Friday, December 31, 2004

New Preliminary Actuarial Education

For the first time, the Society of Actuaries and the Casualty Actuarial Society are going to require prior educational experience in particular subjects which are not going to be part of the traditional actuarial education & examination process. (I believe this experiment will turn out to be a disaster, but that's a topic for another post.) Here are the current "Validation by Educational Experience" topics and traditional actuarial examinations which are common to both societies.

Validation by Educational Experience – Applied Statistical Methods

Courses that meet this requirement may be taught in the mathematics, statistics, or economics department, or in the business school. In economics departments, this course may be called Econometrics. The material could be covered by one course or two. The mathematical sophistication of these courses will vary widely and all levels are intended to be acceptable. Most of the topics listed below should be covered:

Regression analysis
• Least square estimates of parameters
• Single linear regression
• Multiple linear regression
• Hypothesis testing and confidence intervals in linear regression models
• Testing of models, data analysis and appropriateness of models

Time series
• Linear time series models
• Moving average, autoregressive and/or ARIMA models
• Estimation, data analysis and forecasting with time series models
• Forecast errors and confidence intervals

Validation by Educational Experience – Corporate Finance

The typical corporate finance sequence in a business school consists of an introductory semester followed by an advanced semester. The advanced semester will more likely be the one that aligns with the learning objectives. The standard validation method will be completion of the second semester of a two-semester corporate finance sequence. Generally, only the second semester course grade will be evaluated unless this is a narrow course in which case both the first and second semester course grades will be evaluated. The exceptional case where the corporate finance material is covered in one course only will also be considered. Most of the topics in each category listed below should be covered:

• Definitions of key finance terms: stock company; capital structure
• Key finance concepts: financing companies; characteristics and uses of financial instruments; sources of capital; cost of capital; dividend policy; personal and corporate taxation
• Actors to be considered by a company when deciding on its capital structure and dividend policy
• Impact of financial leverage and long/short term financing policies on capital structure
• Characteristics of the principal forms of financial instruments issued or used by companies, and the ways in which they may be issued
• How a company's cost of capital relates to the investment projects the company wishes to undertake

• Key finance concepts: option pricing theory and stock valuation
• Definitions of key finance terms: financial instruments – bond, stock, basic options (calls, puts); dividends; price to earnings ratio
• Structure of a stock company and the different methods by which it may be financed
• Calculate value of stocks
• Calculate value of options
• Measures of financial performance: balance sheet; income statement; statement of cash flows; financial ratios (e.g. leverage, liquidity, profitability, market value ratios); net present value: the payback, discounted payback models; internal rate of return and profitability index models
• Assessment of financial performance using various measures: balance sheet; income statement; statement of cash flows, financial ratios (e.g. leverage, liquidity, profitability, market value ratios); net present value; the payback, discounted payback models; internal rate of return and profitability index models

Validation by Educational Experience – Economics

Typically, the VEE requirement for economics will be met if a candidate has completed two introductory economics courses, one course covering microeconomics and the other covering macroeconomics. Most of the topics listed below should be covered:

• Interaction between supply and demand in the provision of a product and the way in which equilibrium market prices are determined
• Elasticity of demand and supply and the effects on a market of different levels of elasticity
• How rational utility maximizing agents make consumption choices
• How profit-maximizing firms make short run and long run production choices
• Different types of competition, or lack of it, and the practical effect on supply and demand

• Structure of public sector finances of an industrialized economy
• GDP, GNP, and Net National Product. How these concepts are used in describing the economy and in making comparisons between countries, and their limitations
• Propensity to save or to consume by the private sector or the corporate sector and how it affects the economy
• Impact of fiscal and monetary policy and other forms of government intervention on different aspects of the economy, and in particular on financial markets
• Role of exchange rates and international trade in the economy and the meaning of the term balance of payments
• Major factors affecting the rate of inflation, the level of interest rates, the exchange rate, the level of unemployment, and the rate of economic growth in the economy of an industrialized country

SOA Exam P / CAS Exam 1 -- Probability

The examination for this material consists of 3 hours of multiple-choice questions. The purpose of this course of reading is to develop knowledge of the fundamental probability tools for quantitatively assessing risk. The application of these tools to problems encountered in actuarial science is emphasized. A thorough command of probability topics and the supporting calculus is assumed. Additionally, a very basic knowledge of insurance and risk management is assumed.

SOA Exam FM / CAS Exam 2 -- Financial Mathematics

The examination for this material consists of two hours of multiple-choice questions. The goal of the Financial Mathematics course of reading is to provide an understanding of the fundamental concepts of financial mathematics, and how those concepts are applied in calculating present and accumulated values for various streams of cash flows as a basis for future use in: reserving, valuation, pricing, duration calculation, asset/liability management, investment income, capital budgeting and valuing contingent cash flows. The following learning outcomes are presented with the understanding that candidates are allowed to use specified calculators on the exam. The education and examination of candidates should reflect that fact. In particular, such calculators eliminate the need for candidates to learn and be examined on certain mathematical methods of approximation.

SOA Exam C / CAS Exam 4 -- Construction and Evaluation of Actuarial Models

The examination for this material consists of four hours of multiple-choice questions. This material provides an introduction to modeling and covers important actuarial methods that are useful in modeling. A thorough knowledge of calculus, probability and mathematical statistics is assumed. The candidate will be required to understand the steps involved in the modeling process and how to carry out these steps in solving business problems. The candidate should be able to: 1) analyze data from an application in a business context; 2) determine a suitable model including parameter values; and 3) provide measures of confidence for decisions based upon the model. The candidate will be introduced to a variety of tools for the calibration and evaluation of the models on Exam M.

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