IFoA 2015 Exams: Questions applicable to test 4

Question 1

Ideal Criteria for a risk to be insurable

Answer 1

• Moral hazard must be avoided as far as possible
• The probability of the event occurring must be small
• Risks must be independent
• There must be a limit on the overall liability on the insurer
• Similar risks must be able to be pooled to reduce the variance and hence achieve more certainty
• There should be sufficient existing statistical data available to enable the insurer to estimate the extent of the risk and its likelihood of occurrence

(not mentioned)

• Policyholder must have a financial interest in the risk
• Risk must be of a financial and reasonably quantifiable nature
• Claim amount must be commensurate with the size of the loss

Question 2

Why might a motor insurer want to investigate certain claims?

Answer 2

• To ensure that the claim is valid:
• – in terms of the peril covered
• – and the claim amount not being inflated
• Ensure that the claim is in accordance with the policy’s terms and conditions
• Investigate representative samples to help the insurer better understand the risk profile and aid pricing / underwriting
• May help to set new terms and conditions or types of claims (if the risk profile is changing)
• May help in providing advice to the insured on how to avoid (or reduce) claims. I.e. safety & security issues.

Question 3

Describe the main criterion a company would use to determine whether or not to investigate a particular claim

Answer 3

• amount of the claim

Either actual claim amount or the estimated potential claim amount.

Large claims over a threshold would be investigated.

The rationale being that the potential savings on investigating small claims wouldn’t compensate for the expense, time or hassle involved.

The amount could be a fixed cash value or may be relative to average claim amounts.

Allowance would be needed for inflation of claims cost.

The threshold may vary by type of claim or other rating factor.

Question 4

Liquidity risk

Answer 4

risk that the individual or company, although solvent, does not have sufficient financial resources available to enable it to meet its obligations as they fall due.

Question 5

Operational risk

Answer 5

Refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Question 6

What actions might a health insurance company take to reduce the deterioration in its solvency position

Answer 6

• control expenses
• expense investigation
• better / more stringent underwriting
• improve claims underwriting
• monitor claim validity
• remove unnecessary margins (overly prudent) in the pricing basis
• Use reinsurance to limit the volatility of claims or protect it from risk

Question 7

Capital management tools which might be suitable for a mutual life company

Answer 7

Financial reinsurance:
Can be used to provide a capital benefit to a mutual insurance company although there will be some risk transfer involved.

Securitisation

Subordinated debt

Banking products

• • liquidity facilities
• • contingent capital
• • senior unsecured financing

Derivatives
May be used to manage risk relating to long-term interest / inflation rates, and/or manage risk relating to long-term mortality experience.

Internal:

• – funds could be merged
• – assets could be changed
• – the valuation basis could be weakened
• – the distribution of surplus could be deferred

Question 8

Longevity risk

Answer 8

The risk of losses due to mortality being lighter than expected.

Question 9

Why might an individual want to transfer longevity risk?

Answer 9

The risk is important: risk that the individual’s savings are used up while they are alive so unable to maintain desired standard of living.

To the individual this risk is non-diversifiable, so transfer is the best way to manage it.

Question 10

Outline why a new insurance company might need capital

Answer 10

WORKING CAPITAL - a cushion against fluctuating trade volume.

START-UP CAPITAL - to obtain premises, hire staff, purchase equipment and set up a suitable management system to administer the liabilities, collect premiums etc.

CLAIMS MIGHT ARISE before the provider has had enough time to accumulate sufficient funds from premiums to pay the benefits.

STATUTORY REQUIREMENT - to hold a provision in excess of the best estimate value of future outgo.

COMMISSIONS to brokers/intermediaries will use a high proportion of initial premiums.

FINANCIAL STRENGTH is important to (prospective) policyholders, agents, rating agencies and providers of capital.