Chapter 25 - nature of risks (2)

Question 1

Competition may lead management of an insurance company to take decisions that increase its risk profile beyond that which can be supported by available resources. Such decisions:

Answer 1

• reduce premium rates or charges under new business contracts
• offer additional guarantees and options under new business contracts
• increase the coverage under existing contracts
• increase commission
• on existing business with reviewable charges, constrain the future growth of charges

Question 2

Why may management not choose to follow actuary recommendations?

Answer 2

• for competitive reasons
• due to strategic company goals such as maximising new business volumes or amount of funds under management
• to achieve personal goals of the governing body
• to maximise shareholder earnings or benefits to members for a mutual fund

Question 3

Distribution risks

Answer 3

• a distributor may be in a position to commit the insurer to conditions that were not the original purpose of the contract
• a distributor may not return premiums received at the appropriate time or may become bankrupt before these are passed over
• a distributor may, in dealing with clients on behalf of the insurer, bring the insurer into disrepute

Question 4

Provision of medical services

Answer 4

• often third parties are involved to manage aspects of client relationship and control claims cost
• underwriting agencies, third party claims assessors, managed care organisations, counsellors for LTCI claims
• the extent to which these bodies can commit expenditure on behalf of the insurer is a source of risk

Question 5

Regulation/mitigation of non-disclosure

Answer 5

• clearly explained sales literature
• effective sales intermediary process
• clearly worded proposal forms
• more frequent use of doctor’s reports at new business stage
• more checking of information provided
• thorough audits on sample cases
• closer dialogue between underwriting, sales and claims management

Question 6

PMI risks

Answer 6

• claim size (mitigated by fee schedules and preferred provider networks)
• claim frequency (bound up in process of referral)
• anti-selection (mitigated by underwriting) although still a risk for health service requirements that can be planned to some extent
• State healthcare alternative
• single large claim or single incident giving rise to an accumulation of claims

Question 7

CI risks

Answer 7

• uncertain rates of diagnosis of CIs specified in contract (limited info available in most markets)
• unexpected changes in future rates of diagnosis
• significant anti-selection risk for individual policies
• selective and normal lapses
• expense risk
• financial risk from lapses when asset share is negative

Question 8

LTCI

Answer 8

• transition probabilities (shortage of reliable data)
• anti-selection risk
• selective and normal withdrawals
• additional risk if paid directly to care provider
• additional risk if indemnifies
• reputational risks (policyholder may expect the benefits to cover the eventual cost of care)
• investment and expenses