Definition for Corrective Management Action
Hi Graham,
It seems that the source paper defines the corrective management action slightly differently? Would you be able to provide more guidance on that?
Is the corrective management action the actions to lessen the adverse scenario, or the action to mitigate the ripple effect.
Corrective management actions
Paragraphs 2520.29 and 2520.29.1 state:
For each of the adverse scenarios that would result in a threat to satisfactory financial
condition, the actuary would identify possible corrective management actions that would lessen
the likelihood of that threat, or that would mitigate that threat, if it materialized.
As well, under the Management Actions section:
Management actions
Management responses to stress impacts may be classified as either ripple effects or corrective
management actions. As the distinction between the two is critical to the development of the
opinion statement, the actuary will need to carefully assess the appropriate categorization of the
management actions.
Does this look right: the management response to adverse scenario is the corrective management actions; the management response to ripple effects count as part of the ripple effects ?
Thanks,
Ziwei
Comments
The definitions you listed are technically correct. I paraphrased them in the wiki to be more consistent with the examples in Appendix B. It's true that the FCT reading seems to draw a distinction between management actions and corrective management actions but the examples did not support this distinction. Here's what I mean:
Each example in Appendix B is a specific risk category and the discussion has 3 sections:
I was hoping to find illustrations of the distinction between management actions and corrective management actions but there is no reference to corrective management anywhere within these examples. Also, ripple effects are supposed to include routine management actions, but none of the listed ripple effects referred to such. Unless I missed something, all of the potential ripple effects listed were consequences of the adverse scenario over which management would have no control.
So those are the reasons I paraphrased the definitions. Note that old exam problems from the DCAT reading never asked for the definitions of "ripple effect" or "management action". They asked only for examples of ripple effects and management actions relevant to a given adverse scenario. My assumption is that those definitions would not be asked going forward either. (I will edit the wiki however just to be on the safe side.)
Something else: Although an adverse scenario and a ripple effect are two different things, the management actions listed in the Appendix B examples address both simultaneously. I'm not really sure a management action could mitigate a ripple effect but not lessen the adverse scenario and vice-versa. Any management action taken is pretty much always going to mitigate both the ripple effect and lessen the adverse scenario
My strong feeling is that future FCT exam problems will follow the same pattern of the old DCAT problems:
That's what I would focus on. Note that you should also memorize the definitions of the different kinds of scenarios: base, adverse, solvency, and going-concern scenarios.
And the final answer to your question:
I think what you've stated is probably right in the abstract but the source text provides no real examples of the difference. As I mentioned earlier, I don't know how a management action could respond to a ripple effect but not respond to the adverse scenario itself.
Thank you Graham!