Chapter 31: Other risk controls

Question 1

Risk management tools include MURDA/MURDAC:

Answer 1

Management control system
Underwriting and claims control
Reinsurance
Diversification
Alternative risk transfer ART

Question 2

Managing options and guarantees (DOLI):

Answer 2

Derivatives purchased OTC
Option pricing methods - stochastic model
Liability hedging
Immunisation

Question 3

Management control systems (DOLA):

Answer 3

Data recording
- Data of insured risk factors held
- Cannot change risk exposure - ensures adequate
provisions have been made for the risks retained
Options and guarantees
- Liability hedging (e.g. matching, immunisation,
derivatives)
- Option pricing methods
- Anti-selection risk
Liability monitoring RACCCro
- Risk aggregation prevented
- Ability to take on new business assessed
- Will the business mix allow cross subsidizing?
- Cost of reinsurance reduced
Accounting and auditing
- Ensures adequate provisions made for risk
- premiums are collected
- Reassurance of the company’s financial position

Question 4

Reasons for underwriting include:

SAFER E

Answer 4

Special risks offered special terms (change premium/benefit, apply exclusions or refuse) DARE
Anti-selection avoided:
- Taking out cover when you know your risk is higher than what the premium allows for
Financial underwriting to avoid overinsurance
Ensure experience matches expectations
Risk classification; all risks rated fairly and identified properly - homogenous groups

Ensure provider charges a fair premium for the risk that it is taking

Question 5

Diversification can be achieved within the following:

RIGIDS OB

Answer 5

Reinsurance providers and products
Investments – asset classes
Geographical areas of business
Investments – assets held within a class
Different classes of business (lines of business)
Sales channels 
Other service providers - third parties 
Business mix can be diversified

Question 6

If applicants do not meet the minimum underwriting standards, they may be offered special terms such as: DARER

Answer 6

Declining the applicant either temporarily or permanent
Addition to the premium
Reduction in the benefit
Exclusion clause - also temporary to prevent anti-selection
Reinsurance could take on the risk

Question 7

Liability monitoring as a management control system

RACCCro / CAR Co.

Answer 7

Risk aggregation prevented
Ability to take on new business assessed
Will the business mix allow cross subsidising?
Concentration of risk checked
Cost of reinsurance reduced
Cross subsidy of risks considered

Question 8

Underwriting definition

Answer 8

The process of consideration of an insurance risk. This includes assessing whether the risk is acceptable and, if so, the appropriate premium, together with terms and conditions of the cover. It may also include assessing the risk in the context of the other risks in the portfolio.