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Objective 2 Flashcards

1
Q

Describe Risk Management Culture

A

Risk Governance and Organization Structure - clear definition of roles

Incentive Compensation Structure - align with long term goals

Risk Appetite Framework

Risk Reporting and Communication - frequent risk reporting around key risks

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2
Q

Describe successful Risk Appetite Framework

A

Thorough understanding of enterprise risk profile in relation to risk appetite.

Track record of containing risk exposures within the chosen tolerance and limits.

Well-defined framework.

Active involvement from Board and strong buy in from senior management

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3
Q

From ERM score: What is Risk Controls?

How is it scored?

A

Risk controls analyze the processes insurers employ to manage key risk exposures (i.e: Insurance risk, credit risk, etc).

Each material risk is scored: positive, negative or neutral

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4
Q

Describe Emerging Risk Management

A

Emerging risk management analyzes how the insurer addresses risks that are not a current threat, but could be in the future.

Eg: Regulation and medical developments.

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5
Q

Good Risk Model

A

The robustness and consistency of models is scored.

Captures material risk exposures and interrelation

Extensive validation

Rigorous model governance process

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6
Q

Describe Strategic Risk Management

A

Process which insurer facilitate the optimization of risk adjusted returns,

start with view of required risk capital

well defined process of allocation capital among different line of business/products.

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7
Q

Risk appetite

Risk preference

Risk tolerance

Risk limits

A

Risk appetite: Level of aggregate risk company chooses to take in pursuit of objectives

Risk preference: Qualitative statement

Risk tolerance: Quantitative statement to guide insurer in the selection of risk/Aggregate risk taking capacity

Risk limits: Quantitative boundaries to constrain specific risk taking activities.

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8
Q

Total Adjusted Capital =

A

Capital + Surplus

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9
Q

Describe Underwriting Risk: H2

A

Risk of underestimating the cost of insurance

Apply a risk factor against some measure for each health insurance product

Claim Fluctuation risk and Other Underwriting risk

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10
Q

Claim Fluctuation Risk
Grouping?
Formula?
Measure?

A

Five product groupings: Comprehensive Medical, Medicare Supplement, Dental and Vision, Part D, Other

Premium x Incurred Claim/Premium x Risk Factor x Managed care risk adjustment/discount factor

Measure: Underwriting Revenue

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11
Q

Describe Managed care risk adjustment factor?
Measure?
Category?
Not applicable to?

A

Reflects that certain contractual reimbursement leads to greater predictability in claims level and reduce the need of capital

Measure: Paid claims (not incurred)

Category: Not included, Contractual fee arrangements, Bonus payments, Capitation, Non contingent expenses - staff model HMOs.

Not applicable to Part D and Others.

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12
Q

Other Underwriting risk

A

Disability income: earned premium, individual and group not combined.

LTC: Premium, Incurred claim, Reserves

Other: Stop loss

Rate guarantees

Premium Stabilization reserves

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13
Q

Describe Asset Risk - Affliates (H0)

A

Risk that investment in stock of affiliated company may lose value

Require RBC - RBC x % ownership

Not require RBC - book value x 30%

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14
Q

Describe Asset Risk - Other (H1)

A

Risk that investments may default/decrease in value

Book value x risk factor

Cash/Bonds
Common Stock
Property & Equipment

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15
Q

Describe Credit Risk (H3)

A

Risk that amounts owed to health insurer will not be recovered. Receivables x %

Risk that capitated provider won’t fulfill contractual obligations. Annual cap x %

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16
Q

Describe Business Risk (H4)

A

Admin expense risk
ASO business risk
Guaranty fund assessment
Excessive growth risk

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17
Q

Change in RBC formula =

A

RBC ratio new = RBC ratio prior x H2 prior / H2 new

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18
Q

Allocating the benefits of diversification

A

Retain the difference centrally

Give full benefit of diversification to new business line

Start with stand alone capital requirements and then allocate diversification benefit

Consider marginal contribution of each additional business unit: Euler capital allocation principle, Standard deviation of losses, Value at risk/Tail Value at risk

