Chapter 14: Risk (2)

Question 1

What are the other risks facing a life insurer (Non-assumptions)

Answer 1

M3C2 DFG LV

Mix by nature and size
Mix by source (dbn channel)
Management of the company
Competition
Counterparties

Distributors
Fraud
Guarantees and Options

Legal, regulatory and fiscal
Volume of business

Question 2

What are the risks associated with Mix by nature and size?

Answer 2

Change in mix of new business can change:
1. The risk profile
2. Capital needs of the company

Question 3

What are the risks associated with mix by source?

Answer 3

Assumptions used were based on an assumed mix of business. Should the mix change, the assumptions are invalidated

Question 4

How can we mitigate new business mix risk?

Answer 4

1. Setting appropriate targets
2. Transfer via reinsurance
3. Improve marketing

Question 5

What are the risks associated with Competition?

Answer 5

Competition may make the company decide to:

1. Reduce premium rates under NB
2. Offer additional guarantees and options
3. Increase bonuses
4. Increase salaries or commission
5. Stop reviewing charges

Question 6

What are the risks associated with counterparties?

Answer 6

Other party defaults e.g. reinsurer.
Other party performs duties to an unacceptable standard e.g. outsourced work etc

Question 7

What are the risks associated with distributors?

Answer 7

1. Brokers may encourage lapse and re-entry for commission.
2. Take advantage of loopholes in product design
3. Take advantage of timing loopholes in unit pricing practices

Question 8

How can we mitigate distributor risk?

Answer 8

1. Examine loopholes in contract design
2. Unit-pricing lag between pricing and premium
3. Engage with distribution channels to ensure proper business.
4. Commission structures to encourage longer-lasting business

Question 9

What are the risks & mitigation associated with fraud?

Answer 9

Risk: Fradulent claims, cybercrime, access to computer systems

Mitigation:
1.Have control systems in place
2. Claims underwriting

Question 10

What are the risks associated with guarantees and options?

Answer 10

1. Terms are being offered in advance of the event happening
2. Assumptions around future experience may be incorrect (guarantees bite)
3. Model risk in how guarantees are projected
4. Incorrect pricing
5. Large anti-selection risk

Question 11

What are the risks & mitigation associated with legal, regulatory and fiscal?

Answer 11

Risk: Changes may have negative impacts on the life company.

Mitigation: Be aware of changes, test impact of possible changes in advance.

Question 12

What are the risks associated with volume of business?

Answer 12

1. Too much NB: strain on capital, systems, admin. More staff required (can lead to reputational damage)
2. Too little: NO profit, bad name, poor competitiveness
3. Too little: Not enough policies to spread fixed overheads over

Question 13

How can we mitigate volume of NB risk?

Answer 13

1. Improve underwriting
2. Close to NB if volumes are too high

Question 14

How can we mitigate guarantees and options risk?

Answer 14

1. Don’t offer them
2. Limit sum assured under individual options or totals
3. Limit date at which the options can be exercised
4. Limit the time they have to exercise
5. Derivates
6. Strict underwriting
7. Anti-selection
   7.1 Build in costs on contracts
   7.2 Encourage take-up
   7.3 Load on initial premium

Question 15

How can we mitigate counterparty risk?

Answer 15

. Choose reinsurer careful (look at rating)

Ensure good relationship with all counter-parties