ST9: CMP Upgrade 2014/15 Page 1

Subject ST9
CMP Upgrade 2014/15

CMP Upgrade

This CMP Upgrade lists all significant changes to the Core Reading and the ActEd
material since last year so that you can manually amend your 2014 study material to
make it suitable for study for the 2015 exams. It includes replacement pages and
additional pages where appropriate. Alternatively, you can buy a full replacement set of
up-to-date Course Notes at a significantly reduced price if you have previously bought
the full price Course Notes in this subject. Please see our 2015 Student Brochure for
more details.

This CMP Upgrade contains:

all major changes to the Syllabus objectives and Core Reading.

changes to the ActEd Course Notes, Series X Assignments and Question and
Answer Bank that will make them suitable for study for the 2015 exams.

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1 Changes to the Syllabus objectives and Core Reading

1.1 Syllabus objectives

Objective 1.4.2

Reference to Basel II now is to Basel Accord

Objective 3.2.1

Counterparty risk has been added to the list of risk categories.

Objective 6.4

Counterparty risk has been added. The objective now reads:

Describe the tools and techniques for identifying and managing credit and counterparty
risk.

Objective 6.5

Other key risks has been added. The objective now reads:

Discuss the management of operational, liquidity, insurance and other key risks.

Objective 7

The objective is now titled Capital Management.

The word economic has been removed from objective 7.1 and 7.1.2.

1.2 Core Reading

The reference to the Lam textbook has been amended to the following (ie the second
edition is now mandatory required reading):

Enterprise Risk Management From Incentives to Controls Second edition James

Lam. Wiley, 2014. ISBN: 9781118413616

Page references have been updated accordingly and some new chapters and sections of
the new textbook have been added to the lists of required reading.

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The main changes to the Core Reading are as follows:

Chapter 3

The Core Reading on ORSA has been altered and now reads:

The ORSA concept now forms part of the International Association of Insurance
Supervisors (IAIS) standards, and has been introduced in several jurisdictions,
including the USA. Although some of the detailed requirements differ between
adoptions (eg Solvency II v. USA ORSAs), the overall principles are equivalent.

The ORSA is being promoted by the IAIS as a tool both for improving insurance
business practice and for allowing regulators to enhance their assessments of
the ability of insurance companies to withstand stress events.

The Core Reading now includes reference to the Swiss Solvency Test:

The Swiss Solvency Test is a risk-based regulatory capital regime which has
been fully in-force in Switzerland since 1 January 2011.

It takes a market consistent approach and has similarities with the Solvency II
Pillar 1 requirements. Differences include calibration of the solvency capital
requirements to a Tail Value at Risk (TVaR) measure at 99% confidence rather
than Value at Risk (VaR) at 99.5% confidence (these risk measures are described
further in Chapter 10).

Chapter 9

The description of credit / counterparty risk has been redrafted to read:

Credit risk in its general sense is the risk that a counterparty to an agreement
will be unable or unwilling to make the payments required under that agreement.
Some organisations define credit risk more narrowly as the risk that a borrower
will partially or wholly default on repayment of debt (interest and/or capital
payments). The phrase credit risk is also sometimes used to include risks
relating to variations in credit spreads in the market.

Counterparty risk is the risk that another party to a transaction or agreement

fails to perform its contractual obligations, including failure to perform them in a
timely manner. An example would be the default of a counterparty within a
derivatives transaction, or the failure of an outsourcing company. Some
organisations include counterparty risk within the wider credit risk category,
and this is also generally the case in the required reading for this and later
Chapters.

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Chapter 26

Some new introductory Core Reading has been added:

Capital models can be used for a number of purposes within an organisation,

such as regulatory capital setting or considering economic capital
requirements.

Although the underlying assumptions and parameters are likely to be similar, if

not identical, between these two purposes, they are likely to have different risk
measures and calibrations associated with them. For example, a 1 in 200 year
risk measure is typical of regulatory capital requirements, whereas a 1 in 500
year calibration might be considered to be more appropriate for setting
economic capital, which typically would be in excess of minimum regulatory
capital requirements.

Within regulatory and economic capital models there may also be different
scenarios run to allow for some of the accounting requirements of specific
countries that are not appropriate when considering either regulatory or
economic capital requirements.

There may be other ways to assess capital requirements within an organisation,

such as regulatory standard formulae (or other prescribed calculations) and
rating agency factor-based models. Where relevant, these are also an important
part of the capital management process.

