Ch31: Other risk controls

Question 1

Internal risk controls for risks retained (4)

Answer 1

• Diversification
• Underwriting at proposal stage (fair price)
• Claims control procedures (mitigate consequences of risk event; guard against fraudulent or
  excessive claims)
• Management control systems (reduce exposure to risk)

Question 2

Risks can be diversified within the following

Answer 2

• Lines of business
• Geographical areas of business
• Providers of reinsurance
• Investment - asset classes
• Investment - assets held within classes

Question 3

Reciprocal quota share reinsurance

Answer 3

One company reinsures part of its business to another in exchange for accepting part of it’s reinsurance business. Diversify its risks in this way

Question 4

Underwriting definition and how it is used to manage risks

Answer 4

Refers to the assessment of potential risks so that each can be charged at an appropriate premium

• It can protect provider from anti-selection (Anti-selection is not fraudulent, involves applicant not disclosing certain valuable information to the insurer since the insurer did not ask for it)
• Enable classification of risks into homogenous groups for which a standard premium can be charged. Adequate underwriting will help ensure risks are rated fairly.
• Underwriting will enable a provider to identify risks for which special terms need to be quoted
• For substandard risk, underwriting will identify the most suitable approach for special terms to be offered:
  + Increase premiums for same benefit
  + Decease benefit for same premiums
  + Exclusion clauses
  + Deferring the cover until more info is known
  + Declining cover
• Help ensuring that pricing assumptions made ensure that claim experience does not deviate too much
• Financial underwriting procedures will reduce risk of over-insurance for larger proposals
  + Alert insurer to attempted anti-selection from potential PH

Question 5

Life insurance underwriting process

Answer 5

• Medical underwriting
  + Assess what applicant’s health situation is relative to the company’s required standard
• Lifestyle underwriting
  + Occupation
  + Leisure pursuits
  + Country of residence
• Financial underwriting
  + Financial health

Question 6

Management control systems (5)

Answer 6

• Data recording
• Accounting and auditing
• Monitoring of liabilities taken on (protect against aggregation of risks of a specific type)
• Options and guarantees (determine whether options or guarantees are likely to bite)
• Due diligence (comprehensive review or appraisal of organization before conducting business
  with them; reinsurers, outsourcing of admin/accounting/underwriting…)

Question 7

Risk management can optimize risk/return profile of the organization by: (4)

Answer 7

• Supporting selective growth of the business
  + Establish process for assessing new business opportunities (incl. risk adjusted return)
  + Allocate capital and other resources to business units with high risk adjusted return
• Support profitability through risk adjusted pricing
  + Prices should reflect cost of risk+ funding costs + operational expenses
• Use limit setting to control size and probability of potential losses
  + Set basic exposure limits
  + Set stop loss limits (if triggered, trigger management action; e.g. hedging strategy)
  + Set sensitivity limits (designed to keep potential losses from potential extreme events within acceptable bounds)
• Employing techniques to manage existing risks
  + Active portfolio management (portfolio of activities, each with own risk/return characteristics)
  + Reduce risk
  + Transfer risks to third party