Task 1

[HD]

Discussions for task 1 of the CDEF scenario.

[Ray Huang]

I had DNMMR... where task 1 was an issue

I think it's because I may have been confused on what would be strategic risks and insurance risks..

I had put student growth and attrition as a strategic risk but now that I think about it, it might actually fall under insurance risks...

Any input would be appreciated.

[Austin]

Hi Ray,

Sorry to hear that. Hope this would be our last attempt. As an aside,

• I had not have access to the question paper yet, so wasn't really sure what is this about. But I do think that the student growth and attrition rate are pricing/reserving assumptions, am I getting this right?
• If they are actuarial assumptions, then I agree that these should categorized as insurance risks as these might result in poor performance of pricing and reserving.

Hope the above helps.

[Tim Hall]

Hi Ray,

Take everything I say with a grain of salt, as I DNMMR'd as well, but I considered them to be insurance risks as opposed to strategic risks. I have the following definitions written in my notes:

Strategic Risk: Unexpected changes in key elements of strategy formulation or execution

Insurance Risk: Unexpected changes associated with non-investment related events impacting the underlying insured population

In my opinion, student population change rates should fit under insurance risks in that case. Thoughts?

[HD]

Information from earlier google groups:

This is a summary from the 11/11-11/14 group. CM, you also have access to this group, so please review to see if I missed anything.

Please keep in mind that these are students just like us and may their responses may not be correct. If you disagree with any of the items below please add a comment and be sure to note the question and/or answer number.

Q1: Should we consider strictly negative risks for this task?

A1: Risks that would add value can also impact the fund I believe. There is no need to be over funded; this would mean that the contributors paid too much. The EOM4 model solution contains risks that add value and Segal's book is clear on the definition of risk : it can be both upside and downside risks.

Q2: Are we supposed to suggest risk mitigation strategy for each risk or key risk only?

A2.a: I believe the risk mitigation strategies are needed for key risks only.

A2.b: I have written down both upside risk & downside risk in RCD, but address downside risk only in Key Risk.

Q3: How many key risks did you include?

A3: I have 3, but I am not very sure how to justify how key it is. In BBA (a previous FA), "Key Risk" comes from RCD tool + sensitivity test. But now sensitivity test is put to task 4...

Q4: Does anyone have a good definition of Insurance Risk?

A4: From Segal, Insurance Risk – "Additional risk category which generally only applies to insurance companies. Insurance Risk involves poor performance of the pricing, underwriting, reserving, or setting of required capital for insurance products."

Q5: The managed fund is not owned by an insurance company, but rather the Department of Education. Is this really an Insurance Risk?

A5: Since we use lots of assumptions in our models in insurance companies, we call it the "insurance risk". In this assignment, we're still making a bunch of assumptions, I believe that is the "insurance risk" they're referring to. I'm leaning towards any assumptions (demographics) we're making as an insurance risk.

Q6: Are you guys using the format that is provided/adding additional columns to it?

A6: I didn't add the risk subcategory column. Instead, I treated the risk column as the risk sub-category column. If that makes sense. So I stuck with the template provided in the assignment.

The main risk categories and definitions are defined in Segal on page 116.

Looking back at the model solution for EOM4, the RCD tool in this task has less fields, but I think I am going to use the likelihood/severity idea from the EOM4 solution to help me identify key risks.

Some definitions from Segal:
Financial risk - unexpected changes in external markets, prices, rates, and liquidity supply and demand. This includes market risk, credit risk, and liquidity risk.
Strategic risk - unexpected changes in key elements of strategy formulation or execution.
Operation risk - unexpected changes in elements related to operations, such as human resources, technology, processes and disasters.
Insurance risk - generally applies only to insurance companies. Involves poor performance of the pricing, underwriting, reserving, or setting of required capital for insurance products. || [...] this risk category also applies to non-insurance companies issuing contracts that cover contingencies analogous to insurance contracts, such as CDSs.

