Chapter 34-Further Risk Management Flashcards
What are some initial risk management methods we’ve covered so far in this course? (4)
What are the further risk management methods we cover in this chapter? (5)
So far, we’ve covered the following risk management methods
+policy data checks
+choice of with-profits bonus method
+capital management
+asset-liability matching
In addition to the above, we further cover the following risk management methods in this chapter
+expense control
+policy retention activities (managing persistency risk)
+management of new business mix and volumes
+management of options
+systematic risk assessment and management strategies
Expense control:
What is the main aim of expense control? (3)
What are the main pillars an insurer uses to achieve expense control? (4)
Main aim of expense control is that
+at a company level, and in the long term,…
+…the insurer should aim at least to contain expenses and commission
+…within policy loadings built into office premiums and charging rates
Insurer’s can achieve expense control by
+monitoring actual level of expenses incurred
+comparing expenses and expense ratios
+reducing current cost base
+monitoring commission procedures
Expense control:
Discuss the various ways an insurer can control expenses:
reducing current cost base (7)
Reducing current cost base to be within policy ladings
(1) active control of staffing levels to reflect volume of business and amount of work achieved (more business=> more staff, vice versa)
(2) budget constraints/targets within which individual departments must operate
(3) ensure staff not overqualified and overpaid for work they do
(4) salary increases which are not excessive, but consistent with price needed to retain necessary quality of staff
(5) sell greater volume of profitable business, without increasing cost base by as great a proportion (possible due to fixed expenses)
(6) improve effeciency wherever possible
+automation, computerisation => requiring less manpower
+streamline underwriting process
+doing tasks inhouse that were previously outsourced
+cheaper distribution channels eg internet
+sell simpler products=> administration costs lower
(7) increase loadings in premiums to cover more expenses, if competitive position allows
State the main aim of managing persistency risk (2)
Outline the steps it might involve in practice (7)
Main aim of managing persistency risk is to
Minimize volume of lapses and surrenders
In practice, the steps involved include
Distribution channel management
+monitoring persistency rates by distribution channel + by specific salesperson/broker
Design commission to encourage better persistency and/or penalise early lapses and surrenders eg
lower initial comm, higher renewal comm, using commission clawback
Identify systematic reasons for lapses/surrenders; invoke management strategies to avoid trend continuing
eg
Customer relationship management
Encourage good persistency by ensuring product meets PH’s needs
Maintain or improve quality of ongoing administration and contact with PH
by using types of pmt method with higher persistency (eg debit orders vs cash/cheque)
Managing mix and volume of new business:
What is one of the insurer’s key areas of concern regarding management of new business mix and volumes? (2)
What actions might be taken in extreme cases regarding management of new business volumes and mix? (4)
What other important mismatch should be monitored regarding new business sold? (5)
Insurer will want to ensure that it can sustain writing of new business from
+sufficient capital, and
+sufficient administrative resources
In extreme cases, actuaries might recommend that
directors withdraw from sale, for a suitable period, those products that are
the most capital intensive or
for which inadequate administrative resources are available
It is important to monitor the mismatch between
Actual new buss volumes/mix sold vs assumptions used in original pricing
control of new business volumes and mix largely comes down to
+marketing
+product design
+pricing activities
Manage new business mix + volume:
In the context of managing new business, list items of information that need to be monitored by product line and distribution channel
New business valuation strain
Policy charges/loadings
Number of contracts
Amount of premium
Average case size (which can be determined from two points above)
Frequency of premium
Actual expenses incurred
Manage new business mix + volume:
We previously listed ‘monitoring of valuation strain’ as one of the items of information to be considered regarding new business volumes and mix.
What does valuation strain relate to? (2)
How does valuation strain arise? (3)
Give examples of aspects of product design that will significantly influence valuation strain (for both unit linked and conventional business) (4)
Valuation strain relates to the impact of
the supervisory reserves and solvency capital requirement on the company’s capital position.
Valuation strain arises when a policy is sold because
the combination of supervisory reserves and solvency capital requirements tend to place a higher value on the net liabilities than the pricing basis.
this results in the initial reserve and required solvency capital exceeding initial asset shares when the policy is issued, thus causing the strain
Key aspects of product design influencing valuation strain (unit linked + conventional business)
premium frequency
single prem: least, full loadings for init expenses received at start
reg prem: most, only one month’s expense loading received at start
presence of guarantees given
greater level of guarantee => greater valuation strain
Manage new bussiness mix + volume:
We previously listed ‘monitoring of policy charges and loadings’ as one of the items of information to be considered regarding new business volumes and mix.
Give two ways in which the insurer could reduce the mismatch between actual expenses and policy charges/loadings and thereby reduce new business strain
(1) Restrict or encourage certain product lines and/or distribution channels
Directly by structural change in product design eg
from non linked to unit linked
from regular to single premium
from guaranteed to review-able premiums/charges
indirectly by
+remuneration arrangements
+by level of other support given to distribution channel
+by literature used to market to PHs
Reprice and/or redesign contracts
including possibility of an increased minimum premium
Describe four ways for an insurer to manage the options present in its business
(1) Monitor charges/loadings included for options
In product pricing vs actual costs being experience
look separately at uptake rate and profit or loss once option exercised
(2) If option appears unprofitable (even if we’ve allowed for increased marketability on a given product due to option), increase option’s pricing….
(3) ….and/or reduce/remove option’s availability (allowing for the time lag between removal of option and the impact on experience emerging)
(4) Amend, suitably, benefits provided under option
likely only possible (legally and in terms of TCF) to amend the terms of new business written
May also be possible to reduce option’s impact on existing business by strict interpretation of policy literature, subject to interpretation satisfying the need to treat customer fairly
Give an overview of the processes regarding systematic risk assessment and management strategies (3)
Insurer should be aware and assess the overall risk profile to which it’s exposed..
…based on an aggregation of the underlying risks which it faces…
….allowing for correlation effects
Systematic risk assessment and management strategies:
Describe the role of the actuary in managing a life insurer’s risks (5)
(1) should regularly advise directors of nature and size of risks faced
(2) should give particular attention to risks that are most material and/or most sensitive to change
(3) risks should be controlled by analysing and explaining their nature, costing them as far as possible, and agreeing on management strategies
(4) for sensitive risks (to which insurer results are most vulnerable) modelling should be done of a range of long-term scenarios to show the impact of variations in the future experience
(5) management strategies should be designed and implemented to deal with the main risks insurer is willing and able to control
Systematic risk assessment and management strategies:
Define enterprise risk managment (ERM) (7)
ERM is a risk management framework which considers the risks of the enterprise as a whole, rather than considering individual risks in isolation.
This allows the concentration of risk arising from a variety of sources to be appreciated, and for diversifying effects of risks to be allowed for.
ERM recognizes that value can be added to a business through educated risk-taking
