31. Other risk controls Flashcards
What are 4 risk management tools available to a financial product provider other than ART and Re?
- Diversification
- Underwriting at the proposal stage
- Claims control systems/ procedures
- Management control systems
How can an insurer diversify its business?
- Different lines of business
- Different geographical areas
- Different Re
- Different asset classes
- Different assets held within a class
- Different target markets
Why might an insurer use reciprocal quota share Re to diversify risk rather than selling a wider range of insurance contracts itself?
- Marketing and selling a wide range of contracts is expensive=> reputational risk of generalist rather than specialist player
- Reciprocal quota share=> allows a company to concentrate on its marketing and admin on its chosen market sector. While still achieving a diversified portfolio
What is underwriting?
- Assessment of a potential risk
- So that it can be charged an appropriate premium
Why do insurers underwrite business?
SAFARI
- Suitable special policy terms=> identification of the most suitable approach and level of special terms for substandard risks
- Avoid anti-selection
- Financial underwriting=> reduce risk of over insurance on large policies
- Actual claims experience being in line with that expected in pricing basis
- Risk classification=> all risks are rated fairly
- Identify substandard risks- special terms need to be quoted=> accept as many risks as possible on standard premium rates
What are the 3 main types of underwriting?
- Medical
- Lifestyle
- Financial
Who might interpret medical underwriting info?
- Medical evidence is interpreted by specialist underwriters employed by the company
What factors might lifestyle underwriting investigate?
- Applicants occupation
- Applicants leisure pursuits
- Applicants normal country of residence
What is the purpose of performing financial underwriting for a life insurance contract? And what information on the applicant may be obtained in order to carry it out?
- Proposed SI reasonable relative to the financial loss that the applicant would suffer if the insured event occurs => AIMS to reduce risk of over insurance
Information needed:
- Applicants occupation+ salary
- Proposed sum assured selected by the applicant
- Details of other insurance policies held by the applicant
- Whether the applicant has an insurable interest in the insured life
What are possible underwriting decisions? and special terms?
- Accept on standard terms
- Reject/ decline the risk
- Deferral of cover
- Addition to premium, commensurate with degree of extra risk
- Reduction in benefit, commensurate with degree of extra risk
- Exclusion clause(s)
Last three are special terms
What are claims control systems?
- Mitigate consequences of a financial risk that has occured
- Guard against fraudulent or excessive claims
What are examples of claims control systems?
- Claim form
- Evidence for eligibility to claim e.g. Death cetificate
- Continuing evidence of eligibility to claim e.g. Long-term sickness or care insurance
- Estimates of extent of loss- policyholder or loss adjuster
Give examples of how general insurers balance the cost of claims control with the benefits gained from it?
- Accept small claims=> claims form+ single estimate for the necessary repairs
- Above a specified monetary level=> Insurer wish to see 2 or 3 estimates
- Above a further monetary level=> Insurer may require inspection from one of its employees or agents
- For large claims the insurer might appoint a firm of loss adjusters to manage the situation on its behalf
Why may insurers encourage income protection insurance benefits claimants to make a partial return to work with a continued benefit?
- Insurer pays a lower claim amount
- Entering active employment=> long term health of the policyholder might improve
- Reduce time to recovery from current claim
- Reduce likelihood of future claims
What are the 4 types of management control systems used to reduce risk?
- Data recording=> good quality data on risks insured+ risk factors identified => To ensure adequate provisions to reduce operational risk
- Accounting and auditing=> effective procedures enable adequate provisions to be established regular premiums collected+ finance providers to be reassured
- Monitoring liabilities=> Protects against aggregation of risk to unacceptable level. Also,
- Monitoring new business volume=> Provider not exceeding resources available AND
- New business mix=> monitor risk to profit due to cross subsides
- Taking special care over options and guarantees=> Monitor whether options and guarantees are likely to bite
How can the investment risks associated with options and guarantees be managed?
- Liability hedging=> Choose A that match L so that they move consistently
- Put options used to hedge guarantees=> with profits and unit linked
- Hedging can be dynamic=> rebalancing as the market changes
How should low likelihood and high impact risks be dealt with?
- Diversified away to limit extent
- Passed to an insurer or Re (cat re or stop loss cover)
- Management control procedures=> e.g. disaster recovery planning
- Accept risks=> Company must hold capital if not transferred=> stress testing
How does a provider decide how much capital to hold for a retained risk?
- Amount of capital to hold is
- Amount necessary to withstand
- An event that might occur with a given probability
- Over a given time period
- Shorter the time period- the lower the ruin probability
What is an important aspect of risk management?
- Risk management should reduce the total cost of risk.
What are the components of total cost of risk?
Total cost of risk to an entity includes:
- Expected loss costs
- Disruption to business
- Insurance premiums
- Risk managers salaraies
