25. Nature of Risks (2)

Question 1

There are risks associated with

Answer 1

• guarantees and options (model, parameter and random fluctuations risk)
• competition
• management action
• counterparties
• legal, regulatory, tax developments
• reputation
• internal audit failures/ fraud
• physical risks
• aggregation and concentration of risks
• catastrophes
• non-disclosure and anti-selection

Question 2

Management action

Answer 2

• may choose to ignore actuary advice concerning what the actuary views as unacceptable risk, due to:
• competitive
• strategic company goals: maximise NB volumes, amounts of funds under management
• achieve personal goals of the executive
• maximise shareholder earnings

Question 3

Reputation

Answer 3

• very important in markets where product is not differentiated in terms of benefits or price
• reputational risks might arise through media exposure, court cases, regulators

Question 4

Aggregation and concentration of risks

Answer 4

Extent to which insurer over-exposed to particular risk because of specialisation of product / concentration of distribution
- risk mitigated through widespread marketing, reinsurance, coinsurance with reciprocation

Question 5

Non-disclosure and anti-selection

Answer 5

Non-disclosure: decision made by policyholder at proposal stage not to share all risk-related information to insurer
- makes premium rating more difficult

Mitigation techniques
- clearly explained sales literature (clear marketing message)
- effective sales intermediary process
- clearly worded proposal forms
- checking of information provided
- thorough audits on sample cases
- more frequent use of doctors reports at new business stage
- closer dialogue between underwriting, sales and claims management