Chapter 13 - Risk (1) Flashcards
(13 cards)
List the key risks associated with using data
I RAP GIF
- data are INACCURATE or incomplete, leading to erroneous results or conclusions
- past data is not sufficiently RELEVANT for the intended purpose because data isn’t precisely comparable across companies
- the data might not be in a form that is APPROPRIATE for the intended purpose
- the data may be collected for a PURPOSE, so it’s not appropriate for a different purpose
- chosen homogenous data GROUPS may not be optimal due to:
– the group being too small for analysis
– if the data groups merged, it may not be sufficiently homogeneous - INSUFFICIENT volume of data, which makes it not credible
- past data might not reflect what would happen in the FUTURE due to:
HARD FROG - HETEROGENEITY within the group
- past ABNORMAL events
- significant RANDOM fluctuations
- past data may not be up to DATE
- FUTURE trends not being reflected sufficiently in past data
- changes in the way that the data was RECORDED
- OTHER changes e.g. medical, economic
- changes in the balance of any homogeneous GROUPS underlying the data
There may be missing data
Possible reasons for heterogeneity when using industry wide data
GPS RN P
- companies operating in different GEOGRAPHICAL or socio-economic sections of the market
- POLICIES sold by companies differ
- SALES method may differ
- coding use for RISK factor may differ
- NATURE of data storage might differ
- companies will have different PRACTICES
4 other problems with using industry data
LEND
- LESS detailed and flexible than internal data
- EXTERNAL More out-of-date than internal data
- NOT all organizations contribute, and those that do may not be representative of the market
- DATA quality depends on the quality of the data systems of all its contributors
What are the risks associated with the assumptions regarding future mortality
- Model risk - the model, typically a probability distribution, chosen to represent future mortality, may not be appropriate
- Parameter risk - the parameters used with the model may not adequately reflect the future experience of the class of lives insured or to be insured
- Random fluctuations - 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
When is the Random fluctuations risk most likely to arise
- It is most likely to arise if the numbers to risk are not large enough for the law of large numbers to apply
How can an insurance company that appears solvent one day become insolvent the next day following a change in asset values
A fall or rise in interest rates could lead to insolvency if liabilities are valued at market rates. If assets were invested with a shorter discounted mean term than the liabilities, then on a fall in interest rates the value of the liabilities would rise by more than the value of the assets.
What are the key things from withdrawal risk
- The financial risk that the surrender value is higher than the asset share at the time of withdrawal.
- The risk to the mortality experience due to selective effect of withdrawals
- The risk of increasing the per-policy fixed expenses due to the loss of business volume from withdrawals
What are the data Issues for health and care contracts
- Smaller policy volumes (CI and LTCI) and lower incidence rates (IP and CI) limits the credibility of the data
- Changes to products and markets over time limits the applicability of past insurer data
- Heterogeneity of products and markets limits the applicability of industry data
What are examples of an error in a stochastic investment model
- The probability density function chosen is inappropriate
- The time-series relationships between outcomes at different times are not specified appropriately
How can change in the value of assets lead to insolvency risk
- A fall or rise in Assets could lead to insolvency if liabilities are valued at market rates.
If assets were invested with a shorter DMT than liabilities, then on a fall in interest rates, the value of the liabilities would rise by more than the value of the assets.
What is expense risk
It is a risk that the actual expenses are higher than expected, including due to the effects of inflation
What are the different types of underlying drivers for charges being lower than expected
- Investment performance risk ( If charges are fund-based)
- Persistency risk ( If charges required to recoup initial expenses are not received due to high withdrawal rates)
- New business mix or volume risk ( The extent that charges are linked to average size or volume of new business, and this is liwer than expected)
What is the effects of higher selective withdrawals
- Left with a pool of higher-risk policies
- Left with fewer policies to spread overheads
- The financial risk that the surrender value is higher than the asset share
