Chapter 34 - Further Risk Management

Question 1

Commissions should be controlled by a regular monitoring procedure at the level of: (3)

Answer 1

1. Product line
2. Distribution line
3. Specific sales person or broker concerned

Question 2

What is a sensitive risk?

Answer 2

It is a risk to which the company’s financial results are the most vulnerable

Question 3

In order to keep expenses and commissions covered within the loadings received, the company can: (7)

Answer 3

1. Monitor position regularly
2. Monitor competitors’ expense ratios to ensure expenses are at a competitive level
3. Have monitor procedures in place to pick up and prevent any upward slippage in commission levels
4. Control staffing and salary levels to be consistent with the work required, especially for new business/sales effort
5. Attempt to sell more business without increasing the overhead cost base
6. Improve operational efficiency, eg, through automation
7. Increase premium loadings and/or charging rates provided still competitive

Question 4

To improve persistency, the company might: (4)

Answer 4

1. Change distribution channel(s)
2. Set up alternative remuneration (commission) structure that encourage persistency
3. Improve sales methods so that policies are sold more strictly to meet customer needs
4. Restrict premium payment methods (to direct debit, for example)

Question 5

When monitoring the mix of business from a capital efficiency point of view, the following needs to be monitored: (3)

Answer 5

1. Extent of mismatch between charges/loadings and expenses
2. Premium frequency
3. Valuation strain

Question 6

Option control measures include: (3)

Answer 6

1. Increase charges/loadings that are paid for the option
2. Alter the benefits or terms of the options
3. Remove the option from new business

Question 7

Possible mitigations for existing options include: (4)

Answer 7

1. Appropriate reserving
2. Strict interpretation of terms
3. Using derivatives
4. Buy back from PH

Question 8

Explain the particular influence of new business valuation strain:

Answer 8

Valuation strain arises when a policy is sold because the combination of supervisory reserves and solvency capital requirements tends to place a higher value on the net liabilities than the pricing basis. This results in the initial reserves and required solvency capital exceeding initial asset shares when the policy usbissued, causing the strain