By Toby White, Chris Groendyke and Jeffrey Beckley
In 2018, the Society of Actuaries (SOA) will introduce three new exams. Investments and Financial Markets (IFM) will replace Models for Financial Economics (MFE). Short-Term Actuarial Mathematics (STAM) will replace Construction and Evaluation of Actuarial Models (C), and finally, Long-Term Actuarial Models (LTAM) will replace Models for Life Contingencies (MLC). For each of these new exams, a subcommittee worked on the revised curriculum. Below, the chair of each subcommittee provides a high level overview of the changes.
More information regarding the new exams, including the reasons behind the changes, the preliminary syllabus, transition information from the prior exams, and answers to frequently asked questions can be found at www.soa.org/curriculum-changes/curriculum-changes-default/.
Exam IFM by Toby White
Earlier in 2017, Exam MFE went through the first of two stages of significant change. It inherited all of the introductory derivatives material formerly on Exam FM (Calls, Puts, Option Strategies, Forwards, and Futures) except interest rate swaps. Then, to make room for this new material, it lost much of the more mathematically challenging components that had been around since 2007 (including stochastic calculus, Itô’s Lemma, interest rate models). It was determined that this advanced material could be moved to those FSA tracks that needed this depth of derivatives coverage.
In 2018, the second stage will occur. The last version of Exam MFE will be offered in March 2018 while the first version of the new IFM exam will be offered in July 2018. Although the SOA does not list a specific ordering of their preliminary exams, it is expected that IFM, like MFE before it, will more often than not be the third actuarial exam candidates take (after P and FM). Note that the Casualty Actuarial Society will continue to offer credit for these three exams.
IFM will retain the general format of Exam MFE. Specifically, it will be offered primarily as Computer-Based Testing (CBT), will be three hours in length, and will consist of 30 multiple-choice questions. However, financial derivatives will now only make up 50 percent of the exam, with the remaining half covering topics from Intermediate-to-Advanced Corporate Finance and Investment (i.e., commensurate with what is typically covered in the second semester of a corporate finance sequence at the undergraduate level). In fact, these topics are quite similar to what is currently the Validation by Educational Experience (VEE) credit for finance, whereas the new VEE for finance, starting in 2018 will be at a more elementary level with beginning accounting topics also incorporated.
When comparing the derivatives portion of Exam IFM to the current version of MFE, the majority of topics have been retained. Notable exceptions include simulation and interest rate derivatives, along with a reduction of more theoretical topics as relates to binomial trees. New topics, as relates to derivatives, that will appear in a study note (coming soon), include a better motivation for why actuaries need to be familiar with derivatives in a risk management context, examples of how actuaries employ various derivatives strategies, and updated/expanded coverage of exotic options.
As for the half of the exam on corporate finance and investments, the three most heavily covered areas will be mean-variance portfolio theory, asset pricing models (e.g., CAPM, factor models) and investment risk/project analysis. Other topics include perspectives on market efficiency, behavioral finance, and capital structure. Note that these topics were selected in order to be consistent with the learning objectives proposed by the International Association of Actuaries, to ensure continued compliance.
Candidates with credit for the current MFE exam will receive transition credit for the new IFM exam.
Exam STAM by Chris Groendyke
The current Exam C will be offered for the final time in June 2018. It will be replaced by the new STAM Exam, which will be offered for the first time in October 2018. This change is part of the effort in the new exam system to bring greater balance to the coverage of long-term and short-term insurances on the preliminary exam syllabus. Specifically, the current Exam C has in-depth coverage on estimation topics, but lacks material related to short-term coverages, or their pricing and reserving.
While the bulk of the STAM Exam will consist of material that is currently on the Exam C syllabus (such as frequency, severity, and aggregate models, credibility, risk measures, and parametric model estimation) there are several topics—all related to short-term insurance coverages—that will be new to this exam.
Specifically, the readings will include descriptions of some of the more common short-term coverages, such as dental, liability, homeowners, auto, health, and disability. In addition, there will be material related to policy limits and coverage modifications, as well as reinsurance schemes commonly used for these coverages, such as excess of loss and proportional reinsurance.
There will also be a substantial portion of the syllabus dedicated to the pricing and reserving of these types of short-term coverages. Candidates will be required to calculate premiums for short-term insurances using the pure premium and loss ratio methods. They will also use techniques such as the chain ladder and Bornhuetter-Ferguson methods to estimate unpaid losses from a run-off triangle. In addition, they will be expected to understand the role of rating factors and exposure, and to be familiar with different forms of experience rating.
To make room for this new material, some of the estimation material that is currently on the Exam C is being moved to other places on the syllabus rather than being carried forward to the STAM Exam. In particular, the basic Maximum Likelihood Estimators (MLE) material will be moved to the Mathematical Statistics VEE component, while the estimation material related to life tables and survival models will appear on the new LTAM Exam. Estimation material specifically related to short-term insurance coverages will be retained on the STAM Exam.
The STAM Exam will be offered in the computer-based testing (CBT) multiple-choice format, similar to that of the current Exam C. Any candidates who have credit for the current Exam C as of June 30, 2018 will get transition credit for the new STAM Exam along with credit for the new VEE Mathematical Statistics requirement when the transition occurs.
Exam LTAM by Jeffrey Beckley
The current Exam MLC will be offered for the final time in April 2018. It will be replaced by the new LTAM Exam, which will be offered for the first time in October 2018.
The syllabus material for LTAM is about 85 percent the same as the syllabus material for MLC. The primary material that has been added is:
- Survival models will be covered on the LTAM examination. These models were previously covered in Exam C. There is a natural fit for survival models in LTAM since our evaluation of future contingent events relies on survival models.
- As longevity risk is being recognized as a significant risk, it is important for LTAM to address longevity models. Therefore, longevity models will receive a significantly more robust treatment in LTAM. For MLC, a “static” method of projecting mortality improvement was on the syllabus. LTAM will expand the discussion of static models including its application to annuity mortality tables. Additionally, LTAM will now introduce the candidates to stochastic mortality models including the Lee Carter and Cairns-Blake-Down models.
- With the emphasis on long-term models as opposed to life contingencies, LTAM will include coverage of other long-term coverages that are not life insurance or annuities. This would include health coverages, structured settlements, and retiree health
care. Besides the fact that these coverages need to be priced and reserved using long-term actuarial mathematics, for many of these coverages the best model is a multi-state model and LTAM is where candidates learn how to use multi-state models.
Disability Income, Long-Term Care (including combo life insurance/long-term care), Critical Illness, and Continuing Care Retirement Communities are included in the health coverages. For each coverage, there is an expanded description of the coverage and examples of models used for these coverages.
The structured settlement material includes a discussion of annuity payouts under workers compensation insurance. For most structured settlements (whether from workers compensation or otherwise), the use of substandard mortality is appropriate and this is discussed.
In order to accommodate the addition of this material, some material that is currently on the MLC exam will not be included on the LTAM exam. For example, the material covering universal life will not be included in LTAM. It is expected that the universal life material will be included in the Fundamentals of Actuarial Practice course. Additionally, material covering yield curves and non-diversifiable risks have been removed. Finally, certain other minor topics have also been removed from the prior MLC material.
The LTAM Exam will continue to follow the current format of the MLC Exam which is a four hour pencil and paper exam with multiple choice and written answer questions. Candidates with credit for MLC will receive transition credit for the new LTAM exam.