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Actuarial Risk Management CA1 > Chapter 45: Risk Management tools (2) > Flashcards

Chapter 45: Risk Management tools (2) Flashcards

1
Q

Risks can be managed through diversification within… (5)

A
  • lines of business
  • geographical areas of business
  • providers of reinsurance
  • investments - asset classes
  • investments - assets held within a class
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2
Q

Underwriting

A

the assessment of potential risks

… so that each can be charged an appropriate premium

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3
Q

6 Ways in which underwriting can be used to manage risk.

A
  • PREVENTS ANTI-SELECTION
  • helps RATE risks fairly
  • helps ensure that claim experience doesn’t depart too far from that assumed in pricing
  • financial underwriting prevents over-insurance

SPECIAL TERMS:

  • – identifies risks for which special terms need to be quoted
  • – identifies a suitable approach / level for the special terms
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4
Q

3 Parts of life insurance initial underwriting

A
  • medical underwriting (assessing the applicant’s health)
  • lifestyle underwriting (assessing the impact of lifestyle on the level of risk)
  • financial underwriting (to reduce the risk of overinsurance)
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5
Q

Special terms that can be offered to insurance applicants

A
  • PREMIUM ADDITION
  • BENEFIT REDUCTION
  • an EXCLUSION clause
  • DEFEREMENT period
  • DECLINING the applicant (either on temporary or permanent basis)
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6
Q

Claims control systems

A

Mitigate the consequences of a financial risk that has occurred by guarding against fraudulent or excessive claims.

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7
Q

4 Management control systems

A
  • data recording
  • accounting and auditing
  • monitoring of liabilities taken on
  • options and guarantees
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8
Q

5 Techniques for managing options and guarantees

A
  • liability hedging (immunisation)
  • A/L matching
  • Using OTC derivatives (to avoid expense & uncertainty of “rolling over” short-term exchange traded derivatives)
  • Dynamic hedging (rebalancing the underlying hedging portfolio as mkt conditions change)
  • Restricting option ELIGIBILITY CONDITIONS.
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9
Q

How can low-likelihood, high impact risks be managed?

A
  • Can be diversified in a limited way eg. production of major product line on 2 diff. sites to diversify the risk of total loss by FIRE
  • Can be transferred to an insurer/reinsurer
  • Can be mitigated by management control procedures eg. disaster recovery planning
  • Holding necessary capital wrt the company’s risk tolerance for such risks
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10
Q

How do insurance companies deal with the disadvantages associated with diversifying over business lines (using a wide range of contracts)?

A

RECIPROCAL QUOTA SHARE reinsurance.

Each company can concentrate its marketing, sales and administrative effort on its chosen segment, while still writing a wide spread of risks.

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11
Q

Reciprocal quota share reinsurance

A

One company reinsures part of its business to another in exchange for accepting part of its reinsurer’s business.

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12
Q

2 potential types of risk when setting a premium rate

A

the premium rates

  • are NOT APPROPRIATE to the risks concerned
  • permit SELECTION against the provider
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13
Q

An insurer will assess the longevity and health risks of a prospective policyholder by (4)

A
  • asking questions on the PROPOSAL FORM
  • obtaining reports from a policyholder’s DOCTOR(s)
  • carrying out a MEDICAL EXAMINATION
  • performing SPECIALIST TESTS on the applicant
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14
Q

Lifestyle underwriting

A

Risks associated with the applicant’s:

  • occupation
  • leisure pursuits
  • normal country of residence
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15
Q

Financial underwriting

A

To counter the risk of over-insurance, details of the financial health of the applicant may be obtained.

