10 - Overview of risks Flashcards
What are the main categories of risks that affect the provision of health, social, and employee benefits?
- Market risk
- Credit risk
- Liquidity risk (including insurance)
- Business risk
- External risk
- Operational risk
What are some key considerations when analysing risks in terms of frequency and severity?
Some risks have a very little impact and arise frequently, while others have a big impact but are not experienced very often.
What are the three types of risks associated with assumptions made by actuaries?
- Model risk
- Parameter risk
- Random fluctuation risk
Explain the concept of “data integrity risk” and its potential consequences.
Data integrity risk refers to the risk that incorrect data is used to perform calculations, which can lead to incorrect benefits, overpayments, or invalid insurance contracts.
What are some examples of data that may be useful for actuarial investigations besides data collected by the benefit provider?
Asset holding information and external data like industry data, national statistics or overseas markets.
How do mortality and longevity risks present differently when considering health and care benefits compared to retirement benefits?
Health and care benefits have a retirement benefit emphasis. Mortality risk arising from a large death benefit on a retirement fund or prefunded LTCI is typically greater than if the death benefit were smaller.
What is morbidity risk?
Morbidity risk arises whenever a payment is contingent on ill health and encompasses health and care products as well as ill-health benefits provided by retirement funds and social assistance for people with disabilities.
What factors can affect claim amounts for indemnity health products?
Innovation on medical cost, innovations in surgical procedures, prevalence of medical conditions, changes in demand, poor claims control/fraud, negotiated pricing agreements and the aging population.
Define “catastrophe risk.”
A catastrophe is a single event that gives rise to many individual claims and can stem from a pandemic, radiation leak, act of war, or natural disaster.
Explain the significance of investment risk in retirement funds.
Investment risk is very significant in most retirement funds that are funded in advance due to the long time periods involved.
What is “mismatching risk”?
Mismatching is essentially the extent to which the value of assets and the value of liabilities have different sensitivities to factors such as inflation, changes in interest rates, and currency.
Describe liquidity risk.
Liquidity risk is the risk that income received on investments is not sufficient to meet cash outflow needs.
What is default risk?
With investments that involve counterparties there is a risk to the investor that the counterparty will either make no further payments or that the payments will be lower than those promised.
What is funding risk?
Where the benefits are pre-defined, perhaps the greatest risk for a potential beneficiary is that there are insufficient funds available to provide the promised benefit.
List possible reasons a funded benefit arrangement or insurance product could be underfunded.
Parameter risk, random fluctuation risk, model risk, poor commercial performance by the sponsor, benefits larger than originally intended.
What is “excess asset risk”?
Underfunding risk deals with the risk that assets are insufficient to meet liabilities. However, having excess assets relative to liabilities can also represent a risk.
Explain contribution or premium risk.
In an insurance context, the party paying the premium faces the risk that the premium may become unaffordable either because of a change in circumstances or a change in the premium.
How can inflation affect retirement funds?
Benefits may be linked to salaries which are themselves influenced by salary inflation. Generally, salary inflation is made up of a cost-of-living adjustment which is driven by price inflation, changes in general productivity, and promotional increases.
What is expense and taxation risk?
A fund or insurer may experience unanticipated expenses or higher expenses than anticipated, which may be due to increasing costs of regulation.
What are risks relating to member or policyholder choices?
Benefit risks arising from members or policyholders making poor choices, advice risk relating to the quality and cost of advice required by members or policyholders who may struggle to make good choices without assistance, expense risks relating to the costs of implementing the choices and managing a complex benefit arrangement where every member or policyholder has a different combination of investments or benefits and adverse selection risk arising from a higher proportion of ‘bad’ risks choosing the benefit than expected or allowed for.
What is adverse selection?
Adverse selection can arise when members or policyholders have an option that is not actuarially neutral.
Define demographic risk.
Demographic risk refers to the probability that the assumed and expected demographic traits, such as distribution of age, sex, chronic conditions, etc., of a given risk pool are considerably different from the actual demographic characteristics of that risk pool.
What is business mix risk?
A significant unintended change in the mix of new business by nature or by size of contract could lead to a significant change in the risk profile or capital needs of the benefit provider that were not within the resources available to it.
What is persistence risk?
In most investigations conducted by actuaries, assumptions will need to be made as to the future persistency of the contracts issued by the benefit provider, based on lapse rates for long-term business and renewal rates for short-term business.
What is volume risk?
A benefit provider will need to ensure that the capital and administrative requirements of writing new business are within the resources available to it. An inappropriately high volume of new business could, therefore, lead to the available resources becoming inadequate.
What are risks related to distribution?
This section highlights the risk that the sales incentives for a given offering are insufficient to achieve scale, or that they encourage mis-selling and poor persistency.
What is counterparty risk?
Counterparty risk means that counterparties may renege on agreements or may fail entirely. Counterparty risk can lead to other risks, such as data integrity risk in the case of administrator failure or investment risk in the case of an investment counterparty failing.
What is reinsurance?
When an insurance company enters into a reinsurance agreement with either another insurance company or a pure reinsurance company, there is a risk that the reinsuring company will fail to meet its obligations, for example, it may default on the payment of reinsurance claim recoveries.
What is legal, regulatory, and tax risk?
Benefit arrangements may find themselves falling foul of current regulation. This could arise from a legal dispute over the correct interpretation of legislation.
What is operational risk?
Operational risks arise from failures of internal procedures, people, and systems. This could include fraud, such as an administrator paying a benefit to the wrong person, system errors or delaying information being made available, and inappropriate management decisions, also known as governance risk.
What is guarantee risk?
Guarantee risk is the risk that a guarantee may be more costly than anticipated. This may arise from a greater than expected number of policyholders or members taking up the guarantee and the cost of the guarantee per person being higher than anticipated.
What is reputational risk?
Reputational risks may arise if members, policyholders, or the regulator are uncomfortable with a particular course of action taken by a benefit provider. If membership in a benefit arrangement is voluntary, reputational risk can have a knock-on effect on membership, which then may lead to expense overruns.
