Chapter 13-Risk 1

Question 1

List 16 possible sources of risk to a life insurer

Answer 1

Business

\+Mortality rates
\+Expenses (including inflation)
\+Persistency
\+Policy and other data
\+New business mix
\+New business volumes
\+Guarantee and options
\+Competition
\+Aggregation and concentration of risk
\+Legal, regulatory and tax developments (not strictly business risk, but just putting it here as it doesn’t make sense in other category)

Market

+Investment performance

Market fluctuations
How assets change vs liabilities

Credit

+Counter-parties

+Others: credit downgrading

Operational

+Fraud
+Actions of board members
+Actions of distributors
+Failure of management systems and control

Question 2

Risk due to data: types of data

What type of data might an insurer work with? (2)

What kind of ‘other data’ might insurer use (5)

Answer 2

Policy data

eg age at entry, policy term, duration in force, sum assured
maintained by insurer

Other data

\+​Internal data from other products
\+External data
\+Insurance industry data
\+National stats
\+Overseas markets

Question 3

Risk due to data: types of data

We’ve covered the various data an insurer might use and what its potential sources of data might be; what would an insurer use this data for?

Answer 3

Uses of data: MAFIA PEPRS acronym from CA1/ARM :)

\+Marketing
\+Administration
\+Financial planning and management
\+Investments
\+Accounting
\+Provisioning/reserving
\+Experience statistics and analysis/investigations
done to give appropriate advice

inaccurate data => inaccurate advice

+Premium rating or product costing
+Risk management
+Statutory returns

Question 4

Risk due to data:

Explain how policy and other data can be a source of risk to a life insurer

Answer 4

Poor maintenance

Company may not maintain adequate, accurate and complete records required by actuary and so

+results of supervisory valuation may be inaccurate

+other investigations may be inaccurate and so advice inappropriate

Model Points Risk:

not always practical/cost effective to do investigation on whole book.

can use model points, then scale up results

the fewer the model points, less accurate

Internal data

inadequate indicator of future experience: due to inaccuracy/low volumes

population differences: adequate data available, but inappropriately for particular population

External data

​may also be inadequate and/or inappropriate

Question 5

Risk due to data

Discuss main issues for health and care products compared to life insurance products (3)

Answer 5

For health and care contracts specifically, the following issues are experienced (more so than for life insurance):

Limited credibility

+smaller policy volumes e.g CI and LTCI
+lower incidence rates e.g. IP and CI

Limited applicability of past data

\+Changes to products/market over time
\+Limited relevance of past data due to sensitivity to
socio-economic conditions (IP)
medical advances (CI)
longevity/health at older ages (LTCI)

Limited applicability of industry data

+​Due to heterogeneity of products and markets

Question 6

Risks in investigations:

Define 3 risks which normally arise in investigations

e.g. when setting mortality assumptions for pricing

Answer 6

Model risk:
Inappropriate/erroneous probability distribution chosen for underlying model e.g. future mortality.

Parameter risk:
Underlying model correct, but parameters inadequate (don’t reflect future experience of lives insured/to be insured)

Random fluctuation risk:
Actual future experience may not correspond with model/parameters adopted (even though these adequately reflect lives insured/ to be insured)

First 2 risks always exist (impossible to predict future with complete certainty).

Extent of 3rd depends on numbers exposed to risk: smaller number = greater risk.

Question 7

The risk that actual expenses are higher than expected or allowed for e.g. due to inflation is called expense risk.

The risk that charges received are lower than expected or allowed for is more typically classified as other types of risk. Give 3 examples of what these other risks might be.

Answer 7

Investment performance risk (e.g. if charges are fund-based)

Persistency risk (e.g if charges required to recoup initial expenses are not received due to high withdrawal)

New business mix or volume risk (e.g. if charges are linked to average size or volume of new business)

Question 8

Explain how persistence may be a source of risk to a life insurer (4)

Answer 8

Asset share: risk if less than surrender value greater at time of withdrawal…

…made worse by mismatching initial expenses vs charges to recoup expenses

Selective withdrawals negatively influencing mortality experience

Reduce business volumes means risk of increasing per-policy expenses