General consensus is ~3 risks per category, 1-2 sentences per risk describing how each risk relate specifically to this case.

[rebec...@gmail.com]

how many key risks are  you guys thinking? I was told tasks 1 and 2 need most improvement and my rcd chart is pretty solid so I am thinking maybe I need more key risks. I had 4 in  my original attempt

[said.t...@gmail.com]

I think key risks not depend of the number. Its depend of the importance ( the most relevant risks with high likelihood/severity)

[rebec...@gmail.com]

I understand that but how do you determine likelihood and severity? For EOM 4 I just made them up without really justifying and did the same thing for task 1 not really knowing if the ranks I choose made sense in the real world or not. 

[said.t...@gmail.com]

It is a qualitative assessment of risks. Then you can assign for example for the severity/likelihood : Low , Medium, High.

You can do Impact :is  a combined between likelihood and severity.

After you can Rank your risks

[rebec...@gmail.com]

I guess I am thinking more about how I would go about ranking them. For example , I listed legislative/regulatory as a key risk and said med likelihood and high severity but i don't know if those rankings actually make sense or if it matters?

[Austin]

Becky, hope a little thought of mine can contribute to your work. 

My opinion is that perhaps we should quantify the likelihood and severity in a more specific way. Legislative wise, I think perhaps can speak of an example such as the change in the minimum contribution to the fund (increase/decrease)? This should be low likelihood if the government rarely mandate this and would be a high severity to the matter. Say, the decrease in minimum contribution to the fund will certainly reduce the potential accumulated fund value and hence lead to a lower amount of investment return.

[rebec...@gmail.com]

Thanks Austin, that helps put it into perspective!

[Tim Hall]

Hi all,

I am having trouble defining operational risks. Can anyone provide some ideas or guidance?

[rebec...@gmail.com]

check  out the first link posted in helpful readings...I found that document to a great help with task 1.

[said.t...@gmail.com]

How many risks do you have in each category ? and how many key risks ?

For example , in my case :
7 Financial Risks ( 2 key risks)
5 Strategic Risks (1 key risk)
4 Insurance Risks (1 key risk)
3 Operational Risks

[said.t...@gmail.com]

Question :

Unemployment Risk is related to the economic risk (Financial risk ).
For example, when there is a economic downturn, the unmployment icreases and then the accumalated fund decreases and hence lead an increasing amount of contribution .

[Sarah McMullen]

These two actuarial outpost threads address the categorization of unemployment risk.

• http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=318678 
  
• http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=328034

Also from a 2016 google group: 

"FYI - I failed the FA for BBA, and this task equivalent was one of my improvements. (I also failed module 4 which has this RCD tool, so i'm sensing a theme here...) I think the best advice would be to make sure you are defining all your risks by SOURCES and not outcomes. 

For example, unemployment rates increase, is not defining the risk by source, but rather an outcome of something else (in my opinion). "

Looks like you are on the right track.

[rebec...@gmail.com]

i have 3 for each category and my key risks are 2 financial, 1 strategic and 2 insurance.

I categorized unemployment as an insurance risk and key risk

[Tim Hall]

Are we expecting that the board runs the CDEF alone? Or are there employees under the board members that actually administer the plan. I am really struggling with connecting operational risks to the fund.

[rebec...@gmail.com]

Tim,

This link that was posted is really helpful for task 1 : https://www.casact.org/cms/pdf/AdvancingERMinCanada-Report_1.pdf

There are a lot of examples of operational risks in there. 

[rebec...@gmail.com]

for example one operational risk I used was internal theft/fraud - Some on the inside gains access to the fund and uses it for something other than the intended tuition payments

[Tai duong dang]

Hi, I finished the writing for task 1. My first time is concentrate more on the risks on key assumptions such as inflation on tuition fees. Now I changed my mind, I am thinking the key risks should be the one more likely to happen and have high severity.
For example, pricing an adequate tax rate is a key risk because it is likely to happen since it is tough, we can be too conservative but not optimistic, and the impact is huge.
If we set up a good inflation assumptions, the likelihood of suprise inflation is small, or just some years. So it is more on the wrong assumption selection as key risk than the inflation itself.
Any thought please ?

