Chapter 10: Risk and Uncertainty (F203 Appx. 5) Flashcards
Uncertainty
The inability to predict the future with confidence.
2 Main headings of uncertainties faced by a general insurer
uncertainty as to
- the outcome of the business already written
- the premiums the insurer needs to charge in future to achieve a desired financial result
4 Main headings of elements of risk and uncertainty
- those affecting CLAIMS EXPERIENCE
- those affecting EXPENSES
- those relating to the INVESTMENTS
- BUSINESS RISKS, including new business or lapse risks
Uncertainties in the claims experience stem from: (16)
J - JUDICIAL decisions
C - CRIME rates
C - CATASTROPHES
A - attitudes of policyholders to claiming
S - variability in CLAIM SIZES at any one time, and from one period to another
T - TYPES OF COVER provided
L - LATENT claims
E - inflation and consequential rates of ESCALATION of claims.
D - DELAYS between incidents || reporting || settlement
R - REINSURANCE RISK E - ECONOMIC conditions P - characteristics of policyholders, including possible anti-selection L - LEGISLATION/regulation I - interpretation of wording C - CURRENCY risks A - accumulations of risk
3 Main types of legislative changes
FISCAL CHANGES,
such as increases in tax on:
- insurers,
- insured items or their repair
CHANGES IN THE LAW:
- which increase the amount of cover being provided, eg removal of a legal limit on compensation levels
- restrict using certain factors in underwriting
Reinsurance risks (6)
- not purchasing the right type of reinsurance, or enough of it
- doubts as to the AVAILABILITY AND COST of the desired reinsurance
- difficulty assessing reinsurance value for money
- whether catastrophe reinsurance will prove satisfactory with regard to such features as the size of the retention, the reinstatement provisions and the upper limit of cover
- the ABILITY to make reinsurance RECOVERIES. There is the potential for reinsurers to default, especially following catastrophes or poor claims experience for the industry as a whole
- failure to comprehend the true coverage/limits of a reinsurance arrangement and therefore being exposed to risk in areas that were thought to be reinsured.
How do
claim delays
contribute to uncertainty?
REPORTING DELAY leads to uncertainty as to claims incurred but not reported.
SETTLEMENT DELAY leaves uncertainty as to the reported claims’ ultimate cost.
How do
Types of policy and cover
contribute to uncertainty?
If a radically new type of policy is to be introduced, there may be considerable uncertainty regarding the INFORMATION on which the premiums are to be based.
How do
Characteristics of policyholders
contribute to uncertainty?
Policyholders with different characteristics means the resulting claims experience may differ from the past, in ways that are hard to determine.
4 Sources of uncertainty regarding other expenses include:
changes in:
- progression of STAFF COSTS in relation to the amount of business
- professional and LEGAL CHARGES
- INFLATION RATES
doubts as to the appropriateness of the allocation of expenses among the different types of business
Uncertainty regarding investments (4)
- market conditions may worsen
- claims may have to be paid sooner than expected.
- assets may need to be realised in unfavourable conditions.
- poor investment management.
- a larger than expected portion of the assets may not be available for investment. There is usually some delay between the broker receiving the premium and passing it on to the insurer. Similarly, the insurer usually pays a claim in full and then has to wait for recoveries from reinsurance or salvage.
Debtors may, in total, form quite a large portion of the insurer’s total assets. If the average delay increases, a lower proportion of the insurer’s assets will be earning investment return, so the average rate of investment income will fall.
Risks regarding competition (business) (5)
products MAY NOT APPEAL to their potential customers
the prices they need to charge for their products in order to achieve a satisfactory financial result may be TOO HIGH TO BE COMPETITIVE
as a consequence of losing business to competitors, their UNIT COSTS RISE so that they find it even harder to price their products competitively
if they deliberately under-price in response to competition, the prices they actually charge may be insufficient to produce a satisfactory financial result.
ADMINISTRATIVE STRUCTURES and channels for obtaining business may BECOME OBSOLETE, for example because of technological developments exploited by their competitors, resulting in additional costs to update.
Writing “loss leaders”
the process of
… winning new business
… by charging less than economic premiums
… to increase business volumes,
… with the hopes of recovering costs later when premiums are increased to sound levels
(sufficient to cover costs).
Operational risk
risk of loss resulting from inadequate or failed\ - internal processes, - people - and systems or from external events.
8 Examples of operational risk
A - Administration risk S - Strategic risk P - Pension scheme risk E - Event risk C - Compliance risk T - Technological risk F - Fraud risk G - Governance risk
