What to know about the 2016 Exam 7 Syllabus Changes

When I took my fellowship exams, one exercise I did before cracking open the first paper was to compare the new syllabus against last year’s syllabus. This is much more informative than just skimming the new syllabus before diving into four months of studying.

Here’s why it’s helpful to take a look at changes to the syllabus

First, seeing the syllabus changes gives you a better understanding of how the new exam will be different than past exams that you use as practice exams. For example, there may be new papers or changes to section weights, both of which are happening for 2016.

Second, knowing the weights of the different sections and subsections is a good signal for what papers you should pay more attention to. This might not be apparent if you assume the next exam will have the same weighting as prior exams.

Finally, comparing the syllabus from year-to-year allows you see if there are new or re-worded learning objectives or knowledge statements added from the prior year. This might point to topics that may have a higher likelihood of being asked.

We all know that the actual exam won’t be in lockstep with the weights on the syllabus. I’ve always studied from the assumption that anything in the syllabus reading is testable.

BUT, the syllabus weights and learning objectives are a good a priori to start from and you should be ready for anything specifically called out on in the syllabus whether it’s been tested before or not.

A cautionary tale

I took exam 7 in 2013 when the Marshall paper was new. I know that some people weren’t ready at all for that paper because it wasn’t on the past CAS problems (obviously).

There was a big 5.75 point problem that was straightforward but people that didn’t pay attention to the syllabus changes floundered.

Don’t be that person!

Before I jump into the details of all the changes, here’s a summary of the key takeaways that you should keep in mind when you start studying:

Key Changes and What to Expect

  • Expect more questions from Part A, the Advanced Reserving section, than in past years of Exam 7. Especially pay more attention to:
    • Credibility Models (Learning Objective A.1) - This includes the Brosius, Hurlimann and Mack(2000) papers
    • Stochastic/Bayesian Reserve Distributions (Learning Objective A.5-10) - This includes the Meyers paper as well as Marshall, Shapland, and Verrall
  • Expect much less emphasis on the ERM section, which may have more conceptual questions
  • Expect a question from the new Meyers paper
    • Especially know how to use the models in a calculation question and interpret graphical output

Changes to Papers

Added

  • Meyers - Stochastic Loss Reserving Using Bayesian MCMC Models
  • Brehm ch. 2.1 - Corporate Decision Making Using an Enterprise Risk Model
  • Brehm ch. 2.4 - Asset-Liability Management
  • Brehm ch. 2.5 - Measuring Value in Reinsurance
  • Brehm ch 3.3 - Modeling Dependency: Correlations and Copulas

Removed

  • Brehm ch. 5.2 - Overview of Loss Reserve Risk Models
  • Brehm ch. 6.2 - Investment Market Risk
  • IAA - This duplicated a lot of the material in Brehm
  • Feldblum - This was a copula paper, replaced by Brehm ch. 3.3
  • Venter Copulas - Another copula paper, replaced by Brehm ch. 3.3
  • Venter and Underwood - Ideas are covered in Brehm ch. 2.5
  • Venter Non-Tail Measures - Covered in Brehm ch. 2.2
  • Venter Strategic Management - Ideas are covered in Brehm. ch. 2.2

Key Takeaways

  • Be prepared for a question from the new Meyers paper
  • All other changes are in the ERM section and replace technical papers with chapters in Brehm that give a higher-level overview of ERM

Changes to Section Weights

High-Level Changes

Section 2016 2015 Change
A - Estimation of Policy Liabilities B - Insurance Company Valuation C -  Enterprise Risk Management 65 - 75% 8 - 12 15 - 25 45 - 55% 8 - 12 35 - 45 20 point Increase No Change 20 point Decrease

The syllabus committee halved the weight on the ERM section and shifted that weight to part A. Typically part A has been a more calculation-heavy section while there have been more conceptual essay questions in the ERM section.

Section A Changes

Learning Objective 2016             2015           Change
LO 1: Credibility Models LO 2-3: Reserve Distributions LO 4: Reserves for Layers of Loss LO 5-10: Stochastic Reserves/Risk Margins LO 11-13: Reinsurance Reserving LO 14: Premium Reserves 10 - 14% 16 - 18 5 - 7 22 - 24 6 - 9 4 - 5 3 - 4% 16 - 18 3 - 4 16 - 18 5 - 7 2 - 4 7 - 10 point Increase No Change 2 - 3 point Increase 6 point Increase 1 - 2 point Increase 1 - 2 point Increase
Total Section A 65 - 75%   45 - 55% 

Key Takeaways

  • Most Learning Objectives in section A increased in weight
  • LO 1: Credibility Models tripled in weight from 2015
  • LO 5-10, which has the new Meyers paper, also had a big increase in weight

Section B Changes

There are no changes to the Section B weights.

Section C Changes

Learning Objective                                                    2016       2015         Change
LO 1: Insurance/Financial Risks LO 2: Managing Insurance/Financial Risks LO 3-4: Risk Measures LO 5-6: Modeling Enterprise Risks/Copulas LO 7 - Operational Risk LO 8 - Underwriting Cycle 3 - 5% 3 - 5 2 - 4 3 - 5 3 - 5 2 - 4 9 - 11% 8 - 10 4 - 5 9 - 11 1 - 2 N/A 6 point Decrease 5 point Decrease 1 - 2 point Decrease 6 point Decrease 2 - 3 point Increase 2 - 4 point Increase
Total Section C 15 - 25% 35 - 45%

Key Takeaways

  • Weighting was decreased for almost all Learning Objectives
  • LO 8 - Underwriting Cycle is new, so be prepared for a possible question
  • LO 7 - Operational Risk is the only other learning objective that increased in weight

Changes to Wording

From year to year, the Syllabus Committee may make changes to the wording in the Syllabus, especially to the different Learning Objectives and Knowledge Statements. These changes may just be to add clarification, but they may also point to topics that are more likely to be tested. I think this is especially true when there are new Learning Objectives and Knowledge Statements on the syllabus.