[said.t...@gmail.com]

Underwriting risk is included in the Insurance risk ?
I am also confused with it.

[JL]

I think so. Underwriting should be insurance risk.

[Eduardo Sebayan]

Hi everyone,

I have a few questions/thoughts about task 1. 

I am trying to figure out the format for Task 1. Since this is an internal memo, and a little less formal, I am thinking that we do not need the executive summary, etc, long formal memo format. Instead, perhaps something like an email? Just wanted some input on what other people are considering.

Also, I am a bit unclear how to interpret insurance risk in task 1. I'm thinking I agree with Becky that unemployment is an insurance risk, as well as perhaps higher student growth rate and lower attrition rate? Both are demographic assumptions that the CDEF need to make, and could go wrong.

Thanks, 

Ed

[3rdtimesacharm]

Task 1 definitely is less formal. no executive summary needed. My insurance risks largely related to key insurance assumptions such as demographics.

[HD]

Are your "Risk" column entries specific like "Higher Student Growth Rate" or generic like "Student Growth Rate" then explaining about higher/lower rates and their effects in the "Definition" column?

[3rdtimesacharm]

I think that would depend on the risk you're talking about. For example, higher student growth rate may be a risk, but do you think lower student growth rate could also be a risk? If you think so then, i'd keep the "risk" general by saying "student growth rate", but if you think only a higher rate (and not the lower rate) is risky, then i would call it "higher student growth rate"

[Zoo Keeper]

Here's my format for task 1

" Hi! XXX

RCD for CDEF 

Major risk     specific risk name   why specific risk is a risk

Key risk

1. Risk name

   More detail reason

    Mitigation strategy

    

1. Risk name

   More detail reason

    Mitigation strategy

2. Risk name

   More detail reason

    Mitigation strategy

3. Risk name

   More detail reason

    Mitigation strategy

(End of the memo greeting)

(signature)

I think it's not so much about the format. It's how you present it and how your risk has logical backing. I cited 5-6 external references to prove why the risk I listed can be critical to an education fund. 

[HD]

This is similar to what I did, and I think it should be easy for the graders to find what they're looking for. Just have to make sure the risks are relevant in CDEF's context.

[JL]

Is investment strategy considered as Strategic Risk or Financial Risk? I have trouble finding Strategic Risk....

[HD]

Financial risk is defined as " unexpected changes in external markets, prices, rates, and liquidity supply and demand. This includes market risk, credit risk, and liquidity risk." Since investment strategy doesn't fit to this description, I would assume it fits under Strategic Risk.

[Melissa]

If you're having trouble thinking of strategic risks, break down what CDEF's strategy is.

CDEF wants to pay for students who want to go to college and meet a certain grade requirement in high school. To fund this intended obligation, they will collect from the employed population a flat payroll tax, which they will then pool into a fund and invest through their asset management team and attempt to sustain this for a large number of years.

Where in the above can this strategy go wrong? The key is intent. Assuming they underwrite their population perfectly (they won't - that's where insurance risk comes in), their investments perform exactly as expected, and their team is a smooth, efficient, well-oiled machine that doesn't know the meaning of fraud, what else can go wrong?

[3rdtimesacharm]

I think i'd disagree with that sentiment. Investment strategy is directly influenced by market, credit, and liquidity risk. I'd categorize it as financial risk, but that's just me

[Andrew Taggart]

Quick question about how everyone set up their RCD tool.  I didn't get this as a task that needed to be improved on my first try but looking at some posts on AO I'm questioning it.  Do you think you need to include severity and likelihood of the risks you point out?  They don't include it in the little sample they have in task 1 so I didn't include that.

[Katherine Garner]

I don't think it's necessary. There were a few I mentioned that weren't key risks because the frequency/severity was low but I def didn't do that for all of them.