CH:27 Financial product and benefit scheme risks

Question 1

What is the risk to the beneficiary in relation to a benefit scheme

Answer 1

• The benefits will be less valuable than required
• They will not be received at the required time

Question 2

What is the risk to the provider of benefit schemes

Answer 2

• Benefit payment will be greater than expected
• payments will be required at an inopportune time

Question 3

What would cause insufficient funds to provide a benefit to a beneficiary (for benefits that are known in advance)

Answer 3

• insufficient funds set aside
• insolvency of a sponsor or provider
• holding of investment not matched to liability
• illiquid assets
• change in benefit promise, eg. by state or provider
• beneficiaries needs not being met, eg, due to misunderstanding, inflation erosion, changes circumstances

Question 4

What would cause risk of inadequate benefits arising (for benefits that are not known in advance)

Answer 4

• investment returns being lower than expected
• expense charges being higher than expected
• where relevant, annuity purchase terms being poorer than expected
• beneficiary needs not being met, either due to design or inflation

Question 5

What would cause risk to contributions/premiums (for those that are known in advance)

Answer 5

• contribution/premiums are unaffordable and hence not made
• insufficient liquidity to make payment in a timely manner
• contributions/premiums linked to inflationary factor
• contributions/premiums not linked to inflation and result in erosion by inflation

Question 6

What would cause risk to contributions/premiums (for those that are not known in advance)

Answer 6

• amount of promised benefit
• probability of individuals being eligible to accrue benefits
• probability of individuals being eligible to receive benefits
• effect of inflation on the level of benefits
• investment return achieved on contributions/premiums

Question 7

List the business risk for financial product providers

Answer 7

• Claims: mortality, morbidity, general insurance claim rates and amounts
• expenses
• withdrawals/ renewals
• new business volume mix
• options and guarantees
• use of reinsurance