Chapter 29: Other risk management techniques

Question 1

List the reasons for underwriting/ examples of how underwriting used to manage risk

Answer 1

protects insurer from anti-selection

enables insurer to identify substandard lives and may be used to make the decision to reject proposal or accept proposal on special terms

For substandard lives, help determine suitable approach and level for special terms to be offered

helps ensure that all risks are rated fairly through adequate risk classification

help ensure actual mortality/ morbidity experience does not depart too far from pricing assumptions

financial underwriting will help reduce risk of over-insurance (important for high sum assured)

underwriting is also about assessing risk to the insurer in terms of probability and size of claim

Question 2

Describe the different forms of underwriting

Answer 2

full medical underwriting:
aim to assess state of health of applicant
evidence obtained from questions on application form, reports from doctors that applicant has consulted with, medical examination carried out on applicant by doctor, nurse or pharmacist, and special medical tests on applicant

medical history disregarded:
no exclusions for pre-existing conditions
most commonly used for group PMI

financial underwriting:
aim to ensure size of benefit reflects financial circumstances of applicant
insurer may gather information on sum assureds to detect if applicant is trying to commit fraud (eg, aggregating sum assured)
insurer may gather information on applicant’s income to determine if premiums payable are affordable
financial underwriting on individual policies will tend to be used for high sum assureds
consequences of over-insurance: policyholder lapsing policy due to premiums being unaffordable, financial loss from fraudulent activity

moratorium underwriting:
no formal underwriting is carried out at the point of acceptance
past medical history is examined at the time of claim
criticism includes the policyholder not being sure what conditions are insured
there are2defined periods:
applicant can claim for any condition other than those that were pre-existing in a defined period before acceptance
this exclusion is waived after a period of time (moratorium period) if the policyholder receives no further treatment for the pre-existing condition
If the policyholder does receive treatment for the pre-existing condition, the moratorium period starts again

claims underwriting:
is used to determine if claim is subject to exclusion clause or if there is suspicion of non-disclosure

lifestyle/ occupational underwriting:
is used to ensure applicant does not participate in a dangerous hobby (skydiving)/ does not have a hazardous occupation (bomb squad)
underwriting would be done using a questionnaire

Question 3

List ways to manage counterparty risk

Answer 3

due diligence on the counterparty before selection
diversification across different counterparties
limit single counterparty exposure
restriction on the use of a counterparty below a specified credit rating
credit insurance or derivatives
Service level agreements

Question 4

List data checks

Answer 4

reconcile current data with data from previous investigation using data movements (eg policyholder movements)

check data movements against accounting data

spot checks on individual policies

controls on data acceptance for impossible values (for ages, dates) and unusual values (for high sum assured, premiums)

compulsory fields - input captured only if age and gender fields completed

ensure staff capturing data are properly trained

Question 5

Describe business churning and ways to manage it

Answer 5

salespeople encouraging policyholders to lapse their policies and then to take out a similar new policy,
incurring a second round of initial expenses (commission, underwriting, admin)

business churning can be managed through:
the commission clawback
appropriate balance between initial and ongoing commission