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19
Q

Reinsurance Methods

A

Proportional

  • Coinsurance: Fixed/excess share (final payout is fixed like Disability/LTC benefit per day), Quota share
  • Modified coinsurance
  • Funds withheld coinsurance
  • Risk premium reinsurance

Non proportional:

  • Extended wait
  • Excess reinsurance - SSL and ASL (final payout is not fixed like medical reinsurance)
  • Specified benefit
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20
Q

Challenges for new health insurers

A

Start up capital to meet requirements

Pricing

Networks

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21
Q

ORSA Section 2: Assessment of Risk Exposures

A
  • Quantitative and Qualitative assessment of risk exposures
  • Normal and stressed environments
  • For each material risk categories
  • Impact of stresses on capital
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22
Q

ORSA Section 3: Assessment of Group Risk Capital

A

Aggregate available capital is compared against various risks that can have an adverse impact

Assess risk over varying time horizons, valuation approaches and capital management strategies.

Comparative view against prior year

Capital needed to achieve business objectives, not RBC

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23
Q

ORSA Section 3: Assessment of Prospective Solvency

A

Demonstrate financial resources to execute multi year business plan

Describe management actions it will take to remedy capital concerns.

A feedback loop: project, action, re-project

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24
Q

Capital =

A

Asset - Liabilities

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25
Q

Five Main Areas/Subfactors of ERM

A

Risk Management Culture

Strategic Risk Management

Risk Controls

Emerging Risk Management

Risk Models

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26
Q

Insurer’s ERM Score - Describe Overall Score and List Subfactor Scores

A

Overall Score

  • Very strong: all positive
  • Strong: first 3 positive
  • Adequate with strong risk controls: Strong risk controls, Neutral strategic risk management
  • — no negatives—-
  • Adequate: Neutral risk management culture, neutral risk controls
  • Weak

Subfactor Scores

  • Positive
  • Neutral
  • Negative
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27
Q

Considerations for the Scoring of Each Risk under ERM

A

Risk identification

Risk measurement and monitoring

Risk limits and standards

Risk controls: Procedures to manage risk within the limit

Execution of risk control program

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28
Q

Uses of Risk Models under ERM

A

Measuring the risk exposure

Testing risk correlation and diversification benefit

Evaluating risk mitigation strategies

Quantify capital requirements for a given risk profile

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29
Q

Key Areas of Analysis for Strategic Risk Management Score under ERM

A

Company’s strategic planning
Product pricing and repricing

Strategic asset allocation
Optimization of risk adjusted returns

Capital budgeting
Economic budgeting

Reinsurance strategy

Net retained risk profile

New risk-bearing initiatives

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30
Q

Main Risks for Life Insurers

Main Risks for Health Insurers

A

Life:

  • Mortality
  • Longevity
  • Morbidity
  • Policyholder behavior

Health:
- Morbidity

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31
Q

Two Key Items of Uncertainty of Reserving Risk for P&C

A

Level of reserves that will ultimately be needed to meet all liabilities

Timing of those liabilities

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32
Q

Significant Concerns for Health Insurers

and Key Risks Under ERM

A

Concerns:

  • Changing regulations and legislation
  • Rising medical cost
  • Insufficient data: Less-than-perfect data in the underwriting and pricing processes

Risks:

  • Underwriting
  • Pricing
  • Provider Renewal
  • Claims Management
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33
Q

Key Elements Essential to All Insurers’ Operational Risk Controls Under ERM

A

Procedures in place to systemically:

  • identify operational risks and
  • to monitor,
  • assess,
  • and mitigate those identified risks

Sound business continuity plan (BCP) that has undergone multiple drills

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34
Q

Two Key Principles of ERM

A

Recognizes broad range of risks as either sources of capital or potential for losses

  • ”Capital” risk can be negative (adverse effect) or positive (upside).
  • Manage risks to exploit the upside possibilities

Holistic approach to managing diverse risks: Risks are not isolated in silos

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35
Q

Risk Domains of ERM

A

Financial: Organization’s ability to earn, raise or access capital, as well as costs associated with transfer of risk

