SOA - Examination and Other Requirement Details

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.

• ASOP 12 Risk Classification (for All Practice Areas) (Excl. appendix) December 2005
  
• "A Method for Option-Adjusted Pricing and Valuation of Insurance Products", Product Development, November 1991.
• "Investor & Management Expectations of the 'Return on Equity' Measure vs. Some Basic Truths of Financial Accounting", Financial Reporter, September 2003
• "Actuarial Aspects of SOX 404", Financial Reporter, December 2004.
• "Responsibilities of the Actuary for Communicating Sarbanes-Oxley Control: Effectiveness In Accordance With Actuarial Standards of Practice", Financial Reporter, December 2004.
• "The Fair Value Financial Economics Perspective", NAAJ, January 2002
• "Application of Coherent Risk Measures to Capital Requirements in Insurance", NAAJ, April 1999
• "Accounting/Actuarial Bias Enables Equity Investment by Defined Benefit Pension Plans", NAAJ, July 2005
• "Risk Management: The Total Return Approach and Beyond", Risk Management Newsletter, November 2004, Issue 3
• "A Case Study in Risk Management: U.S. Monetary Policy", Risk Management Newsletter, July 2004.
• "Influenza Pandemics: Are We Ready for the Next One", Risk Management Newsletter, July 2004.
• "Strategic Management of Life Company Surplus", TSA XXXVIII pp. 105-144
• "Liquidity Modeling and Management", RSA 27 Session 101PD
• "Risk Aggregation for Capital Requirements Using the Copula Technique", Risk Management March 2005

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
Study Note Order Form located on the Study Note Information page. Candidates should be sure to check this site periodically for additional corrections or notices.