Chapter 29 - Other Risk Management Techniques

Question 1

What is underwriting?

Answer 1

It is the pricess of consideration of an insurance risk. This includes assessing whether the risk is acceptable and, if so, setting the appropriate premium, together with terms and conditions of cover

Question 2

Types of medical underwriting (3)

Answer 2

1. Full medical underwriting
2. Medical history disregard
3. Morotorium underwriting

Question 3

Medical evidence can be obtained from the following sources: (4)

Answer 3

1. Quesrions on the proposal form
2. Reports from medical doctors that the applicant has consulted
3. A medical examination carried out on the applicant at the request of the insurer
4. Specialist medical tests on the applicant

Question 4

Offerings to sub standard risks can be: (6)

Answer 4

1. Offered higher premiums or lower benefit
2. Postponed (if period of higher risk is deemed temporary)
3. Declined (additional risk though to be too high
4. Offered a different type of policy
5. Offered to a reinsurer facultatively with zero retention
6. Can have certain specific causes and/or conditions excluded

Question 5

Ways in which medical underwriting can manage risk: (5)

Answer 5

1. Protects IC from anti-selection risk
2. Enables insurers to identify lives with a sub-standard health risk for whom special terms must be quoted
3. For sustandard risks, the medical UW process will identify the moet suitable approach and prm level for the special terms to be offered
4. Adequate risk classification within the UW process will help to ensure that all risks are rated fairly
5. Will help in ensuring that actual morbidity experience does not depart too far from that assumed in the pricing of the contracts being sold

Question 6

Fixed payment methods used by insurers to manage the cost of claims: (6)

Answer 6

1. Indemnity or fee-for-service
2. Modified (negotiated) fee-for-service
3. Per diem (hospitals)
4. Per case
5. Capitation
6. Salary

Question 7

In order to protect it relationship with the client, the insurer must: (6)

Answer 7

1. Monitor the sales message
2. Beware business churning
3. Analyse the quality of sales staff
4. Beware overgenerous commission
5. Monitor premium receipts
6. Invest in sales training

Question 8

Techniques for managing counterparty risk: (5)

Answer 8

1. Through due diligence on the counetparty before selection
2. Diversification across different counterparies
3. Single counterparty exposure limits
4. Restriction in the use of counterparties below a specified credit rating
5. Credit insurance or derivatives (protect insurer against risk of default, insolvency or bankruptcy of counterparty)

Question 9

Pros and cons of morotorium underwriting:

Answer 9

+ the insurer can encourage purchase by offering the prospect of immediate cover subject only to a blanket exclusion on pre-existing conditions
+ can encourage sales amd reduces new business costs

• insured can not be sure or what illnesses or treatments they are on risk (unlesa theybare sufficiently medically aware to understand the connectivity of medical conditions)
• risk of reputational damage die to non-payments of claims due to misunderstanding of the moratorium