Chapter 24 Nature of risks (1) Flashcards
Overview of the broad categories of insurer risks
Give an overview of the broad catergories of risk faced by insurers (8)
(CA1/ARM recap; not in ST1/F101 notes)
- Financial risks
- Business risk
- Liquidity risk
- Market risk
- Credit risk
- Non-financial risks
- Operational risk
- External risk
Various possible sources of health insurer risk:
List the various possible sources of risk to a health insurer
(When approaching this question, try and use the broad categories of risks which you’ve learned about so far; the list ‘sub-risks’ within each category. Most risks are business risks)
Easily 30+ points, including sub-risks and broader categories
Financial risks
-
Business risk
- Risks in investigations (model, parameter, random flactuation)
- Policy data and other data
- Morbidity: claim incidence rates, claim inception rates, sickness duration, claim amount
- Mortality
- Early screening diagnosis
- Expenses (including inflation)
- Persistency/withdrawals
- New business mix
- New business volumes
- Anti-selection and non-disclosure
- Guarantee and options
- Competition
- Aggregation and concentration of risk
- Management of company
- Legal, regulatory and tax developments (makes more sense in this catergory than any other other category)
-
Market risk
- Investment performance
- Market fluctuations
- How assets change vs liabilities
- Investment performance
-
Credit risk
- Counterparties
- distribution
- provision of medical services
- reinsurance
- Others: credit downgrading
- Counterparties
Non-financial risks
-
Operational risk
- Fraud
- Actions of board members
- Actions of distributors
- Failure of management systems and control
-
External risk
- Catastrophes
Risks in investigations:
Define 3 risks which normally arise in investigations
e.g. when setting mortality assumptions for pricing (6)
-
Model risk:
- Inappropriate/erroneous probability distribution chosen for underyling model e.g. future mortality.
-
Parameter risk:
- Underlying model correct, but parameters inadequate (don’t reflect future experience of lives insured/to be insured)
-
Random fluctuation risk:
- Actual future experience may not correspond with model/parameters adopted (even though these adequately reflect lives insured/ to be insured)
Additional comments
- First 2 risks always exist (impossible to predict future with complete certainty).
- Extent of 3rd depends on numbers exposed to risk: smaller number = greater risk.
- These risks are also associated with other major assumptions e.g. investment, expenses
Risk due to data: types of data
What type of data might an insurer work with? (2)
What kind of ‘other data’ might insurer use (5)
-
Policy data
- eg age at entry, policy term, duration in force, sum assured
- maintained by insurer
-
Other data
1. Internal data from other products
2. External data - Insurance industry data
- National stats
- Overseas markets
-
Other data
Risk due to data: types of data
We’ve covered the various data an insurer might use and what its potential sources of data might be; what would an insurer use this data for? (9)
(Remember a useful acronym from CA1/ARM)
Main actuarial reason for policy data:
- Regular valuation of liabilities
Uses of data: MAFIA PEPRS acronym from CA1/ARM :)
- Marketing
- Administration
- Financial planning and management
- Investments
- Accounting
- Provisioning/reserving
-
Experience statistics and analysis/investigations
- done to give appropriate advice
- inaccurate data => inaccurate advice
-
model points:
- not always practical/cost effective to do investigation on whole book.
- can use model points, then scale up results
- the fewer the model points, less accurate
- Premium rating or product costing
- Risk management
- Statutory returns
Risk due to data
Discuss main issues for health and care products compared to life insurance products (3)
For health and care contracts specifically, the following issues are experienced (more so than for life insurance:
-
Limited credibility
- smaller policy volumes e.g CI and LTCI
- lower incidence rates e.g. IP and CI
-
Limited applicability of past data
- Changes to products/market over time
- Limited relevance of past data due to sensitvity to
- socio economic conditions (IP)
- medical advances (CI)
- longevity/health at older ages (LTCI)
-
Limited applicability of industry data
- Due to heterogeneity of products and markets
Risk due to data: risks due to policy data
Explain how policy and other data can be a source of risk to a health insurer specifically with reference to policyholder data (10)
Policyholder data: main risk is poor maintenance
- company may not maintain adequate, accurate and complete records required by actuary and so
- results of supervisory valuation may be innacurate
- other investigations may be inaccurate and so advice innapropriate
- risk when used in investigations
- eg investigations modelling part/whole of business
- risk that model doesn’t adequately reflect business
- properly referred to as a model or modelling risk - risk that results from model office being an over-simplification of the real company in terms of the portfolio of policies currently in force and as a consequence behaving unrealistically
Risk due to data: risks due to other data/non-policy data
Explain how other data (ie non-policyholder data) can be a source of risk to a health insurer (5)
Comment on these risks in the context of other data which is ‘internal’ to the insurer (4)
Comment on these risks in the context of external data (3)
Other data (internal, and or external data)
- other data may be used for actuarial assumptions eg used to determine claim incidence, surival periods, mortality
- data may
- be adequate, but not suitable for the task at hand (see comment regarding external data below)
- be purely purely inadequate or undreliable indicators of future experience
- be of insufficient volume
- suffer from population differences causing data to no longer be applicable to population being considered
Internal data
- even if other data is internal, it may be inadequate for many reasons:
- missing data
- inaccurate data,
- insufficient volume,
- inappropriate for task at hand
External data
- inadequacy of data is worsened where overseas/external data is used..
