Chapter 13 & 14 & 15 - Risk

Question 1

What is model risk?

Answer 1

Risk that the model, typically a probability distribution, chosen to represent future mortality, etc, may not be appropriate

Question 2

What is parameter risk?

Answer 2

Risk that the parameters used with the model may not adequately reflect the future experience of the class of lives insured or to be insured, even though the underlying model may be appropriate

Question 3

What is random fluctuation risk?

Answer 3

The actual future experience may not correspond with the model and parameters adopted, even though these adequately reflect the class of lives insured or to be insured

Question 4

Decisions that can be taken by the board to increase competitiveness (and increase risk) are: (5)

Answer 4

1. Reduce prm rates or charges under new business contracts
2. Offer additional guarantees and options under new business contracts
3. Increase bonuses under existing contracts
4. Increase salaries or commissions in respective distribution channels
5. In existing business with reviewable charges, either do not increase the charges or reduce their rate of growth relative to what may have been intended originally

Question 5

Directors have the legal responsibility to: (2)

Answer 5

1. Make decisions affecting the running of the company
2. Impose proper systems of management and control on the financial operation of the company

Question 6

Why the board of directors may not follow actuaries’ advice: (3)

Answer 6

1. For competitive reasons
2. Due to strategic company goals such as maximising new business volumes or amount of funds under management
3. So as to maximise shareholder earnings

Question 7

Actions taken by a disitributor that may give rise to financial risk faced by an IC: (3)

Answer 7

1. Encouraging business to lapse and re-enter where there are no exit penalties or there is no clawback of commission payments
2. Taking advantage of loopholes in product design
3. Taking advantage of oppertunities that arise due to timing effects in unit pricing practices

Question 8

Failure of controls may result in: (3)

Answer 8

1. Financial losses for the insurer
2. Regulatory intervention
3. Reputational damage

Question 9

4 examples of counterparty risk:

Answer 9

1. Reinsurance agreements
2. Outsourcing arrangements (eg poor quality service from a company providing outsourced administration services)
3. Corporate bonds held as investment
4. Distribution arrangements

Question 10

What is physical climate risk?

Answer 10

It is the first-order effects of environmental changes such as greenhouse emissions, pollution and land use ( eg increase in mortality)

Question 11

What is climate transition risk?

Answer 11

Refers to economic, political, and market changes as a result of efforts to mitigate climate change. (Eg policy changes designed to reduce fossil fuel consumption resulting in investments in fossil fuels and carbon-intensive industries losing value)

Question 12

What is climate liability risk?

Answer 12

It can arise from injured parties seeking compensation for the impacts of climate change

Question 13

The most relevant aims of the management of a LI company: (2)

Answer 13

1. Maximise the profits of the company, whether these go to shareholders or with-profits policyholders
2. Maximise the return that the company achieves on its available capital