34 Further risk management Flashcards
Expense control
- insurer should seek at least to contain expenses and commissions within the policy loadings built into the company’s premiums and charging rates
- loadings for expenses and commissions, being received through premiums and charges, are the actual amounts of income the company receives to pay for these costs
- Should monitor regularly the actual levels of expenses being incurred and can compare these with the policy loadings
- Comparisons will also be made with expense ratios for competitors where possible
- Expenses can be controlled by reducing the current cost base of the insurer to be within the policy loadings
- For those distribution channels where the insurer incurs the costs of acquiring business – work done (costs incurred) versus actual business acquired should also be monitored and managed.
- Commissions should be controlled by a regular monitoring procedure at the level of:
product line
distribution channel
the specific sales person or broker concerned
How can the current cost base be reduced to be within the policy loadings?
- Maintain active control of staffing levels, to reflect the volume of business (and the amount of work) being achieved
- Impose budgetary constraints or targets within which individual departments are required to manage.
- Ensure that the staff used are not overqualified (and overpaid) for the work they are required to do.
- Ensure that salary increases are not excesive, but consistent with the price needed to retain quality of staff
- Attempt to sell greater volumes of (profitable) business, without increasing the cost base by as great a proportion
- Improve efficiency wherever possible. For example, increase automation and/or computerisation of tasks, so requiring a smaller workforce
- Increase the loadings in the premium so that higher expenses can be covered (but this is only possible if the competitive position will permit it).
Policy retention activity
With a view to managing the persistency risk, an insurer may seek to minimise the volume of lapses and surrenders.
Can be controlled by:
1. Distribution channel management
2. Customer relationship management
Policy retention activity
Distribution channel management
- monitor persistency rates by distribution channel and by the specific salesperson or broker concerned
- subject to not damaging the future sales potential from the channel,
- the level of commissions or other remuneration can be designed to encourage better persistency and/or penalise early lapses and surrenders
- Pay lower initial commission and higher renewal commission
- Use a commission clawback system
- identify systematic reasons (misleading information) for the lapses and surrenders and to invoke suitable management strategies to avoid the trend continuing.
Policy retention activity
Customer relationship management
- encourage good persistency by ensuring that the product sold is suitable to meet the policyholder’s needs
- via any intermediary or salesperson as appropriate
- it should aim to maintain or improve the quality of ongoing administration and contact with the policyholder.
Management of new business mix and volumes
- The insurer will wish to ensure that it has sufficient capital and administrative resources to allow the writing of new business
- might involve the actuary recommending that the directors withdraw from sale
- insurer should monitor the extent of arising mismatch between the actual new business sold and that assumed in the original pricing of the product
- monitor, typically, the following items, by product line and distribution channel:
number of contracts
amount of premiums
frequency of premium
policy charges/loadings
actual expenses incurred
new business valuation strain
How to reduce the mismatch between actual expenses and policy charges/loadings, and to have lower new business strain
restrict or encourage certain product lines and/or distribution channels
directly by structural change (nonlinked to unitlink, regular to single premiums, guaranteed to reviewable premiums)
indirectly by remuneration arrangements, by the level of other support given to the distribution channel, or the literature used to market to policyholders (changing the incidence of outgo)
reprice and/or redesign contracts, including the possibility of an increased minimum premium
Management of options
- continuous monitoring of option benefits and costs
- monitor the charges/loadings included for options in the product pricing with the actual costs being experienced
- look separately at the uptake rate for the option and the profit or loss which arises once an option is exercised
- despite increased marketability, any net loss for the insurer then the option’s pricing should be increased and/or its availability should be reduced or removed altogether
- or change the benefits provided under the option so as to make it more affordable
- time lag between removal of an option and the impact on experience emerging must be borne in mind
How could a situation in which serious future option losses, expected under options held by existing policyholders, be dealt with?
- you might be able to limit certain features by interpreting the terms strictly, as long as you ensure that this interpretation is fair to customers.
- set up appropriate (prudent) reserves for the future option cost, thereby retaining current surplus and preventing future insolvency
- match the options by purchasing appropriate financial derivatives (if appropriate).
Systematic risk assessment and management strategies
The role of the actuary in managing a life insurer’s risks
* regular programme of advising the directors of the nature and size of the risks faced
* Special attention to most metarial and sensitive risks
* explain nature of risks
* cost risks
* lay out management strategies to control risks
* Sensitive risks: model rage of longterm scenarios to show impact
* management strategies should be designed to protect those risks which the insurer is able to control
* A sensitive risk is one to which the company’s financial results are most vulnerable
* Deterministic and stochastic modelling methods may be used as appropriate to model the nature of the risks concerned
* management strategies should be well documented and implemented, then be monitored on an ongoing basis.
Enterprise Risk Management (ERM)
- risk management framework which considers the risks of the business as a whole, rather than considering individual risks in isolation.
- This allows the concentration of risk arising from a variety of sources within an organisation to be appreciated,
- and for the diversifying effects of risks to be allowed for.
- This is the holistic, integrated approach to risk management.
- recognition that value can be added to a business through educated risk-taking,
- with a strong risk management framework that better allows companies to identify and assess strategic opportunities.
