All are complete.

5 Consider the following scenarios: Scenario 1: A person goes to see a concert with a $50 ticket price. When they open their wallet to buy the ticket, they realise that they have lost $50. Scenario 2: A person goes to see the same concert having paid $50 in advance for the ticket. As they arrive at the venue they realise they have lost the ticket. Research by Richard Thaler has shown that in scenario 1 84% of people would buy the ticket; however, in scenario 2 only 46% of people would buy another ticket. (i) (a) State which aspect of behavioural finance this relates to. (b) Propose, with reasons, why people may act in this way. [3] A large-scale experiment has shown that individuals who receive information about investment performance too frequently tend to under-invest in riskier assets. (ii) (a) State which aspect of behavioural finance this relates to. (b) Propose, with reasons, why people may act in this way. [3] A street vendor has the choice of two places to sell their goods: at location A, where there is never any competition, but there are fewer potential customers: at location B, where a competitor is sometimes present, but there are more potential customers. If the street vendor sells their goods at location A, they usually earn 75 in a day. If the street vendor goes to location B and there are no competitors there, they will usually earn 120 in a day. If there is a competitor at location B, they will usually earn 50 in the day. The vendor cannot predict if there will be any competition at location B and usually chooses to sell at location A. (iii) (a) State which aspect of behavioural finance this relates to. (b) Propose, with reasons, why the vendor may act in this way.

A tourist is looking for a restaurant to eat in. There are two restaurants next to each other: one is nearly full, while the other is less busy. The tourist chooses the nearly full one to have their meal. (iv) (a) State which aspect of behavioural finance this relates to. (b) Propose, with reasons, why the tourist may act in this way

(i) Describe, the five financial risks faced by an institutional investor. [5] A new fund management group, Top Asset, is about to launch its first fund. (ii) Outline how Top Asset's management can monitor and control the fund's risks, as described in part (i). [5] (iii) Suggest who should monitor each of the fund's risks that you have outlined in part (ii). [3]

7 A fund manager is considering two investments. The first investment is from a popular musician offering to sell all the royalties to their music. (Royalties are monies paid to a musician each time their music is played in public.) The second investment is a government offering a tranche of student loans. (These are loans made to students to fund their university education. The loans are repayable when the students become employed.) (i) State reasons why the musician and the government may be offering these investments. [2] (ii) Outline the information you would need to collect to value each of these investments. [4] (iii) Describe how you would value these investments. [4] The fund manager is seeking investments that are uncorrelated with global bond markets. (iv) Discuss whether or not these two investments will be uncorrelated with global bond markets. [3] (v) List the problems the fund manager may encounter as a result of investing in either of these two investments.

2 Company A has been writing motor and home insurance business for the past 10 years. Company A has never purchased reinsurance cover and has delivered underwriting profits for each of the 10 years it has been in operation. A new director has joined Company A's Board. The director has reviewed the company's financial results and, based on their previous experience in other companies, has suggested that Company A should purchase reinsurance. (i) Describe four factors Company A should consider while deciding on an appropriate reinsurance structure. [4] The Chief Underwriting Officer disagrees with the new director and has stated that 'We are consistently making an underwriting profit so we don't need reinsurance'. (ii) Comment on the Chief Underwriting Officer's statement. [4] [Total 8]

3 (i) Define facultative reinsurance. [2] (ii) Outline the advantages and disadvantages of facultative reinsurance. [4] (iii) Describe different ways of allowing for facultative reinsurance in a capital model, commenting on when they may be appropriate.

4 Profit & Loss Attribution is the review of the causes and sources of profits and losses for each major business unit of a company compared to the initial business plan. It is required to be performed at least annually under Solvency II for all companies with approved internal capital models. (i) Outline potential different sources of profits and losses for a general insurance company. [6] (ii) Suggest why the European Insurance and Occupational Pensions Authority (EIOPA) would make Profit & Loss Attribution a requirement for all companies with approved internal capital models. [2] (iii) Suggest, with reasons, an alternative regulation that EIOPA could have implemented to achieve the same result.

5 Country B has a relatively young but thriving motor insurance market with the local regulator, the Country B Monitoring Authority (CBMA), playing a very active role. Recently, motor premium rates have been set via a motor insurance tariff imposed by the CBMA. This meant that the CBMA set the premium insurers could charge for a motor insurance policy for each of the standard risk profiles it set. The CBMA decided to remove the motor insurance tariff with effect from 1 January 2020. It now allows insurance companies in Country B to charge a premium of their choice for policies written with effect from 1 January 2020, while still prescribing the rating factors to use. Industry analysts predict that this change will lead to a price war that could reduce premiums charged to an unsustainably low level. Company C is a small-sized motor insurer in Country B with a roughly 6% market share of the motor insurance market. Company C has been in operation for the past 5 years. Company C's pricing actuary believes that the removal of the motor insurance tariff will lead to a rate reduction of up to 10% compared to premiums charged last year. Company C's reserving actuary is about to perform a reserving exercise as at 31 March 2020. (i) Describe the factors that they should consider during the reserving exercise. [6] (ii) (a) Describe the reserving methods that could be used to estimate the Incurred But Not Reported (IBNR) claims for the current accident year. [3] (b) Recommend, with reasons, the most appropriate reserving method. [1] Six months after the reserving exercise, Company C's market share has reduced from 6% to 2%. (iii) Suggest possible reasons for this reduction

6 The regulator of Country Z requires all insurance companies operating inside the country to pay a compulsory levy (fee) to an independent but regulated body called Country Z Protection Scheme (CZPS). CZPS's goal is to provide protection to customers in the event that an insurance company operating in Country Z were to go bankrupt. CZPS uses an objective system of rating the risk associated with each insurance company to determine the amount of the levy to be paid by each insurance company, using the following risk measures: capital adequacy; reserve adequacy; and gross written premium income. (i) Explain the significance of each of the three risk measures CZPS is using to determine the amount of levy applicable to each insurance company. [6] As a small general insurance company, Company Y provides commercial property insurance in Country Z. Over 40% of Company Y's premium income has historically come from high risk commercial properties. However, at the start of 2020, Company Y decided to stop writing the high risk business leading to a sudden drop in its annual premium income. (ii) Suggest possible reasons why Company Y may have decided to stop writing high risk commercial property insurance. [3] CZPS has proposed significantly increasing Company Y's levy, citing the sudden drop in premium income as the reason. (iii) Comment on whether it is appropriate for CZPS to impose this levy increase on Company Y.

8 A general insurance company has decided to move from modelling claims and premium reserves on a prudent basis to a best estimate basis in its stochastic capital model. (i) Suggest reasons why the company may have decided to do this. [3] (ii) Suggest, with reasons, which parameters within the capital model may change following the change in basis. [4] The company has decided to roll-forward the model parameters relating to reserve risk instead of doing a complete re-parameterisation. It currently uses a Log-Normal distribution to model the gross reserve risk for each class of business. (iii) (a) Suggest three different approaches that could be used to roll forward the model parameters. (b) Discuss the potential impact on capital for reserve risk of each option. [6] The capital model has five risk areas, namely Premium Risk, Reserve Risk, Credit Risk, Market Risk and Operational Risk. The company mainly writes liability business. (iv) Discuss the correlations that may exist within and between these risk groups. [5] (v) Suggest how the most material correlations and dependencies may differ if the company wrote mainly property business. [3] (vi) Describe how copulas could be parameterised by the company.