Chapter 15 - Risk

Question 1

Comment on aggregation and concentration of risks that an insurer is exposed to

Answer 1

it’s important to understand risks individually

But the financial impact on the insurer will also depend on
* how these risks emerge in future, and
* how they relate to each other

Question 2

How might a company go about assessing its overall risk, allowing for aggregation/accumulation of risks?

Answer 2

• Carry out financial projection with the greatest insight being provided if stochastic methods…
  …incorporating probability distributions of the key risks, are adopted.
• This will allow for correlation between the parameters.
• Running the projection model many times to test sensitivities and different scenarios ..
  …will produce results that enable the insurer to assess the inherent risk in the business.

Question 3

State 3 considerations in assessing the overall level of insurer risk .

Answer 3

• Capital and other resources available to insurer
  More capital => greater emphasis on return on capital
  Company may be willing to take on risks with higher severity of loss if these risks could result in greater return
• Cost of failing to meet public interest need for company to avoid insolvency
• Cost of failing to meet requirements of any other applicable legislation

Question 4

Credit rating

What do we mean by an insurer’s credit rating? (1)
Why is downgrading of credit rating a risk to the insurer? (4)

Answer 4

• An insurer’s credit rating is an external, objective measure/assessment of the insurer’s risk profile…hence its aggregation of risks

Downgrading of company’s credit rating is a risk because it would lead to:
* adverse publicity
* greater difficulty + cost of raising additional capital in market

…and as a consequence

• profitable activities available to do may be constrained
• policyholders may be less likely to maintain/purchase policies=> less business