Chapter 45 - Risk Management Tools (2) Flashcards
List all the major types of risk management strategies.
- Alternative Risk Transfer
- Diversification
- Reinsurance
- Underwriting
- Management Control Systems
- Claims Control Systems
- Options and Guarantees
Name ways in which an insurance company can diversify.
- Across lines of business
- Annuities and assurances
- Long term and short term
- Savings and Protection
- Reciprocal Quota Share Reinsurance
- Different type of customers
- Different geographic regions
- Different providers of reinsurance
- Different providers of other services
- Asset classes to invest in
- Assets within an asset class to invest in
- Distribution channels
- Sales people within a distribution channel
What is meant by underwriting?
Underwriting is the assessment of risk to ensure an appropriate premium/fair price is charged for the risk.
It includes deciding not to take on the risk at all, as well as to which risks special terms and conditions may be offered.
Not underwriting properly leads to 2 risks. What are they?
- Mispricing
2. Anti-selection is allowed by your premium structure
What are the benefits of underwriting?
- Identify policies to whom Special terms must be offered. The majority will be accepted at standard terms.
- Helps decide what to do with Sub-standard risks (Higher P, Lower benefit, Decline, Defer, Exclusions, Change design, Reinsure)
- Avoid anti-selection
- Financial reinsurance helps to prevent overinsurance
- Ensure experience do not depart too widely from pricing basis
- Ensures adequate Risk classification (competitive, heterogeneity -> variability, anti-selection)
When is underwriting especially important?
- Large sum assured
- Potential to benefit from anti-selection is large
- Cover is optional, not compulsory
What are the main types of underwriting?
- Financial
- Medical
- Lifestyle
List practical ways in which an insurer can underwrite.
- Proposal form
- Report from the p/h’s doctor
- Medical examination
- Standard tests
- Specialist tests
What will the effect of dishonesty in underwriting have?
Depends on
- Level of dishonesty in group the product was priced on
- Type of product
- Sales method
- Degree of underwriting
Name the aspects of lifestyle underwriting.
Occupation Leisure activities Post code Country - Terrorist risk - War risk - Diet - Prevalent diseases - Climate - Standard of living - Access and quality of medical care - Levels of violent crime
Name some questions that will be asked on the proposal form.
- Age
- Sex
- Height
- Weight
- Smoker-status
- Units of alcohol consumed per week
- Medical history
- Family medical history
- Current medication taken
- Sum assured
- Occupation
- Salary
- Leisure pursuits
Why are claim control measures used?
- Protect the company against fraud and excessive claim
- Mitigate the consequences of a risk event after it happened
How would the size of the claim affect the claim control system used?
- Small = claim form + 1 estimate
- Above a threshold = 2/3 estimates, one of which is from an approved company
- Medium = own employees or agent will assess loss
- Large = loss adjusters will be in charge of whole remedial program
List the management control systems.
- Data recording
- Accounting and auditing systems
- Monitoring the liabilities taken on
- Options and guarantees
How can you manage the risks linked to options and guarantees.
- Immunisation = matching assets and liabilities by term to protect a portfolio against interest rate risks
- Hedging = choosing assets that behave similarly to liabilities
- Buy OTC derivatives from an investment bank
- Option pricing techniques to hedge guarantees and options dynanamically
- Use liabilities linked to external indices
