24. Nature of Risks (1)

Question 1

Risk Classification

Answer 1

Model risk
- risk the underlying model is not adequate

Parameter risk
- risk the parameters assumed for the underlying model are incorrect

Random fluctuations risk
- risk of unpredictable fluctuations arising from sample errors (greater the smaller the sample)

Question 2

Risk in estimating the cost of PMI claims

Answer 2

The following factors contribute to the uncertainty in cost of PMI claims
- changes in lifestyle and prevalence of medical conditions
- changes in cost of medical treatment due to medical innovation, advances in technology, currency fluctuations
- policyholder or medical professional behaviour affecting utilisation of medical services
- poor claims control and fraud may result in insurer paying claims that should have been excluded due to benefit limitations
- introduction of claims management / managed care processes such as preferred providers
- ageing population, implying greater demand for healthcare treatment
- currency fluctuations resulting in cost of medical treatment that relies on imported equipment or pharmaceuticals

Question 3

Expenses

Answer 3

• risk of higher than expected expenses
• contributions to expenses from charges and premiums may be significantly mismatched with actual expenses incurred over time
• particular example is that of heavy upfront expenses are gradually recouped by charged made over the term of the policy

Question 4

Persistency

Answer 4

-early withdrawals represent a particular risk of loss - failure to recoup initial expenses (asset share can be low or negative as result)
- if persistency experience different from expected it may invalidate assumptions about effects of selective withdrawals on mortality, critical illness, or sickness experience