Chapter 24 - nature of risks

Question 1

Two aspects to data risk:

Answer 1

• data may be inadequate, inaccurate or incomplete
• risk that model points do not represent the characteristics of the actual portfolio well enough to produce valid results

Question 2

Why may internal data be inadequate?

Answer 2

• there may be missing data
• data may be inaccurate
• may not be enough data for credibility

Question 3

Risks associated with claim rates

Answer 3

• model risk
• parameter risk
• random fluctuation risk

Question 4

Why past claims experience may not be a suitable source of data for PMI?

Answer 4

Changes in the cost of hospitalisation may be due to:

• changes in cover, benefit limitations and exclusions
• changes in cost of hospitalisation (more sophisticated medical technology)
• changes in hospitalisation patterns (due to changing health and new diseases)
• changes in policyholder behaviour or medical professional behaviour
• changes in claims control processes
• the availability of step-down facilities which may reduce admission rates and length of stay if used for recuperation

Question 5

Cause of random fluctuations

Answer 5

• heterogeneity of insured lives

- numbers exposed to risk too small to be large enough for law of large numbers to apply

Question 6

Uncertainty around cost of PMI cover

Answer 6

• the effect of innovation on the cost of medical treatment covered
• changes in lifestyle and prevalence of medical conditions
• changes in policyholder behaviour or professional behaviour
• poor claims control and fraud
• the effect of claims management processes
• ageing population
• early detection of diseases
• currency fluctuations

Question 7

Examples of errors in a stochastic investment model

Answer 7

• the probability distribution for the random error term is inappropriate
• the time-series relationships between outcomes at different times are not specified appropriately

Question 8

Key things about persistency risk:

Answer 8

• risk that the surrender value is higher than the asset share at the time of withdrawal (made worse by mismatching of initial expenses and charges)
• risk to mortality/morbidity experience due to selective effect of withdrawal
• risk of increasing per-policy fixed expenses due to loss of business volume

Question 9

A change in mix by nature might involve:

Answer 9

• class of business (long-term vs short-term)
• type of contract (CI vs LTCI)
• contract design
• premium frequency

Question 10

Random fluctuation risk

Answer 10

risk of unpredictable fluctuations arising from sample error

Question 11

Risks faced by the insurer

Answer 11

• policy data
• other data
• claims
• investment performance
• expenses and inflation
• persistency
• business mix
• business volume