Chapter 26 - Nature of risks (3)

Question 1

What are the main aims of the management of an insurer

Answer 1

• Maximise ( or optimise within an acceptable level of risk) the profits of the insurer, whether these go to shareholders or to mutual policyholders
• Maximise (or optimise within an acceptable level of risk) the return that the insurer achieves on its available capital

Question 2

The aim of the actuary should be to enable the insurer to meet its aims, in the context of

Answer 2

• its Risk profile
• the Resources available to it
• the Public interest need, as usually expressed in insurance supervisory legislation, for the insurer to avoid insolvency
• the Requirements of other applicable legislation

Question 3

What are the problems that the actuary will encounter when trying to achieve his aims

Answer 3

PPPPP RR CC IS

• Policy data ( is it complete and accurate?)
• Product design - what products should the insurer offer and what benefits and design features should be included in them, given its risk profile and the resources available to it
• Product marketability - How can the company optimise the balance between price and volumes of business, both new and renewing business, taking into account competition
• Pricing - What is the expected profit, and its variance, from selling a new contract at particular premium rates or with particular charges and will the insurer have the resources to sell the contract on those terms
• Profitability - What is the expected profit, and its variance, from existing business
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• Return on capital or members’ funds - What return on capital will the insurer expect to make by investing its capital in the development and issue of a new insurance contract
• Risk management - How can underwriting and reinsurance be used to manage risk so that the insurer can increase profits, while keeping its risk profile within the resources available to it
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• Capital management or funds of the mutual - Will the insurer be able to achieve its short, medium, and long-term plans given the resources available to it
• Claims - Are the claims procedures adequate? are the claim functions being properly followed? are there effective fraud control measures in place
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• Investment - How should the insurer invest its assets to maximise expected return within the resources available to it
• Supervisory reserves - What assumptions should be used so that the reserves and solvency requirements provide adequate security for policyholders

Question 4

What actions can the insurer take if a particular business turns out to be unprofitable

Answer 4

CREW B

• Ensuring that the CONTRACTS currently being sold are not likely to suffer the same fate (ie. they are not too sensitive to whatever has caused the losses on the existing business)
• Reducing actual RENEWAL expenses
• Altering the EXPENSES, sickness or mortality charges if possible
• Altering WITHDRAWAL payment scales if possible
• Altering current BENEFIT levels if possible