities Under Canadian GAAP