4b Role of Actuaries in General Insurance Flashcards
The Actuarial Control Cycle Study Points:
Definition and purpose:
Cyclical process:
The Actuarial Control Cycle Study Points:
Definition and purpose: The actuarial control cycle is a model used in actuarial work and risk management. It provides a simple approach to problem-solving and helps actuaries gain a clearer understanding of the situation at hand.
Cyclical process: The actuarial control cycle involves several interconnected processes:
Analyzing situations, products, and projects to identify associated risks.
Quantifying the financial consequences of risk events.
Considering and quantifying methods to manage, mitigate, or transfer risks.
Monitoring the situation and implemented risk management procedures over time.
Modifying or changing risk management approaches based on experience.
Basic elements of the ACC: The actuarial control cycle encompasses key elements applicable to all actuarial and risk management work, including:
Basic elements of the ACC: The actuarial control cycle encompasses key elements applicable to all actuarial and risk management work, including:
Estimating the financial impact of uncertain future events.
Taking a long-term perspective in decision-making.
Recognizing stakeholders’ requirements and risk profiles.
Making short-term decisions based on likely future outcomes.
Utilizing models to represent future financial outcomes.
Incorporating assumptions based on relevant historical experience.
Considering the impact of legislation, regulation, taxation, and competition.
Interpreting modeling results to develop practical strategies.
Periodically analyzing emerging experience and adjusting models/strategies accordingly.
Steps in the Actuarial Control Cycle:
Steps in the Actuarial Control Cycle:
General economic and commercial environment: Understanding the external environment’s impact on the problem being addressed.
Specifying the problem: Analyzing risks faced by stakeholders and defining the problem from their perspectives.
Developing the solution: Selecting appropriate actuarial models, making assumptions, interpreting model results, and proposing a solution.
Monitoring the experience: Dynamically monitoring and analyzing experience to compare it with assumptions and identify causes of any deviations.
Feedback loops: Using monitoring results to refine the problem specification, solution development, or overall approach.
Professionalism: Demonstrating professionalism throughout the process, following relevant standards, and considering stakeholders’ views.
Factors influencing the Actuarial Control Cycle:
Risks and considerations:
Factors influencing the Actuarial Control Cycle:
General commercial and economic environment: Various factors, such as interest rates, inflation, crime levels, and regulatory changes, can impact the actuarial control cycle’s execution.
Specific to different classes of business: Different insurance classes have unique risk factors, such as healthcare costs for travel insurance or policyholder protection regulations.
Risks and considerations: Identifying and managing risks related to claims, expenses, investments, and business cycles.
Modeling and monitoring: Actuaries employ a wide range of modeling techniques, such as generalized linear models, to develop solutions. Monitoring involves analyzing claims, exposure, portfolio movements, expenses, persistency, and profitability to assess performance and adjust strategies accordingly.
Product Design and Pricing:
Indemnity vs. Full replacement (new for old):
Indemnity:
Deductible vs. Excess:
Co-payment:
Escalation clause:
No-claim discount (protected NCD):
Product Design and Pricing:
Indemnity vs. Full replacement (new for old):
Indemnity: Provides coverage up to the actual value of the loss or damage.
Full replacement (new for old): Covers the cost of replacing the damaged item with a new one without considering depreciation.
Deductible vs. Excess:
Deductible: The amount that is deducted from the claim amount before the insurer pays.
Excess: The sum that the insured must bear before any liability falls upon the insurer.
Co-payment:
Requires the insured to pay a portion of the claim or treatment cost, while the insurer covers the remaining portion.
Escalation clause:
Allows for an increase in coverage or benefits over time to account for inflation or rising costs.
No-claim discount (protected NCD):
Offers a discount on premiums for policyholders who have not made any claims during a specified period.
Expenses:
Claims handling expenses:
Commission:
Other loadings:
Expenses:
Claims handling expenses:
Costs associated with processing and managing insurance claims, including administrative expenses, personnel, and technology.
Commission:
The fee paid to insurance agents or brokers for selling insurance policies.
Other loadings:
Additional charges or fees added to the premium to cover various costs, such as profit margins and contingencies.
