Insurance Week 1 Flashcards
Concept of insurance
An individual can transfer risk to a company in exchange for a set of payments (premiums )
Premiums can be invested for a period of time, and then paid back out to policy holders in the form of claims
Law of large numbers - If the insurer sells n policies to n individuals, it assumes the total risk of the n individual but through careful underwriting and selection the insurer will end up with an average risk that is relatively smaller to the original risk to the policy holder
For a risk to be insurable it must satisfy the following criteria
It should be economically feasible
The economic value of the insurance should be calculable
The loss must be definite
The loss must be random in nature
The exposures in any rate class must be homogenous
Exposure units should be spatially and temporally independent
Life v non life
Life (non life )
Long term contracts (short)
High duration of payments (short duration)
Risk in life of policy holder (diversity in products=diversity in risks )
Driven by mortality table (statistics )
Balance sheet and asset management (P+L)
Market consistent embedded value (MCEV), Value of new business (VNB). (Premium, reserves, reinsurance )
Technical provisions
TPs determine how much financial resources (assets) the insurance company should set aside to be able to pay obligations to policy holders
TPs signed off by the certified actuary
Principles of calculating TPs:
Projections of cash flows
Prudenci or best estimate of insurance parameters eg mortality and lapse
Find interest rate to discount cash flows
TP= total sum of discounted future cash in and outflows
Reserves
Reserves should be the PV of future :
Payouts on death, surrender, lapse and maturity
\+expenses \+commission \+reinsurance premium outgo - premium -Fees on investment income -reinsurance claim income
How do insurance companies make money
In the premium calculation the insurance company adds a layer of Prudency on parameters such as mortality,lapse, and expense risk
Layer should help compensate the insurance firm of risks unfold
Investment management
Profit from mortality, lapse , expenses , investments
And diversification of risks
Corporate and risk governance
Line no. 1 - business 2- risk/compliance/actuary 3- internal audit 4- external auditor 5- DNB/AFM/ privacy/ competition
Insurance risks
Underwriting Credit risk Market risk Operational risk Liquidity risks Strategic / event risk
Market risk
Interest risk Spread risk Equity and property risk Currency risk Basis risk Reinvestment risk Concentration risk Asset -liability (ALM) risk Off balance sheet risk
Operational or non financial risk
Strategic of business risk
Legal,regulatory,conduct, compliance risk
Tax risk
Financial crime risk
Processing risk
Model risk
Systematic risk and business disruption risk
People risk
Facility risk
Insurers risk management strategies
Avoid -do not invest in assets without expertise in the company Retain Reduce Transfer Exploit