The reading material for this Chapter focuses on the concept of economic
capital, but the principles (modelling techniques and capital allocation
approaches) can apply similarly to regulatory required capital.

Chapter 28

Certain principal terms have been altered / added as follows:

Credit risk

Credit risk in its general sense is the risk that a counterparty to an agreement
will be unable or unwilling to make the payments required under that agreement.
Some organisations define credit risk more narrowly as the risk that a borrower
will partially or wholly default on repayment of debt (interest and/or capital
payments), and it may also include risks relating to variations in credit spreads
in the market.

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Solvency II

Solvency II is an updated set of regulatory requirements for insurance firms in

the EU, which is planned to replace the current Solvency I regime from the
beginning of 2016.

Counterparty risk

Counterparty risk is the risk that another party to a transaction or agreement

fails to perform its contractual obligations, including failure to perform them in a
timely manner.

Swiss Solvency Test

The Swiss Solvency Test is a risk-based regulatory capital regime which has
similarities to Pillar 1 of Solvency II, although uses a different calibration
measure.

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2 Changes to the ActEd Course Notes

Minor changes have been made to the Course Notes to reflect the changes to the Core
Reading listed above.

Page references have been updated to match those in the second edition of Lam.

Extensive changes have been made to the notes, particularly to Parts 1 and 2, to
incorporate the new required reading in Lam.

Due to the extent of the changes and the mandatory use of the new textbook it is not
practical to produce updated or replacement pages. We recommend that students:

purchase the second edition of the Lam textbook

purchase a new set of Course Notes (or a new Combined Materials Pack) at the
special retaker price.

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3 Changes to the Q&A Bank

Some minor changes have been made to some solutions to ensure they are consistent
with revised text in the Course Notes (eg the term economic capital has been largely
removed from the course and so the term capital is used in its place). However, in
such cases, the 2014 questions and solutions are fit for purpose and hence are not listed
below.

Question 3.33

This question has been moved to the Development Questions section.

Questions 6.10 & 6.11

Counterparty risk has been added to the list of risks to be considered in the two
questions.

4 Changes to the X assignments

Some minor changes have been made to some questions and solutions (particularly in
Assignment 6) to ensure they are consistent with revised text in the Course Notes
(eg the term economic capital has been largely removed from the course and so the
term capital is used in its place). However, in such cases, the 2014 questions and
solutions are fit for purpose and hence are not listed.

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5 Other tuition services

In addition to this CMP Upgrade you might find the following services helpful with
your study.

5.1 Study material

We offer the following study material in Subject ST9:

Mock Exam
Additional Mock Pack
ASET (ActEd Solutions with Exam Technique) and Mini-ASET
Flashcards.

For further details on ActEds study materials, please refer to the 2015 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.

5.2 Tutorials

We offer the following tutorials in Subject ST9:

a set of Regular Tutorials (lasting three full days)
a Block Tutorial (lasting three full days)
Online Tutorials.
For further details on ActEds tutorials, please refer to our latest Tuition Bulletin, which
is available from the ActEd website at www.ActEd.co.uk.

5.3 Marking

You can have your attempts at any of our assignments or mock exams marked by
ActEd. When marking your scripts, we aim to provide specific advice to improve your
chances of success in the exam and to return your scripts as quickly as possible.

For further details on ActEds marking services, please refer to the 2015 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.

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6 Feedback on the study material

ActEd is always pleased to get feedback from students about any aspect of our study
programmes. Please let us know if you have any specific comments (eg about certain
sections of the notes or particular questions) or general suggestions about how we can
improve the study material. We will incorporate as many of your suggestions as we can
when we update the course material each year.

If you have any comments on this course please send them by email to ST9@bpp.com
or by fax to 01235 550085.

The Actuarial Education Company IFE: 2015 Examinations

 All study material produced by ActEd is copyright and is sold
for the exclusive use of the purchaser. The copyright is owned
by Institute and Faculty Education Limited, a subsidiary of
the Institute and Faculty of Actuaries.

Unless prior authority is granted by ActEd, you may not hire

out, lend, give out, sell, store or transmit electronically or
photocopy any part of the study material.

You must take care of your study material to ensure that it is

not used or copied by anybody else.

Legal action will be taken if these terms are infringed. In

addition, we may seek to take disciplinary action through the
profession or through your employer.

These conditions remain in force after you have finished using

the course.

IFE: 2015 Examinations The Actuarial Education Company