Chapter 25 - Nature of risks (2)

Question 1

How does the offering of guarantees and options pose a risk to the insurer

Answer 1

The insurer is offering terms in advance of the happening of the event to which those terms apply

Question 2

What are the steps an insurance company can take to increase its competitive power in the market

Answer 2

RAISE

• REDUCE premium rates or charges under new business contracts
• offer ADDITIONAL guarantees and options under new business contrast
• INCREASE the coverage under existing contracts
• increase SALARIES or commissions in the respective distribution channels
• on EXISTING business with reviewable charges, constrain the future growth of charges

Question 3

Why would management not choose to follow recommendations as to how it should operate to stay within its risk profile

Answer 3

• For competitive reasons
• Due to strategic company goals (eg. maximising new business volumes or amounts of funds under management, allowing cross-subsidies)
• To achieve personal goals of the executive/government body (which may constitute a conflict of interest)
• To maximise the shareholder earnings or benefits to members for a mutual fund

Question 4

What are the distribution risks that an insurer is exposed to

Answer 4

• A distributor may be in a position, knowingly or otherwise, to commit the insurer to conditions that were not the original purpose of the contract
• A distributor, under circumstances where policyholder money transactions are conveyed through the 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 5

How can legal, regulatory and tax developments pose a risk to the insurance company

Answer 5

• New legislation and regulation may apply to policies already in force changing the nature of the contract between the insurer and policyholder (eg certain exclusions may be deemed no longer acceptable or the payout for certain conditions may be increased)
• Taxes may be introduced to benefits or premiums that may affect the profitability or coverage of existing contracts

Question 6

How may reputation pose a risk to the insurance company

Answer 6

• The quality of customer service is very important in markets where products are not differentiated in terms of benefits or price
• where there is a high degree of consumer market awareness or culture of consumer protection, the insurer runs the risk of losing both the existing client base and potential new business as a result of obtaining a reputation for poor customer service

Question 7

How may internal audit failures/fraud pose a risk to the insurer

Answer 7

• leaking of confidential information
• embezzlement of funds ( by people in power)

Question 8

How may physical risks pose a risk to the insurer and how to mitigate these risks

Answer 8

• e.g fire, flood, loss of key staff, Hacking

Its imperative to have business continuation procedures in hand to manage the smooth flow of business in these circumstances:
- back-up systems
- alternative premises
- Insurance cover

Question 9

How can an insurer reduce the risks of Non-disclosure and anti-selection

Answer 9

I FACE DC

• more checking of INFORMATION provided
• more FREQUENT use of doctors’ reports at new business stage
• thorough AUDITS on sample cases
• CLEARLY explained sales literature
• EFFECTIVE sales intermediary processes
• closer DIALOGUE between underwriting, sales, and claims management
• CLEARLY worded proposal forms

Question 10

Risks specific to PMI

Answer 10

• Limited control over the benefit payments
• A consultant will make their own decisions regarding what they charge for services rendered
• Claim frequency of specialist is dependent on the rate of referral from a GP
• No policy limits are applicable
• Accumulation of claims ( eg. accident within a single insured workforce)

Question 11

Risks specific to CI

Answer 11

• Rates of diagnosis of the critical illness specified in the contract
• Fairly new product to the market, limited data to work with
• Significant anti-selection risk ( particularly for individual contracts).
• A financial risk from lapses will arise when the asset share is negative

Question 12

Risks specific to LTCI

Answer 12

• Transition probabilities in the underlying multiple-state model
• Anti-selection risks
• Selective withdrawals
• Investment risks as significant reserves may need to be built up in advance of a claim starting
• Significant marketing and reputational risk, as policyholders may expect the benefits to be enough to cover the eventual costs of care