Chapter 25: Nature of risks (2)

Question 1

List product-specific risks

Answer 1

PMI:
third party control over claims
moral hazard (intentional) and selective withdrawals
single large claims and aggregation of claims (group PMI)
capital requirements usually lower than CI

CI:
critical incidence rates- more dominant when guaranteed premiums are offered, which is often the case
selective withdrawals and withdrawals when asset share is negative
expense risk
capital requirements will normally be low

LTCI:
claim inception and transition rates
expense and investment risk (large reserves on LTCI policies)
selective withdrawals and withdrawalswhen asset share is negative
marketing risk - policyholder may expect benefits to be enough to cover actual costs of care
capital requirements could be extensive - particularly for guarantees
additional risks if insurer pays directly to the care provider (fraud) or for indemnity benefits

Question 2

Define counterparty risk

Answer 2

counterparty may either fully or partially default on its obligations or perform them to an unacceptable standard

eg. reinsurance agreement

Question 3

Define counterparty risk in distribution channels

Answer 3

distributor may delay premiums or claim payments or become bankrupt

distributor can bring the insurer in disrepute

Question 4

List other risks not mentioned previously

Answer 4

mis-selling risk

fraud

regulation risk

tax risk

risk from guarantees/ options

Question 5

Describe briefly the overall impact of risk

Answer 5

financial loss

regulatory intervention

reputational damage:
This may arise formally through courts and regulators, and less formally through social media, word of mouth, tv exposure