Chapter 24 - Nature of risks (1) Flashcards
What are the 2 aspects of data risk
- The data might be inaccurate, inadequate or incomplete
- Where model points have been used to represent the business in force, there is a risk that these will not represent the characteristics of the actual portfolio well enough to produce valid results (modelling risk)
Why even when data may be adequate, it will be inappropriate to use
- There might be differences between the population on which it is based and the population for which it would be used
Why might internal data be inadequate
- Missing data
- Inaccurate data
- Not enough for credibility
What assumptions have to be made when projecting claim rates for H&C insurance
- future mortality
- incidence of critical illness
- incidence and duration of sickness
What are the risks associated with making assumptions regarding future mortality, the incidence of critical illness & incidence and duration of sickness
- A model risk - the model chosen may not be appropriate or contain errors
- A parameter risk - the parameters used may not adequately reflect the future class of lives insured
- Random fluctuation risk - the actual future experience may not correspond with the model and parameters adopted, even though these adequately reflect the lives insured
What causes the average cost of claims to vary
- Inflation increases costs year on year
- The mix of insured members changes (eg by age, health status, location)
- Different medical procedures are used to treat the same conditions
- Hospital capacity changes the likely stay as in-patient for a given procedure
- Pricing arrangements are negotiated and re-negotiated with providers
- The effect of innovation on the cost of medical treatment
– the use of more sophisticated medical technology may increase the cost of treatment
– innovations in procedures may shorten the recuperation time in hospital - Changes in lifestyle and the prevalence of medical conditions (eg. leads to increase in co-morbidities)
- Changes in policyholder behaviour or medical professional behaviour, which may result in higher utilisation of medical services
- Poor claims control and fraud
- The effect of the introduction of claims management processes such as preferred providers
- Ageing population
- The early detection of diseases due to greater access to diagnostic services
- Currency fluctuations, affecting imported equipment or pharmaceuticals
What are the key things that affect persistency risk
- The financial risk that the surrender value is higher than the asset share at the time of withdrawal -often made worse by the mismatching of the initial expenses and the charge made to recoup those expenses
- The risk to the mortality and/or morbidity experience due to the selective effect of withdrawals
- The risk of increasing the per-policy fixed expenses due to the loss of business volume from withdrawals
What are the changes in the mix of new business causes a change in the risk profile or capital needs of a company
A change in the mix by:
- Class of business (eg long vs short term)
- Type of contract ( eg CI vs LTC)
- Contract design ( eg conventional vs unit-linked)
- Premium frequency ( Single vs regular premium)
What are the risks of writing too much new business
- Not enough capital and administrative capabilities available to write new business
What is the risk of writing too low new business
- Not recovering fixed development costs that would of already been incurred
What are the main risks an insurer is faced with
VAMPIRED
- VOLUMES of new business
- Claim AMOUNTS
- MIX of new business
- PERSISTENCY
- INVESTMENT performance
- Claim RATES
- EXPENSE and Inflation
- DATA
Why past claims experience may not be a suitable source of data for setting parameters for a comprehensive PMI product
Changes in the cost of hospital treatment may be due to:
* Changes in cover, benefit limitations and exclusions
* Changes in the cost of hospitalisation (e.g. the use of more sophisticated medical technology may increase the cost of treatment)
* Changes in hospitalisation patterns (e.g. due to changing health of policyholders and new diseases)
* Changes in policyholder behaviour or medical professional behaviour, which may result in higher hospitalisation rates for less severe treatment (i.e. increasing in the incidence of smaller claim amounts)
* Changes in claims control processes and the introduction of claims management processes such as preferred providers or managed care, which may result in paying lower fees to hospitals for their services
* The availability of step-down facilities for less serious conditions, which may reduce admission rates and also the length of stay if these facilities are used for recuperation
Uncertainty in PMI claim cost stems from
CABLE PACE
- CHANGES in the cost of medical treatment eg. new technology
- AGEING population
- BEHAVIOUR of P/H or provider
- LIFESTYLE or health status of P/H
- EPIDEMICS or new diseases
- POOR claims control paying unnecessary claims
- ADVANCES in medical science
- CURRENCY fluctuations
- EARLY detection of diseases