Section A Changes

There are no wording changes in section A.

Section B Changes

Knowledge Statement 1.a:

2016 Knowledge Statement 2015 Knowledge Statement
a. Calculate the effect of loss and expense reserve requirements and regulatory or rating agency capital requirements on the free cash flow to equity for a P&C insurer. a. Free cash flow to equity for a P&C insurer

For 2016, the wording for Learning Objective 1 was copied over to the Knowledge Statement to replace the vague 2015 wording.

Source: Knowledge Statement 1.a regarding FCFE is covered in Goldfarb pg 19-21. It’s a very short section and definitely worth knowing well for the exam.

Section C Changes

In the description of section C, the 2016 syllabus added the following clarification:

The candidates should gain general knowledge of ERM and are expected to explain it conceptually in the context of an examination. Expert proficiency is not a requirement for candidates.

Below is a rundown by Learning Objective to compare the Knowledge Statements from 2015 to 2016. I’ve highlighted new topics for 2016. Note that some of the Learning Objectives were re-ordered and had a different number in 2015.

Learning Objective 1:

  1. Demonstrate how insurance and financial risk can be analyzed quantitatively.
2016 Knowledge Statements 2015 Knowledge Statements
a. Definition of ERM and key elements of consideration b. ERM process and risk management c. ERM risk models evaluation d. Sources of risks and modeling of dependencies e. ERM in setting capital requirement a. Currency risk b. Credit risk c. Spread risk d. Interest rate risk e. Equity risk f. Hazard/insurance risk

Learning Objective 2:

  1. Describe the rationale for, methods for, and effect of managing insurance and financial risks.
2016 Knowledge Statements 2015 Knowledge Statements (as LO 6)
a. IRM and other capital adequacy models b. An asset-liability modeling approach c. Reinsurance and Risk optimization a. Selection of appropriate degree of risk b. Risk optimization and value impact c. Retention including estimated costs compared to benefits of risk transfer, value of specific risk, costs of financial distress, taxation, firm value, financing costs, and risk attitudes of debtholders, customers, employees, etc.

Learning Objectives 3-4:

  1. Demonstrate the properties of various risk measures and their limitations.
  2. Describe how risk measures and risk modeling, including allocation, can affect strategic management.
2016 Knowledge Statements 2015 Knowledge Statements (as LO 4-5)
a. VaR, TVaR, and XTVaR b. Expected policyholder deficit and default put option c. Probability transforms d. Generalized moments a. (Semi) standard deviation b. VaR and TVaR c. Expected policyholder deficit and default put option d. Risk-adjusted TVaR e. OpVaR (including variations) f. Distortion measures and probability transforms

Learning Objective 5-6:

  1. Describe the use of enterprise-wide risk modeling and aggregation techniques.
  2. Evaluate and select appropriate models to handle diverse risks, including stochastic approaches.
2016 Knowledge Statements 2015 Knowledge Statements (as LO 2-3)
a. Incorporating the use of correlation b. Evaluation and selection of appropriate copulas as part of the process of modeling multivariate risks c. Tail dependence and tail correlations d. Low frequency/high severity events e. Parameter, projection, estimation, and model risk a. Incorporating the use of correlation b. Evaluation and selection of appropriate copulas as part of the process of modeling multivariate risks c. Alternatives to copulas d. Scenario analysis e. Stress testing f. Tail dependence and tail correlations g. Low frequency/high severity events h. Model and parameter risk

Learning Objective 7:

  1. Describe operational risk and demonstrate possible mitigation and quantification methodology.
2016 Knowledge Statements 2015 Knowledge Statements
a. Types of operational risk b. Key risk indicators and operational risk modeling c. Types of strategic risks d. Examples of strategic risks e. Scenario planning a. Types of operational risk b. Examples c. Quantification d. Capital charges e. Mitigation

Learning Objective 8 (2016):

  1. Describe approaches to modeling the underwriting cycle.
2016 Knowledge Statements 2015 Knowledge Statements
a. Definition, characteristics, and drivers of the underwriting cycle b. Soft, behavioral, and technical modeling approaches c. Modeling components: supply and demand, capital flows d. Assembling the components of a model Not a Learning Objective in 2015

Learning Objective 8 (2015):

8 (2015). Evaluate best practices in risk measurement, modeling, and management of various financial and non-financial risks faced by an entity.

2016 Knowledge Statements 2015 Knowledge Statements
Not a specific Learning Objective in 2016, but generally falls under most of the other Learning Objectives in Section C. a. Economic capital b. Extreme events c. Risks d. Model structure

Key Takeaways

  • Learning Objective 8 is new for 2016, so I would definitely pay attention and be ready for a possible question about underwriting cycles.
  • Most of the Knowledge Statements were reworded to correspond with the Brehm text. I would be prepared for possible questions that could come straight from the new Knowledge Statements.
    • For LO 8 an example might be: “Discuss the three types of approaches to modeling the underwriting cycle."
  • The syllabus points to more conceptual, general questions for the ERM section.
    • I think you’re more likely to see essay and “Bloom-y” questions and less likely to see very technical calculation questions.

A Final Note

As you gear up to study for the 2016 sitting, think about the syllabus and the takeaways above.

It’s helpful to pay attention to the syllabus weighting and how the 2016 exam might be different than prior exams that you’ll use as practice exams. Past exams placed significant weight on the ERM section.

Some of the Brehm chapters and the Meyers paper didn’t appear on prior exams, so it’s important to be prepared for new questions on those topics.

Do you have any thoughts or comments about the 2016 Syllabus changes? Let me know!