- because policy conditions may differ significantly from what’s used in company
- any external data used may be inadequate or unreliable and even when reliable it may prove to be inappropriate
Claim incidence rates, claim inception rates, estimates of sickness duration, mortality rates
Describe what type of risks arise in terms of claim incidence rates, claim inception rates, estimates of sickness duration, and mortality rates? (5)
Regarding these claim incidence rates, claim inception rates, estimates of sickness duration, mortality rates, list some key health and care factors (5) that lead to
- difficulty in estimating these assumptions
- risk in the investigations which use these assumptions
Risks which arise re
- claim incidence rates, claim inception rates, estimates of sickness duration, and mortality rates will usually be
- determined by investigations done by the insurer/actuary
- used in investigations done by the insurer/actuary
- in these investigations, 3 key risks arise
- model risk: inappropriate probability distribution or model
- parameter risk: parameters don’t reflect future experience
- random fluctuations risk: actual future experience differs from model and parameters
What health and care factors make these assumptions difficult to estimate/risky to use in investigations:
- New diseases and epidemics / preventative measures over time
- Lifestyle changes affecting prevalence of certain illnesses
- Utilisation levels may differ over time
- Claim definitions will differ over time
- Claim durations / recoveries will change over time
Claim incidence rates, claim inception rates, estimates of sickness duration, mortality rates
Describe additional factors related to model/parameter/random flacuation risk that arise when conducting investigations that estimate (or make use of) claim incidence rates, claim inception rates, estimates of sickness duration, mortality rates (6)
Additional factors regarding model/parameter/random flactuarion risks
- model and parameter risk always exist, but their extent depends on reliability and applicability of the data used in investigations
- parameter risk especially is worsened by poor data, essentially expanding the funnel of doubt in future
-
random fluctuations risk arises due to
- heterogeneity of lives insured and/or low numbers exposed to risk (reducing impact of “law of large numbers”)
- it may still apply to large samples, but more so with small samples
- in addition, there’s always a risk is that experience is simply more adverse than expected, as no-one can predict the future
Claim amounts
Describe risks to the insurer related to claim amounts which are either estimated, or used in investigations (8)
Claim amounts are a significant source of uncertainty, especially for indemnity products, such as PMI cover; the following factors contribute to uncertainty in the cost of PMI claims
- new diseases or epidemics
- changes in cost of medical treatment due to medical innovations, advances in technology, currency fluctuations etc.
- changes in lifestyle and prevalence of medical conditions
- policyholder or medical professional behaviour affecting utilisation of medical services
- poor claims control and fraud may result in the insurer paying claims that should have been excluded due to benefit limitations
- introduction of claims management processes, such as preferred providers
- an aging population, which implies that there will be greater demand for healthcare treatment
- currency fluctuations which may result in volatility in cost of medical treatment that relies on imported equipment or pharmaceuticals
Earlier screenings
Describe risks to the insurer related to the impact of earlier screenings (4)
Advances in medical science mean that claims for health insurance might increase. As time progresses (earlier) screening is often encouraged, which may lead to the following
- increased claims frequency
- insurers finding themselves facing claims significantly earlier than was expected on the basis of the data on which premiums were calculated
- earlier diagnosis may prompt some claims that would not otherwise have been payable (because policyholder wouldve died prior to diagnosis, or lapsed or term policy may have expired)
Investment performance: risks due to investment performance
For what purposes might investment assumptions be needed, and what risks does this introduce? (4)
What key factors influence the significance/importance of the investment return assumption (2)
Investment return assumptions
- may be needed for investigations which rely on existing assets or future investment
- return will need to allow for both income and capital appreciation on amounts to be invested in the future
- both model risks and parameter risks apply
- some investigations require assumptions as to future income and capital on existing assets.
- likely to require comparison between value of assets and value of liabilities, also capital values risk on assets being valued.
The importance of the assumption depends
- importantly on the size of the reserves
- in part on the delay between premium receipt and claim payment
Investment performance: risks due to investment performance
In what way may investment return assumptions be modelled? (4)
What kind of investment risks may be introduced due to 3rd parties? (3)
Investment return might be modelled deterministically or stochastically
- in either case there are model, parameter
- in deterministic modelling, can also use sensitivit/scenario testing to better understand risk, hence reduce it
- in a stochastic model the random fluctuations are modelled explicitly (modelling volatility of returns)
Asset management
- the passing of responsibility for the process or management of investments to 3rd parties introduces further investment risks
Investment performance: significance thereof for various health insurance products
Describe the extent of risk that investment performance gives rise to under various scenarios (3)
PMI
- Investment performance be of lesser significance considering PMI due to its short-tail from premium receipt to claim settlement.
Long term contracts
- For some long-term insurance, particularly pre-funded long-term care, the investment performance, and hence risks, may be major considerations.
Currency risks
- Insurers paying claims in foreign currencies the insurer will be exposed to exchange rate movements and may need to invest in assets in the relevant foreign currencies.
