14. Risk II Flashcards
Business mix by nature and size of contract as a source of risk
- Unexpected variation may change risk profile of company»_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
Examples of changes in the nature of a business mix
- 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
Mix of business by source as a source of risk
- Demographic and expense experience may differ by source
- Variation from assumed mix by source could invalidate demoraphic and expense assumptions
Volume of new business as source of risk
- Too much- exceed capital resources or admin capacity
- Too little- can’t cover overhead
- Departure from assumed volumes could invalidate expense assumptions
Guarantees and options as a source of risk
- Model, parameter and random fluctuation risk when calculating cost of guarantees
Competition as source of risk
- May lead management to take unacceptable risks that can’t be supported by available resiurces
Examples of decisions management may take due to competition
- 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
What is meant by directors?
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
Why might directors not follow actuary’s recommendations?
- Competition
- Strategic company goals e.g. maximise new business volums
- Maximise shareholder earnings
Management of a company as a source of risk
- 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
Repercussions of mismanagement
- Financial losses
- Regulatory intervention
- Reputational damage
Distributors as a source of risk
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
Counterparties as a source of risk
- Defaults
Examples of default
- 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)
Legal, regulatory and fiscal risks
- Changes could negative affect company and/or ph
LTCI as a source of risk
- 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.
What is fraud?
General type of control failure, cause by deliberate intent of one or more parties.
Who might commit fraud?
- Directors or staff - have special access to financial systems and computer programs and data
- Policyholder- fraudulent claims
- Other external parties- may gain access to computer systems es where there’s external components e.g. website access
