CH 34 (Further Risk Management)

Question 1

Managing Expenses

Answer 1

MR SELS B

• Monitoring of expenses (and commissions) vs charges
• monitor expense Ratios (competitor comparison)
• control Staff + salary levels to be consistent with work required
  (compare with business volume)
• attempt to Sell more business without increasing the overhead cost base
• improve operational Efficiency
  (e.g. automation, better sales channels, doing tasks in-house instead of outsourcing, slicker underwriting)
• increase premium Loadings/charges if rates still competitive
• set Budget constraints/targets for individual departments

Question 2

Managing Commission Levels (incl. acquisition costs)

Answer 2

• compare commissions with Loadings
• monitor Consistency
  (to prevent slippages in commission levels) at level…
  1. Product
  2. Channel
  3. Broker/Individual
• monitor NB levels vs Staff employed

-Monitor number of sales per quotes

Question 3

Managing Persistency

Answer 3

MCR PMS

• Monitor experience
  (esp. by channel)
• change Channel if problems emerging
• alternative Remuneration commission structures
  (to encourage persistency)
• restrict premium Payment methods
• improve sales Methods
  (meeting customer needs)
• good Service
  (quality of admin + contact - identify sources of lapses/surrenders)

Question 4

Managing New Business Volumes and Mix Risk

Answer 4

• Monitor new business VOLUMES relative to pricing assumptions
  (too much volume -> Inadequate capital
  too low volume –>
  reduce profit and increase pp cost of overheads)
• Monitor MIX for capital efficiency
  (extent of mismatch with charges vs expenses,
  premium frequency,
  valuation strain,
  average premium)
• Controls through:
  > appropriate Marketing + sales strategies
  > product Design
  (e.g. min prem)
  > Pricing activities
  (incl. re-pricing for maintenance)

Question 5

Managing Options

Answer 5

• Monitor…
  1. Take-up rates
  2. Profit/loss from take-up
• To intervene…
  1. increase Loadings for option
  2. Alter benefits or terms under option
  3. Remove/reduce option availability
• Mitigate effect…
  1. appropriate Reserving
  2. strict Interpretation of terms
  3. using Derivatives
  4. Buy-back option

Question 6

Managing Systemic Risk

Answer 6

1. Monitoring overall risk profile (based on aggregation of underlying risks)
2. Monitor correlation effects
3. Focus on most sensitive/material risks
   » Model risks - range of LT scenarios to show impact on risk
   » Management strategies to control main risks and protect insurer against risks outside control
4. Risk management strategies should be documented and regularly monitored