Chapter 24 - 26 - Nature Of Risks

Question 1

What is model risk?

Answer 1

Risk that the model, typically probability distribution, chosen to represent future mortality etc may not be appropriate or may contain errors

Question 2

What is parameter risk?

Answer 2

Risk that the parameters uded with the model may not adequately reflect the future experience of the class of lives insured or to be insured, even though the underlying model may be appropriate

Question 3

What is random fluctuations risk?

Answer 3

Risk that the actual future experience may not correspond with the model and parameters adopted, even though these adequately reflect the class of lives insured or to be insured

Question 4

What is biased lapsing?

Answer 4

Lapses thatvhave certain features, but which aren’t necessarily die to selective action by PHs (eg in recession tendency for small policies to lapse)

Question 5

In order to increase competitiveness insurers can: (5)

Answer 5

1. Reduce prm rates or charges under new business contracts
2. Offer additional guarantees and options under new business contracts
3. Increase the coverage under existing contracts (eg further critical illnesses)
4. Increase salaries or commissions in respective distribution channels
5. On existing business with reviewable charges, constrain the future growth of charges

Question 6

Risks relating to distribution: (3)

Answer 6

1. A distributor may be in the position to commit the insurer to conditions that were not theboriginal purpose of the contract (eg broker can make wording of ADLs nore lenient in LTCI)
2. Distributor may not return premiums received at appropriate time or may become bankrupt before these are passed over. If transactions are conceyed through distributor
3. Distributor may, in dealing with clients on behalf of the insurer, bring the insurer into disrepute ( broker might dispute claim directly with PH, only for PH to find out later from insurer claim was perfectly valid)

Question 7

Resolution or mitigation can be achieved through: (7)

Answer 7

1. Clearly explained sales literature
2. Effective sales intermediary processes
3. Clearly worded proposal forms
4. More frequent use of doctors’ reports at new business stage
5. More checking of information provided
6. Thorough audits on sample cases
7. Closer dialogue between underwriting, sales and claims management

Question 8

2 most relevant aims of the management of an insurer:

Answer 8

1. Maximise profits of the insurer, whether these goes to shareholders or mutual PHs
2. Maximise the return that the insurer achieves on its available capital

Question 9

Who does the profit belongs to under:
A. Mutual funds
B. Proprietary funds

Answer 9

A. The policyholders or members of the fund

B. Shareholders

Question 10

Problems that confront the actuary in achieving his/her aims: (11)

Answer 10

1. Policy data
2. Product design
3. Pricing
4. Return on capital
5. Profitability of in-force business
6. Supervisory reserves and solvency capital requirements
7. Investment
8. Capital management
9. Risk management
10. Claims