31. Other risk controls TO DO Flashcards
What is an example of a quantifiable risk appetite statement?
- The organization will not accept risks that would cause its available capital to fall below x% of the regulatory MCR.
What features of the company might influence its risk appetite?
- Existing exposure to a particular risk
- Culture of company
- Size of company
- Period of time for which it has operated
- Level of available capital
- Existence of a parent company or other guarantors
- Level of regulatory control to which it is exposed
- Institutional structure
- Previous experience of board members
- Attitude towards risk of owners and other capital providers
How does a market for risk arise?
- Different entities have different appetite for risk=> market in risk
- Enables risk to be transferred=> Entities with small risk A> large risk A • All financial transaction=> transfer of risk for payments
What makes a market for risk transfer ‘risk efficient?
- Reasonable size
- Participants with excess risk
- Transfer excess risk
- Other participants with less risk
- Then they are prepared to accept
Give an example of pairs of individuals with different appetites of risk that want to transfer risk?
- Policy holder ceding risk to an insurance company
- Insurance company ceding risk to a reinsurance company
How does investment in a collective scheme result in risk transfer?
- Transfer risk of poor investment decisions
How are risk and product design related?
- Financial products transfer risk between parties
- Price of the product cover cost of risk transferred+ profit margin
- Cost of risk= Risk covered+ business risks
- Good product design techniques=> identify all risk involved+ risk management
- Appropriate cost => perform risk classification
- Risk new product design  needs + desires of beneficiaries
- Additional options=> introduce new risks
- i. Allowed for in the costing
What factors make a risk insurable?
- Policyholder must have an interest in the risk
- Risk must be financial and reasonably quantifiable
- Claim amount must bear some relationship to the financial loss incurred
Why do insurance companies aim to pool risk?
- Law of large numbers=> Greater certainty in the future payments on the occurrence of the insured event.
What additional criteria should a risk meet to be insurable?
- MUD PIS
- Moral hazard eliminated
- Ultimate limit on the liability undertaken
- Data exists with which to price the risk
- Pooling a large number of similar risks
- Independent risk events
- Small probability of occurrence
- Chapter 29- Risk measurement and reporting
What is a subjective approach of assessing risk exposure?
- Estimate probability and severity separately
- Assign a number from the scale 1-5
- The product of probability and severity=> ranked 1-25
- Allows risks to be ranked and prioritised
- Carried out with and without possible risk controls
How can a model be used to assess a risk event?
- Distribution assigned to both Frequency and severity of a risk event
- Define an event
- Use historic events to calculate a probability distribution for that event
- Alternatively – Frequency of the event defined=> determine the loss parameter
- Stochastic vs deterministic model
- Availability of data=> Influence which model is used
- Important when considering rare events
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
Why might an insurer use reciprocal quota share Re to diversify risk rather than selling a wider range of insurance contracts itself?
- Market and selling a wide range of contracts is expensive=> 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 policy terms=> identification of the most suitable approach and level of special terms- 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=> 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?
- 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?
- 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)
What are claims control systems?
- Mitigate consequences of a financial risk
- Guard against fraudulent or excessive claims
What are examples of claims control systems?
- Claim form
- Evidence for eligibility to claim
- Continuing evidence of eligibility to claim
- Estimates of extent of loss- policyholder or loss adjuster
How do 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 control risks? ✓ Data recording=> good quality data on risks insured+ risk factors identified
- i. 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.
- Monitoring new business volume=> Provider not exceeding resources available
- Business mix=> risk of profit due to cross subsides
- Taking special care over options and guarantees=> Options and guarantees are likely to bite
How can the investment risk 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
- Management control procedures=> 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
- Amount necessary to withstand
- An amount 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
- Chapter 32-Provisions
