Ch 34: Further risk management

Question 1

Expense control - things to consider

Answer 1

• Monitor regularly the actual levels of expenses being incurred and compare these with policy loadings.
• Comparisons will be made with expense ratios for competitors where possible - want level of costs to be competitive
• Monitor procedures in place to pick up on and prevent upward slipage of commission levels
• Control staffing and salary levels to be consistent with the work required (business volume)
• Attempt to sell more business without increasing the overheads
• Improve operational efficiency
• Increase premium loadings/charges provided still competitive

Question 2

Persistency risk management things to consider

Answer 2

• Aim to minimise volume of lapses and surrenders
• To achieve should monitor experience (especially by distribution channel) to identify problem areas

Question 3

To improve percistency, company might:

Answer 3

• Change distribution channel
• Set up alternative commission structures that encourage persistency
• Improve sales methods so that policies are sold more strictly to meet customer needs
• Restrict premium payment methods (to direct debit)

Question 4

Managing new business mix and volumes risk

Answer 4

• Company must ensure it has adequate capital and administrative capital to sell its new business
• Monitor volumes and mix compared with pricing assumptions
  * Excess volume - inadequate capital
  * Low volume - reduced total profit and increase per-policy loading of overhead expenses
  * Lower than expected case size may uncover per-policy expenses
• Monitor mix of business from capital efficiency point of view:
  * Extent of mismatch between charges/loadings and expenses
  * Premium frequency
  * Valuation strain
• Volume and mix could be controlled by:
  * Appropriate marketing (encourage certain prodcucts/distribution channels
  * Product design (matching charges, premium frequency, min premiums, guarantees)

Question 5

Management of options risks consider:

Answer 5

• Monitor charges/loadings included for options in the product pricing with the actual costs experienced
• Monitor take-up rate, profit/loss arising from take-up
• Consider cost burden of option together with the potential marketability advantage
• Control measures include:
  * Increase charges/loadings that are paid for the option
  * Alter the benefits or terms of the option
  * Remove the option from new business
• Option cost occur after a considerable time lag and may have capacity of being extremely onerous, possible mitigations:
  * Set up prudent reserves
  * Strict interpretation of terms
  * Using derivatives to hedge
  * Buy back options from policyholders

Question 6

Systematic risk assessment and management strategies - role of the actuary

Answer 6

• Advise the company’s decision-making process
• Company should be aware of the overall risk profile to which it is exposed based on aggregation of underlying risks it faces allowing for correlation effects
• Focus on risks that most material or sensitive to change
• Identify, quantify and illustrate risks and mitigation strategies to control the risks
• Deterministic or stochastic nodelling methods may be used to show impacts of risks and impact of mitigation strats
• Once decided on risk management strat, should be well documented and implemented. as well as monitored on a regular basis

Question 7

ERM def

Answer 7

• Risk management framework which considers risks of the business as a whole, rather than considering individual risks in isolation
• Allows concentrations of risk arising from various sources within firm to be appreciated and for the diversifying effects of risks to be allowed for.
• This is holistic, integrated approach to risk management.
• Recognises that value can be added to the business through educated risk taking, i.e. better allows companies to identify and assess strategic opportiunities