Actuarial Notes

Exam 9

Risk Management for Actuaries (Exam 9) is a 4-hour computer-based exam (4.5-hour Pearson VUE appointment, with a 15-minute scheduled break) covering catastrophe modeling and reinsurance pricing, risk and return, financial risk management, and enterprise risk management.

Learning Objectives

A. Catastrophe and Reinsurance (25–35%) Candidates are expected to be able to interpret the methods used to model losses due to catastrophic events for the purpose of generating a catastrophe expected loss cost. Candidates are also expected to manage the total exposure from catastrophic events within an insurance portfolio.

Candidates will also be familiar with current and historical methods used to price reinsurance, with an emphasis on the application of these methods in pricing reinsurance contracts.

  1. Fit loss distribution-based exposure curves.
  2. Determine the loss cost of various types of reinsurance contracts (e.g., excess of loss, quota share, surplus share, treaty, aggregate excess of loss, and facultative).
  3. Determine the effect of common contract provisions (e.g., reinstatements, loss corridors, clash covers, profit and sliding scale commissions) on the loss cost of reinsurance contracts.
  4. Evaluate catastrophe models.
  5. Apply catastrophe models to ratemaking.

Readings: Grossi & Kunreuther · Clark · Bernegger

B. Risk and Return (20–30%) Candidates can define, compare, select, and apply appropriate risk measures to compute a risk-loaded technical premium. Candidates can evaluate the economic value of insurance cash flows reflecting the time value of money. Candidates can explain and apply the insurance concepts of margin, return, and leverage.

  1. Define and apply risk taxonomies and the concept of a risk measure.
  2. Calculate and compare financial risk using risk measures.
  3. Evaluate the economic value of insurance cash flows reflecting the time value of money, including the selection of interest rates.
  4. Determine risk loads for insurance pricing.
  5. Assess insurance profitability by decomposition (e.g., return on equity, margin on premium, leverage).

Readings: Mildenhall & Major

C. Financial Risk Management (FRM) (20–30%) Candidates can describe and explain the need, purpose, design, and execution of insurer financial risk management (FRM) and perform the calculations necessary to allocate the cost of capital, estimate risk-adjusted prices, and evaluate economic performance by line or unit.

  1. Describe and explain the financial risk and capital structure of insurers, the cost of insurance capital, and the impact and sources of insurance market imperfections (e.g., informational asymmetries, competition, potential financial distress).
  2. Allocate the cost of risk capital to business units or lines of business.
  3. Set prices for insurance policies on a risk-adjusted basis.
  4. Assess risk-adjusted performance of business units or lines of business.
  5. Estimate and manage interest rate and credit risk (e.g., default, prepayment, reinsurance).
  6. Describe and apply the basics of structured finance.
  7. Describe and apply securitization and its applications to the management of catastrophe risk (e.g., CAT bonds, insurance-linked securities).

Readings: Coval, Jurek, and Stafford · Cummins Capital · Cummins CAT Bond · Mildenhall & Major · Panning

D. Enterprise Risk Management (ERM) (15–25%) Candidates can define and explain Enterprise Risk Management (ERM), including model selection and calculations necessary to implement a realistic program. Candidates can describe the relationship between ERM and the overall risk that a business faces, and the impact of different ERM tools on business risk and strategy.

  1. Describe the common process of ERM.
  2. Determine operational and strategic risks.
  3. Analyze insurance and financial risk quantitatively.
  4. Determine the effect of risk measures and risk modeling on strategic management.
  5. Select models to manage diverse risks and evaluate correlations of risks.
  6. Develop risk mitigation strategies.
  7. Assess effectiveness of risk mitigation strategies.

Readings: Brehm et al

Source Material

Source Material

  • Swiss Re Exposure Curves and the MBBEFD Distribution Class (Bernegger - 1997)
    • A1
  • Enterprise Risk Analysis for Property and Liability Insurance Companies (Brehm et al.)
    • D1-D6 — Chapters 1, 2 (excluding Section 2.6), 3 (excluding Section 3.4), 4, and 5 (Section 5.4 only)
  • Basics of Reinsurance Pricing (Clark - 2014)
    • A2-A3
  • The Economics of Structured Finance (Coval, Jurek, and Stafford - 2009)
    • C5-C6
  • Allocation of Capital in the Insurance Industry (Cummins - 2000)
    • C1-C4 — including study note
  • CAT Bonds and Other Risk-Linked Securities (Cummins - 2008)
    • C7
  • Catastrophe Modeling: A New Approach to Managing Risk (Grossi and Kunreuther - 2005)
    • A4-A5 — Chapters 2-6 (excluding references at the end of each chapter) and including errata for Section 2.4, updated March 2021
  • Pricing Insurance Risk: Theory and Practice (Mildenhall and Major - 2022)
    • B1-B5, C1-C4
  • Managing Interest Rate Risk: ALM, Franchise Value, and Strategy (Panning - 2006)
    • C3, C5