Chapter 14 - Risk Flashcards
Explain how the mix of new business (M.O.B) may be a source of risk to a life insurer in terms of:
Mix by nature/size of contract
Mix by nature/size of contract
* Nature
+class of business (eg proportion of pensions sold)
+type of contract (eg term ass vs endowment)
+contract design (eg with profits vs unit linked)
+premium frequency (single vs regular)
- size of contract
could cause significant change in risk profile/capital needs of company
in particular, if contracts are on average smaller than assumed, expense loadings may fail to cover company’s overheads
Explain how the mix of new business (M.O.B) may be a source of risk to a life insurer in terms of:
Mix by source
Mix by source (distribution channels)
- Pricing assumptions (e.g. mortality, withdrawals) based on expected M.O.B by source,
If same premium charged across channels, effectively causes some average weighting in assumptions.
Change in M.O.B by source may invalidate assumptions.
Risk due to new business volumes:
Explain risks may arise for the insurer if new business is:
* too much and
* too little
Too much: risk of insufficient
* capital to cover financing requirements
* admin resources to process new policies
To little:
* expense risk:
overheads spread over too few policies (expense loading in premiums/charges insufficient)
mismatching of charges and expenses
- new products’ (fixed) development costs:
+risk of not recovering fixed development costs already incurred - fall in new business
damages profitability, competitiveness, long term viability
Give 5 examples of decisions, which may be taken as a result of competition, that may increase a company’s risk profile (5)
- Reduce premium rates or charges under new business contracts
- Offer additional guarantees and options under new business contracts
- Increase bonuses under existing contracts
- Increase salaries or commission in respective distribution channels
- Don’t increase charges/reduce charges’ growth rate relative to what may have been originally intended for existing business with review-able charges
Risk due to actions of directors:
What is the role of directors? (2)
What role do actuaries perform (2)
State 3 reasons why board of directors may not follow actuary’s recommendations to take actions that are within the company’s and available resources (3)
Director’s role is to:
* make decisions which steer the running of the company
* Impose proper systems of management/control on financial operation of company
Actuary’s role
* Help judge financial risks with particular course of action
* Ensure inappropriate risks are not taken, esp where security/fair treatment of policyholders concerned
Reasons why directors may not follow actuaries’ advice
- Competitive reasons
- Strategic company goals, such as maximising new business volumes or amount of funds under management
- Maximise shareholder earnings
Risk due to actions of distributors:
State 3 actions that a distributor could take that may create financial risk for a life insurer.
Especially prevalent where distributor independent of insurer
- Lapse and re-entry encouragement where no/low penalties exist, and no commission claw-back
- Take advantage of loopholes in product design
intermediary naturally try find best premiums for client
some definitions may allow variation in interpretation e.g. smoker/non-smoker status - Take advantage of timing effects in unit pricing
e.g. if UP fixed daily at start, and MVs fall heavily during day, if units sold at end of day, and purchased at start of following day, significant profit can be made at insurer’s expense
Risk due to failure of appropriate management systems and controls:
State 3 problems that may result from the failure of management systems and controls
Even if we assume enough control systems have been implemented (with proper documentation/training support for systems), there’s still a risk that one/more control is contravened (e.g. due to insufficient monitoring)
May lead to
* Financial loss
* Regulatory intervention
* Damage to reputation
Counterparty risk:
How does counterparty risk arise (2)
Name 4 counterparties who might default on their obligations to an insurance company (4)
Counterparty risk arises
- when insurer enters into agreements with another party/entity….
…and insurer relies on obligations under the agreement
Examples of counterparties
- Reinsurer e.g .failure to pay their share of claims
- Outsourcers
e.g. poor quality service for outsourced administration services (IT, investment management, policy admin)
complaints from policyholders + cost insurer to put things right - Corporate bond issuers e.g failure to pay coupons or capital
- Distribution arrangements e.g distributors fail to pass premiums
Risk due to fraud:
Generally speaking, what causes fraud?
Name 3 parties who might perpetuate fraud against an insurer.
Fraud is generally the result of a type of control failure, caused by deliberate intent of one/more parties
Can be perpetuated by:
* Directors or staff (have special access to financial systems or insurer and to computer programs and data which support business)
* Policyholders (main risk is fraudulent claims)
* Other outside parties (who may obtain some access to computer systems of insurer e.g. website access)
Risk due to climate change
What are the 3 catergories for climate risk
- Physical
the first order effects of environmental changes such as greenhouse emissions - Transition
economic, political and market changes as a result of efforts to mitigate climate change
eg, policy changes designed to reduce fossil fuel comsumption resulting in investment in fossil fuels and carbon-intensive industries losing value - Climate liability
can arise from injured parties seeking compensation for impacts of climate change
eg, link established between air polution and adverse health consitions, resulting in a new class of latend claims