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16
Q

Management control systems:

- data recording

A
  • Important that the company holds good quality data on all risks insured, w emphasis on the risk factors identified in product design or risk writing stage
  • This ensures adequate provisions are established for the exposure to risks
  • Reduces the operational risks from having poor data.
17
Q

Management control systems:

- accounting and auditing

A

Good accounting and audit procedures enable

  • proper provisions to be established,
  • regular premiums to be collected
  • and the providers of finance to the provider to be reassured as to its financial position.
18
Q

Management control systems:

- Monitoring of liabilities taken on

A

Reasons to monitor liabilities taken on by a company :

  • To protect against CONCENTRATION of risks of specific type to an unacceptable level.
  • Wrt NEW BUSINESS STRAIN, it is important to quantify the amount of new business to ensure that it is within the provider’s risk appetite.
  • Premium rating may involve cross-subsidies from one type or class of business to another, BUSINESS MIX should be monitored
19
Q

Management control systems:

- Options and guarantees

A
  • Care needs to be taken when OFFERING options and guarantees, particularly ones that have limited value when granted but could become valuable if market or other conditions change.
  • Care is required to MONITOR any options and guarantees and in particular to determine whether the options or guarantees are likely to bite.
20
Q

Liability hedging

A

Involves choosing assets in such a way as to perform in the same way as the liabilities.
A specific example of this is immunisation, where assets are matched to liabilities by term in order to hedge against interest rate risk

21
Q

6 tools aiding the management of risk for a financial product provider

A
  • diversification
  • underwriting at the proposal stage - this ensures a fair price is paid for the risk
  • claims control procedures - these mitigate the consequences of a risk event that has occurred eg. claims underwriting
  • management control systems (data recording, accounting & auditing, monitoring of liabilities, options and guarantees)
  • (re)Insurance
  • ART
22
Q

Why will a provider aim to accept a large proportion of the business it accepts at standard rate of premium?

A

Accepting a large proportion of the business at standard rates makes all aspects of the administration easier.

Is may also be easier to present to customers, who are likely to dislike being classed as substandard risks.

23
Q

What characteristics of a class of insurance would make underwriting important for that class?

A

Underwriting is important for those products where the potential risk to the provider is large. This is the case when:

  • the size of the policy is large
  • the gains to be made from anti-selection are large
  • cover is optional rather than compulsory.
24
Q

What are the risks of offering preferential annuity rates to smokers?

A

The risk is that the policyholders deemed to be unhealthy improve in health (ie give up smoking).

There is also a risk of non-smokers declaring themselves as heavy smokers when applying.

It might not be considered ETHICAL.

25
Q

What questions would be asked on a typical life insurance proposal form?

A

questions about:

  • age and sex
  • height and weight
  • smoking and drinking habits
  • current health and details of any current treatment being received
  • personal medical history
  • family medical history
  • occupation and salary
  • sum assured
  • address (country of residence)
  • potentially dangerous leisure pursuits.
26
Q

How big of a risk to the insurer is applicant dishonesty?

A
  • Dishonesty is not a major problem if premiums charged allow for it correctly.
  • This is automatic since premiums are based on mortality experience for past policyholders who may have been dishonest to the SAME DEGREE in answering proposal form questions

So dishonesty is only a problem if:

  • It is increasing, or
  • Insurer’s premiums are based on a different group of lives for which underwriting procedures were stricter
27
Q

What factors, relating to the applicant’s normal country of residence, influence mortality risk?

A
  • standard of living
  • diet and lifestyle
  • climate
  • prevalent diseases
  • access to medical care and the quality of care
  • levels of violent crime
  • terrorism / war risk
28
Q

What is risk financing concerned with?

A
  • Ensuring PRICE charged to accept risk is sufficient for profit contribution & overall continuation of business
  • Determining the AMOUNT of CAPITAL to hold against risks accepted or retained eg. to target a ruin probability over a specified period or run-off period (for insurance)
  • CO-ORDINATED risk management (ERM) for efficient use of capital and hence a reduction in COST of RISK ie all costs to the entity to deal w risks eg expenses, expected cost of claims etc
29
Q

COOL FACT:

A
  • FSP who provide benefits on contingent events cannot do much to reduce business risk frequency
  • GI contribute to Public education campaigns about security of buildings & reducing risk of fire; health insurer offer incentive to stay healthy eg free gym
  • Life insurers & benefit schemes can’t do shit tho, they just wait around

Actuarial Risk Management CA1 (57 decks)

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