Renewal Process:
Policy conditions:
Renewal arrangements:
Reinsurance:
Underwriting:
Risk management:
Capital rating factors:
Rating factors:
Variables used to determine insurance premiums, such as the insured’s age, location, occupation, and claims history.
Renewal Process:
Policy conditions:
Terms and conditions specified in the insurance policy, including coverage limits, exclusions, and renewal requirements.
Renewal arrangements:
Procedures and policies regarding the renewal of insurance policies, including premium adjustments and underwriting reviews.
Reinsurance:
Reinsurance arrangements:
Agreements made by insurance companies to transfer a portion of their risk to another insurer, known as the reinsurer.
Underwriting:
Risk management:
The process of identifying, assessing, and managing risks associated with insurance policies.
Capital rating factors:
Factors considered in evaluating the financial strength and stability of an insurance company, including capital adequacy, solvency, and credit ratings.
Rating factors:
Variables used to determine insurance premiums, such as the insured’s age, location, occupation, and claims history.
INSURANCE CONTRACTS AND CAPTIVES:
Insurable Risk:
Predictability and Measurability:
Insurable Interest:
Risk Transfer:
Utmost Good Faith:
Subrogation:
INSURANCE CONTRACTS AND CAPTIVES:
Insurable Risk: The insurance contract must cover an insurable risk related to fortuitous events that are unforeseen, unexpected, or accidental.
Predictability and Measurability: There should be a sufficiently large number of homogeneous exposure units to make the losses somewhat predictable and measurable. The losses should be non-catastrophic.
Insurable Interest: The cedant (policyholder) must have an insurable interest and be able to demonstrate an actual economic loss.
Risk Transfer: The risk of loss must be specifically transferred under a contract providing indemnity. It involves an exchange of risk for an upfront premium payment.
Utmost Good Faith: All dealings between the parties involved must be in “utmost good faith.” This includes the conveyance of material representations, ensuring transparency and honesty.
Subrogation: The right of subrogation must exist, allowing the transfer of loss recovery rights from the cedant to the insurer.
INSURANCE AND LOSS FINANCING:
Maximum Risk Transfer Contracts:
Minimal Risk Transfer Contracts:
Partial Insurance:
Deductible:
Policy Cap:
Copay/Coinsurance:
INSURANCE AND LOSS FINANCING:
Maximum Risk Transfer Contracts: Full insurance aims to shift as much exposure as possible at an appropriate price. It is characterized by small deductibles, large policy caps, limited or no copay/coinsurance, and limited exclusions.
Minimal Risk Transfer Contracts: Risks can be retained through self-insurance, risk retention programs, captives, partial insurance, loss-sensitive contracts, and finite risk programs.
Partial Insurance: It involves tailoring a standard insurance contract to retain more exposure and transfer less. Deductibles, policy caps, copay/coinsurance features, and policy coverage/exclusions can be altered to achieve this.
Deductible: The deductible can be set on an individual loss basis or in aggregate, affecting the level of risk retention.
Policy Cap: A policy cap sets a limit on the insurer’s liability for loss payment, influencing the level of risk transfer.
Copay/Coinsurance: Cedant and insurer share a certain amount of losses through copay/coinsurance features. The cedant’s share determines the level of retention.
CAPTIVES:
Definition:
Benefits:
Costs:
Note: The provided points are based on the information given in the text and may not cover all aspects of the topics.
CAPTIVES:
Definition: A captive is a closely held risk channel used to facilitate a company’s insurance/reinsurance program and retention/transfer activities. It is formed as a licensed insurance/reinsurance company controlled by a single owner or multiple owners (sponsors).
Benefits: Captives offer appropriate and flexible risk cover, lower costs by avoiding commissions and overhead, possible tax advantages, incentives for loss control measures, decreased earnings volatility, access to the reinsurance market, profit potential with third-party business, and increased investment income.
Costs: While captives offer benefits, there are costs involved such as formation and operational expenses, regulatory requirements, potential capital requirements, and risk associated with underwriting and investment activities.
Note: The provided points are based on the information given in the text and may not cover all aspects of the topics.
