Insurance as a Risk Management Tool

Question 1

What are the 5 important functions of the Insurers?

Answer 1

Ratemaking, underwriting, claims, investments, advanced methods of risk assessment.

Question 2

What is rate making? PREMIUM = RATE * EXPOSURE UNIT

Answer 2

Assessing the price of insurance and calculating what the costs of premiums should be. Rate is price per unit of insurance, exposure unit is the unit of measurement used while figuring out pricing.

Question 3

What is the role of an actuary?

Answer 3

An actuary figures out the costs of rates and premiums based on past trends of loss and industry statistics.

Question 4

What are 3 kinds of ratemaking?

Answer 4

Merit-based (alters up and down based on individual loss experience, class-based (linked with likewise situations), judgement based (each exposure is individually judged).

Question 5

What do underwriters do?

Answer 5

Refers to process of classifying, identifying, and deciding who gets the benefits of the insurance.

Question 6

What’s the asset distribution for Life Investments?

Answer 6

Bonds are 75% of the asset distribution.

Question 7

What’s the asset distribution for life investment Property & Casualty Insurance?

Answer 7

Bonds are 65% of the asset distribution and stocks comprise of 19%

Question 8

What advanced methods are their to assess risk?

Answer 8

Loss forecasting: probability analysis (risk manager can assign probabilities to individual and joint events), regression analysis (characterizes btwn two or more variables), forecasting on based on lost distribution (useful if the history shows accurate trends)

Value of Risk Analysis

Question 9

What is NPV?

Answer 9

Net Present Value–the sum of present values of future cash flows minus the cost of the project

Question 10

What’s IRR?

Answer 10

Internal Rate of Return–the average annual rate of return provided by investing on the project

Question 11

What is VaRA?

Answer 11

Value at Risk Analysis–common tool to assess risk; calculating the worst probable loss likely to occur in a given period of time. * Popular risk assessment tool*

Question 12

What is CVAR?

Answer 12

Conditional Value at Risk the alternative to VAR, calculates the expected loss

Question 13

Why use reinsurance?

Answer 13

Increase underwriting capacity, stabilize profits, provide protection against catastrophic events

Question 14

What are the 2 principal types of insurance?

Answer 14

Facultative (optional and case by case) and Treaty (obligatory) reinsurance

Question 15

What are 2 basic methods of sharing loss?

Answer 15

Pro-rata (proportional) and excess method.

Question 16

What are some alternatives to reinsurance risk?

Answer 16

Securitization of risk, catastrophe bonds (damage based, industry-index based, parametric trigger)

Question 17

What are some advantages / disadvantages to CAT bonds vs Trad. bonds?

Answer 17

ADVANTAGES: CAT bonds are independent from traditional reinsurance, no moral hazards, and easy regulation DISADVANTAGES: not very flexible, high transaction costs, basis risk

Question 18

What is one disadvantage of the VAR concept?

Answer 18

It is blind when it comes to considering high risk with low possibility.