Chapter 24: Nature of risks (1)

Question 1

Define model risk

Answer 1

risk that the chosen model is inappropriate

Question 2

Define parameter risk

Answer 2

risk that parameters used in model may not adequately reflect the lives insured or to be insured, regardless the appropriateness of model

Question 3

Define random fluctuation risk

Answer 3

risk that actual future experience may not correspond with model and parameters adopted, even though they adequately reflect the lives insured or to be insured

Question 4

Define model point risk

Answer 4

Risk from using model points as opposed to the individual policies

Question 5

Define expense risk

Answer 5

actual expenses higher than expected expenses

charges received lower than expected:
investment risk: charges linked to fund values
persistency risk: charges not received due to withdrawals
business volume/mix risk: charges linked to volume or average size of business

expense inflation higher than expected

Question 6

Define withdrawal risk

Answer 6

withdrawal when asset share negative

withdrawal when withdrawal benefit (eg surrender value) > asset share

selective withdrawals

lapse and re-entry risk:
profitability reduced from the insurer incurring another round of commission, initial expenses and underwriting costs

Question 7

Define (new) business mix risk

Answer 7

actual business mix not as expected by:

by nature and/ or size of contract
by distribution channel

Question 8

Define (new) business volume risk

Answer 8

actual business volume not as expected:

too high - strain on capital and admin resources
too low - inadequate contributions to overheads