14. Risk II

Question 1

Business mix by nature and size of contract as a source of risk

Answer 1

• Unexpected variation may change risk profile of company&raquo_space; could overstretch company’s capital and other resources available to cover risk
• Reduction in average size of policy could affect coverage of per-policy expenses

Question 2

Examples of changes in the nature of a business mix

Answer 2

• Class of business (e.g. proprotion of pensions business written)
• Type of contract (e.g. term assurance vs endowment)
• Contract design (e.g. unit linked vs w/profits)
• Premium frequency

Question 3

Mix of business by source as a source of risk

Answer 3

• Demographic and expense experience may differ by source
• Variation from assumed mix by source could invalidate demoraphic and expense assumptions

Question 4

Volume of new business as source of risk

Answer 4

• Too much- exceed capital resources or admin capacity
• Too little- can’t cover overhead
• Departure from assumed volumes could invalidate expense assumptions

Question 5

Guarantees and options as a source of risk

Answer 5

• Model, parameter and random fluctuation risk when calculating cost of guarantees

Question 6

Competition as source of risk

Answer 6

• May lead management to take unacceptable risks that can’t be supported by available resiurces

Question 7

Examples of decisions management may take due to competition

Answer 7

• Reduce premium rates or charges under new business contracts
• Offer additional guarantees and options under new business
• Increase bonuses under existing contracts
• Increase salaries or commissions in respective distr channels
• Keep charges too low under existing and reviewable contracts

Question 8

What is meant by directors?

Answer 8

Individuals with legal responsibility to:
1. Make descisions affecting the running of a company; and
2. Impose proper systems of management and control on financial oerations of company

Question 9

Why might directors not follow actuary’s recommendations?

Answer 9

• Competition
• Strategic company goals e.g. maximise new business volums
• Maximise shareholder earnings

Question 10

Management of a company as a source of risk

Answer 10

• Directors can make a conscious decision to ignore sound risk-management advice in pursuit of competitive aims
• Control systems in place may be inadequate or not properly followed

Question 11

Repercussions of mismanagement

Answer 11

• Financial losses
• Regulatory intervention
• Reputational damage

Question 12

Distributors as a source of risk

Answer 12

May:
* Encourage lapse and re-entry where it favours ph
* take advantage of loopholes in product design
* take adavantage of timing loopholes in unit pricing practices

Question 13

Counterparties as a source of risk

Answer 13

• Defaults

Question 14

Examples of default

Answer 14

• Reinsurer agreement
• Outsourcing arrangements (poor quality service)
• Corporate bonds (e.g. no coupons and/or capital paid)
• Distribution arrangements (e.g. non-recovery of broker balances)

Question 15

Legal, regulatory and fiscal risks

Answer 15

• Changes could negative affect company and/or ph

Question 16

LTCI as a source of risk

Answer 16

• State attitude to LTC may increase costs e.g. state deciding to charge for nursing and ersonal long-term care
• Policyholders might believe they are purchasing a policy primarily for access to care services, regulators might focus on the financial aspects and sustainability of the insurance company. This potential difference in perspective could lead insurance companies to set aside extra funds (margins) to cover the rising costs of providing care services in the future.

Question 17

What is fraud?

Answer 17

General type of control failure, cause by deliberate intent of one or more parties.

Question 18

Who might commit fraud?

Answer 18

1. Directors or staff - have special access to financial systems and computer programs and data
2. Policyholder- fraudulent claims
3. Other external parties- may gain access to computer systems es where there’s external components e.g. website access