Chapter 25 Nature of risks (2) Flashcards
1
Q
Guarantee and options
A
- To calculate the cost of guarantees and options, an insurance company will use a model.
- Model, parameter and random fluctuations risk therefore occur.
- Stochastic models are usually used to model these.
- Because there would be bias in scenarios chosen under a deterministic model and probabilities assigned to them.
- health and care event are less easy to predict then their life insurance counterparts and greater care has to be taken in policy wording of options and guarantees.
2
Q
Competition
A
- The need to compete may lead to management to take unacceptable risks. This might involve decisions to:
- 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 salaries or commissions for distribution channels.
- arrest/constrain the future growth of charges
3
Q
Actions of management
A
- The company’s management may choose to ignore the actuary’s advice concerning what the actuary views as unacceptable risk. Possible reasons for this are:
- to be competitive
- to increase the size of the business
- to maximise shareholder earnings
- to achieve personal goals of the executive
4
Q
Counterparties under reinsurance arrangements
A
- When an insurer gets into an agreement it expects the 3rd party to meet its obligations.
- There is a risk the entity will not be able to do this.
- default on reinsurance recoveries.
5
Q
Counterparties in distribution
A
- the risks are that the distributor may:
- commit the insurer to new conditions that were not part of the original purpose of the contract.
- delay premium or claim payments or become bankrupt
- bring the insurer into disrepute
6
Q
Counterparties in provision of medical services
A
- There may be some loss of claims cost control and quality of service to 3rd parties.
- Under medical expenses covers and some long-term care insurance the benefit itself is provided by 3rd parties on an indemnity basis.
- This of ultimate claims cost then lies, at least to some extent, in the hands of these 3rd parties.
7
Q
Counterparties in investments
A
- There is a counterparty risk associated with some investments that the insurer may be holding to back its business.
- This particularly relates to corporate bonds and deposits.
- The issuer of a bond may default on its obligations to pay coupons.
8
Q
Other sources of risks
A
- Legal, regulatory and tax developments
- reputation
- Internal audit failures
- physical risks
- aggregation and concentration risks
- catastrophes
- Non-disclosure and anti-selection
9
Q
Regulatory and fiscal developments
A
- Development might relate to tax, policy conditions, exclusions and premium rating for example.
- new legislation and regulation may apply to policies already in force changing the nature of contract between insurer and policyholder.
- some exclusions may be deemed unacceptable.
10
Q
reputational risks
A
- quality of customer service is very important in market when product is not differentiated in terms of benefits or price.
- Where there is a higher degree of consumer market awareness or culture of consumer protection, the insurer runs a risk of losing existing client base and potential new business as a result of obtaining a reputation for poor customer service.
- this may arise through press comments or legally through courts.
11
Q
Internal audit failures/fraud
A
- Examples of internal audit failures are leaking of information and embezzlement of funds.
- appropriate training , governance and internal audit procedures are vital.
12
Q
Physical risks
A
- Examples of physical risks are fire, fire, flood, impact, loss of key staff.
- suffering IT outages due to a computer virus
- it is imperative to have business continuation procedures in hand to manage the smooth flow of business in these circumstances, including back-ups and alternative premises.
- business interruption cover but intervening damage makes proper processes and drills essential.
13
Q
Aggregation and concentration of risk
A
- An example of aggregations/concentration of risk is the outbreaks of local illnesses.
- part of an insurer’s assessment of portfolio risk will be the extent to which the insurer is over-exposed to a particular risk as a result of specialisation of a product.
- these risks are mitigated through more widespread marketing, reinsurance and through reciprocation.
14
Q
Catastrophe
A
- a health and care insurer is at risk from a catastrophe ie an event that gives rise to the introduction of widespread illness or injury.
- by their very nature, these are difficult to predict.
- resolution lies mainly in reinsurance or possible global expansion to spread risks.
15
Q
Non-disclosure and anti-selection
A
- non-disclosure makes premium rating more difficult.
- the extent of this risk depends in part on whether a moratorium approach is used.
- There is also a risk that anti-selection is greater than anticipated in the pricing basis.
16
Q
Anti-selection/non-disclosure: Resolution or mitigation can be achieved through?
A
- clearly explained sales literature
- effective sales intermediary processes
- clearly worded proposal forms
- more frequently use of doctors’ reports at new business stage
- more checking of information provided
- thorough audits on sample cases
- closer dialogue between underwriting, sales and claims management.
17
Q
Advancing information and genetic test come with some potential problems.
A
- genetic testing exposes an insurer to anti-selection if the insured has information that is not available to the insurer.
- there is the potential for illnesses to be diagnosed at afar earlier stage through such tests, leading to potential windfall payments
- increased diagnosis of early stage illnesses increase the risk of future non-disclosure for insurers.
- through genetic testing, “personalised medicine” is being developed. like to be more expensive although effective.
18
Q
Product specific risks: PMI
A
- Main risk to insurer is that it may have limited control over the benefit payments.
- although the insurer may also impose constraints through the use of agreed fee schedule.
- 3rd party control over claims
- anti-selection if underwriting and risk rating are not used, moral hazard and selective withdrawals.
- in regions where the state provides an alternative free healthcare service, the insurer is under constant pressure to remind policyholders the insurance package is preferable to the free-alternative.
- single large claims and accumulations due to no policy limits.
- capital strain even lower than CI, unless high commission. This is due to the short-term nature of the contracts.
19
Q
Product specific risks: CI insurance
A
- for both stand-alone and rider benefits diagnosis rates, of CI specified in the contract including anti-selection.
- limited information in most markets with which to assess the likely rates of diagnosis.
- selective and normal withdrawals
- stand-alone contracts give rise to expense risk and to a lesser extent investment
- A financial risk from lapses will also arise at times when the asset share is negative.
- capital requirements will normally be low, depend on the relationship between pricing and supervisory reserving bases.
20
Q
Product specific risks: Long-term care insurance
A
- claim inception and transition probabilities between multiple states, including anti-selection.
- there will be investment and expenses because the reserves are significant & may build up in advance of a claim starting.
- where the asset share is negative there is a financial risk from selective and normal withdrawals
- There are additional risks where the policy pays directly to the care provider and where the policy indemnifies the cost of care. Costs may be higher than expected.
- marketing & reputational risk due to policyholder expecting benefits to be enough to cover the eventual costs of care.
- capital requirements could be extensive especially where any guarantees are given.
