Chapter 26 Nature of risks (3)

Question 1

Overview of the broad categories of insurer risks

Give an overview of the broad catergories of risk faced by insurers (8)

(CA1/ARM recap; not in ST1/F101 notes)

Answer 1

• Financial risks
  
  1. Business risk
  2. Liquidity risk
  3. Market risk
  4. Credit risk
• Non-financial risks
  
  1. Operational risk
  2. External risk

Question 2

Various possible sources of health insurer risk:

List the various possible sources of risk to a health insurer

Answer 2

Financial risks

• Business risk
  
  1. Risks in investigations (model, parameter, random flactuation)
  2. Policy data and other data
  3. Morbidity: claim incidence rates, claim inception rates, sickness duration, claim amount
  4. Mortality
  5. Early screening diagnosis
  6. Expenses (including inflation)
  7. Persistency/withdrawals
  8. New business mix
  9. New business volumes
  10. Anti-selection and non-disclosure
  11. Guarantee and options
  12. Competition
  13. Aggregation and concentration of risk
  14. Management of company
  15. Legal, regulatory and tax developments (makes more sense in this catergory than any other other category)
• Market risk
  
  1. Investment performance
     
     • Market fluctuations
     • How assets change vs liabilities
• Credit risk
  
  1. Counterparties
     
     • distribution
     • provision of medical services
     • reinsurance
  2. Others: credit downgrading

Non-financial risks

• Operational risk
  
  1. Fraud
  2. Actions of board members
  3. Actions of distributors
  4. Failure of management systems and control
• External risk
  
  1. Catastrophes

Question 3

Key aims of healthcare insurers: management

What are the key aims of a healthcare insurer’s management (5)?

Answer 3

Key aims of health insurer’s management

• maximise (or optimise within an acceptable level of risk)
  
  • the profits of the insurer, whether these go to shareholders or to mutual policyholders.
  • the return that the insurer achieves on its available capital.
• these aims go hand-in-hand but management will want to be sure that the capital in the insurer is being used to the best advantage,
  
  • particularly where it needs to decide between a number of competing uses of capital.

Question 4

Key aims of healthcare insurers: actuary

What are the key aims of the actuary who works with healthcare insurers? (1)

…what context does the actuary need to operate in when meeting their main aim? (4)

Answer 4

Main aim of the actuary is the help the insurer to meet its aims/goals in the context of

• insurer’s risk profile
• insurer’s available resources
• the public interest need (for the insurer to avoid insolvency)
• supervisory requirements and other applicable legislation

Question 5

Problems confronting actuary in achieving goals: intro

The key problems that confront the actuary in achieving their aims relate to:

(11)

Answer 5

1. policy data
2. product design
3. product marketability
4. pricing
5. return on capital
6. profitability
7. supervisory reserves and solvency capital management
8. investment
9. capital management
10. risk management
11. claims

Question 6

Problems confronting actuary in achieving their goals:

Policy data (2)

Answer 6

Problems surrounding policy data relate to the need for data which is

• accurate
• complete

Question 7

Problems confronting actuary in achieving their goals:

Product design (3)

Answer 7

Problems surrounding product design relate to questions surrounding

• what contracts should the insurer offer, and
• …what benefits and features should be included
• …given the insurer’s risk profile and resources available.

Question 8

Problems confronting actuary in achieving their goals:

Product marketability (2)

Answer 8

Key problem faced by actuary in achieving its goals relates to

• how the company can optimise the balance between price and volumes of business…
• ..taking into account competition.

Question 9

Problems confronting actuary in achieving their goals:

Pricing (3)

Answer 9

In terms of pricing, considerations giving rise to problems for the actuary relate to

• the expected profit, and its variance, from selling new contract at particular premium rates or with particular charges…
• …whether the insurer has the resources to sell the contract on those terms

Question 10

Problems confronting actuary in achieving their goals:

Return on capital or members’ funds (3)

Answer 10

Key issues facing the actuary in achieving its goals relate to

• the return on capital the insurer expect to make by investing its capita…
• …in the development and issue of a new insurance contract.

Question 11

Problems confronting actuary in achieving their goals:

Profitability (1)

The topic of profitability is of great importance in the context of the actuary’s in helping the insurer to achive its goals. What steps can be taken if business turns out to be unexpectedly unprofitable? (6)

Answer 11

In terms of profitability, considerations giving rise to problems for the actuary relate to

• the expected profit, and its variance, from the existing business
• if business turns out to be unprofitable insurer needs to take actions such as:
  
  • altering current benefit levels
  • altering withdrawal payment scales if possible
  • altering the expense, sickness or mortaility charges
  • reducing renewal expenses
  • ensuring contracts currently being sold are not likely to suffer the same fate

Question 12

Problems confronting actuary in achieving their goals:

Supervisory reserves

What problems arise for the actuary in achieving their goals related to supervisory reserves? (2)

Answer 12

Problems arise through the need to decide

• what assumptions to use…
• …so that the reserves and SCR (solvency capital requirement) provide adequate security for policyholders.

Question 13

Problems confronting actuary in achieving their goals:

Invesment (3)

In relation to managing problems related to investment, what two conflicting aims might an actuary/health care insurer face? (2)

Answer 13

Problems affecting the actuary in achieving their goals in relation to investment would be

• how the insurer should invest its assets…
• …so as to maximise expected return…
• …within the resources available to it.

2 conflicting aims faced by an actuary/insurer related to investment

• meeting liabilities (guaranteed benefits) with a high degree of certainty vs.
• …adopting a more adventurous/rewarding investment policy in pursuit of best returns

Question 14

Problems confronting actuary in achieving their goals:

Management of capital or mutual policyholders’ funds

What problems arise for the actuary aiming to help a health insurer meet its goals in terms of management of capital/mutual policyholders’ funds? (6)

Answer 14

Helping the insurer achieve its short, medium and long-term plans given the resources available to it.

This can be done by

• projecting expeted future values of assets and liabilities
• then investigating investment policy, business plans, etc…
• …and whether these represent a coherent and achievable product.

Question 15

Problems confronting actuary in achieving their goals:

Risk management

In what way does risk management affect an actuary’s ability to help a health insurer to achive its goals? (5)

Answer 15

Actuary needs to consider how

• underwriting and reinsurance be used to manage risk….
• ….so that the insurer can
  
  • increase profits,
  • whilst keeping its risk profile
  • within the resources available.

Question 16

Problems confronting actuary in achieving their goals:

Claims

In relation to claims, what questions/points are of particular importance to an actuary aiming to help a health insurer to achieve its objectives? (3)

Answer 16

Keyh questions relating to the helath insurer include:

• are the claims procedures adequate?
• are the claims functions being properly followed?
• are there effective fraud control measures in place?