Chapter 14: Risk 2

Question 1

The more general risks faced by a life insurer: (10)

Answer 1

1. The mix of business by nature and size of contract.
2. The mix of business by source
3. The volume of business
4. Guarantees and options
5. Competition
6. The management of the company
7. Distributors
8. Fraud
9. Counterparties
10. Legal, regulatory and fiscal risks.

Question 2

The mix of business by nature and size of contract: (3)

Answer 2

1. The unpredictability of the mix of new business by nature and size of contract is a risk for the insurer.
2. Unexpected variation in nature or size may change the risk profile of the company, which may lead to an overstretching of the company’s capital and other resources available to cover the risk.
3. Coverage of per-policy expenses is particularly vulnerable to a reduction in the average size of policies issued.

Question 3

The mix of business by source: (3)

Answer 3

1. Different distribution channels involve different sales methods and reach different populations.
2. As a result, the demographic and expense experience of the various channels is likely to differ.
3. Variation from the insurer’s assumed mix by source could therefore invalidate the insurer’s demographic and expense assumptions.

Question 4

The volume of business: (2)

Answer 4

Insurers may experience difficulties as a result of:

1. too much business, so that its capital resources or administrative capacity are exceeded, or
2. too little business, so that it fails to cover its overhead expenses.

Question 5

Guarantees and options: (2)

Answer 5

1. To calculate the cost of guarantees and options, a life insurance company will use a model.
2. Model, parameter and random fluctuations risks therefore occur.

Question 6

The need to compete may lead management to take unacceptable risks. This might involve decisions to: (5)

Answer 6

1. reduce premium rates or charges under new business contracts.
2. offer additional guarantees and options under new business contracts.
3. increase bonuses under existing contracts.
4. increase salaries and commissions in the respective distribution channels.
5. keep charges too low under existing, reviewable, contracts.

Question 7

Management risks can arise because: (2)

Answer 7

1. the directors have made a conscious decision to ignore sound risk-management advice in pursuit of other competing aims.
2. the control systems in place are inadequate or are not properly followed.

Question 8

Distributors may: (3)

Answer 8

1. encourage lapse and re-entry where this favours the policyholder.
2. take advantage of loopholes in product design.
3. take advantage of timing loopholes in unit pricing practices.

Question 9

Distributors may: (3)

Answer 9

1. encourage lapse and re-entry where this favours the policyholder.
2. take advantage of loopholes in product design.
3. take advantage of timing loopholes in unit pricing practices.

Question 10

The risk of Fraud:

Answer 10

Directors, staff, policyholders and even external parties can all perpetrate fraud and so cause loss to the insurer.

Question 11

The risk of Fraud:

Answer 11

Directors, staff, policyholders and even external parties can all perpetrate fraud and so cause loss to the insurer.

Question 12

Counterparty risk

Answer 12

If an insurer has an agreement with another entity then it faces the risk that the entity either fully or partially defaults on their obligations or performs them to an unacceptable standard.

Question 13

Legal, regulatory and fiscal risks:

Answer 13

Future changes to any of these can adversely affect the insurer and/or its policyholders.