Chapter 13 : Risk (1) Flashcards
What are the risks faced by a life insurer (assumption related)
POCE WIN
Policy data
Other data
Claims experience on health and care products
Expenses
Withdrawals
Investment return
Mortality
What are the risks associated with policy data?
Inadequate, inaccurate and incomplete data could lead to incorrect results and recommendations.
What are the risks associated with other data?
Data used in the formulation of assumption may be inadequate. This may be because of lack of availability of reliable and appropriate data.
What are the risks associated with claims experience of health and care products assumptions?
Healthcare is more complex than life insurance. This is because the benefits can vary according to the severity of the episode. Main risk = mis-estimation of transfer probabilities
What are the risks associated with expense?
Higher than expected expenses. Higher than expected expense inflation. It is investment risk, persistency risk & new business mix and volume risk.
What are some ways to mitigate expense risk?
MUPP
- Price conservatively
- Premiums should increase over time to match charges to expenses
- Monitor and control
- Underwrite efficiently
What are the risks associated with withdrawal assumptions?
Withdrawals are unpredictable. Early withdrawals = risk of loss because of failure to recoup initial expenses.
What are some ways to mitigate withdrawal risk?
DCS
- Design (Have an appropriate SV, recoup profit later)
- Make sales better or more appropriate (Consider commission structure)
- Commission clawbacks
What are the risks associated with investment return?
Investment return assumptions are needed for existing assets and future investment.
What are some ways to mitigate investment return risk?
D2M2I
- Product design = unit linked
- Match/Immunise
- Diversify
- Invest similarly to competitors
- Margins in assumption (use sensitivity testing an scenario testing to ensure margins are sufficient)
What are the risks associated with mortality assumptions?
Future parameters cannot be predicted with certainty but quality and relevant data can reduce this risk.
There could be new diseases that we could not take account of.
What is the mitigation for mortality risk?
M2U2R2
- Include margins as a buffer
- Monitor the experience
- Policy underwriting
- Claims underwriting.
- Reinsurance
- Transfer risk back to the policyholder (Design, with profits)
Name the three risks associated with assumptions
Model risk
Parameter risk
Random fluctuations risk
What is model risk?
Risk that the underlying model is inadequate. This may be a probability distribution etc
What is parameter risk?
Risk that parameters used in the model may not adequately reflect the future experience of the class of lives insured even though the underlying model is appropriate.