Strategic: Ability of organization to grow and expand

Operational: Organization’s core business, including systems and practices

Regulatory: Health care statutory and regulatory compliance, licensure and accreditation

Human: Recruiting, retaining and managing workforce

Technological: Associated with biomedical and information technologies, equipment, devices and telemedicine

36
Q

Issues with Traditional Risk Management

A

Fails to appreciate relationships among risks

Lacks optimization of collective risk evaluation

Lacks common definition of risk and how to gauge risk management efforts

37
Q

Risk Handling Categories under ERM (Ways to Deal with Risk)

A

Avoid

Retain/Accept

Share

Reduce

38
Q

Roles and Responsibilities under ERM

A
  1. Chief Risk Officer (CRO): Responsible for identifying and quantifying risks and managing the process, analyzing risk strategically. Facilitator, liaison, etc.

Board of Directors: Provides oversight, understand key elements and discuss risks regularly

Chief Executive Officer (CEO) /President: Responsible for molding corporate culture and making sure ERM functions
effectively

Chief Financial Officer (CFO): Provides analytical insight to determine risk appetite

Health Care Risk Manager: Front lines of risk management and focused on daily operations

Middle Managers and Others: Understand risks they are accountable for and manage them within approved tolerances

39
Q

COSO ERM Framework

A

Process

Effected by people

Applied in strategic setting

Applied across enterprise

Designed to identify potential events

Manages risks to be within risk tolerance

Provide reasonable assurances

Supports achievement of key objectives

40
Q

What Distinguishes CRO from Risk Manager

A

Risk Manager

  1. 1 Snapshot view
  2. 2 Lacks wider view to see patterns/relationships
  3. 3 Not sufficiently involved with sr. leadership
  4. 4 Decisions based on isolated issues or circumstances

CRO

  1. 1 Decision based on total picture of risks and opportunities
  2. 2 Connects dots among risks in all departments; Empowered to examine workings of all departments
  3. 3 Unlimited access to sr. management
41
Q

Three Major Tasks for CRO (broad list)

A

Coordinating all risk management activities

Introducing integrated framework

Improving risk communication with internal and external partners

42
Q

Key Tasks for CRO (different list than major tasks of CRO)

A
  1. Develop framework for risk management
  2. Identify and monitor emergent risks
  3. Determine risk tolerance
  4. Evaluate insurance coverage
  5. Develop alternative risk strategies
  6. Ensure compliance with regulations
  7. Inform board of significant risk issues
  8. Train and communicate with workforce on policies and structures
  9. Chair ERM committee
  10. Policy assessment
  11. Assure business continuity
  12. Extend risk principles to broader strategy
  13. Develop data strategy to build picture of operational risk
  14. Educate investment committee on risk management strategy
  15. Disclosures (internal and external)
  16. Deliver integrated picture of risk
43
Q

Regulatory Action Levels

A

Company action: 150% to 200% - submit correction action plan

Regulatory action: 100% to 150% - submit corrective action plan and Commissioner may issue an order specifying corrective actions

Authorized control: 70% to 100% - Commissioner may place company under regulatory control

Mandatory control: Under 70% - Commissioner must take regulatory control of the company

44
Q

Reasons why NAIC RBC Model influences states that haven’t adopted the model act

A

All companies filing an Orange blank (medical) must calculate Health RBC for annual statement

Regulators are familiar with the RBC concept and express concerns when TAC/ACL ratio is below 200%

Quasi-regulatory agencies like Blue Cross/Blue Shield have embraced Health RBC ratios and may require these levels from companies associated with them

45
Q

Calculation of Health RBC After Covariance (RBCAC)

A 
RBCAC:
H0 - Asset Risk for Affiliates
H1 - Asset Risk for Other Assets 
H2 - Underwriting Risk
H3 - Credit Risk
H4 - Business Risk

Authorized Control Level = RBCAC/2

46
Q

Components of Underwriting Risk H2

A

Claims Fluctuation Risk = Premium x Claims/Premiums x Risk Factor x Managed Care Discount Factor

Other UW Risk

47
Q

Life RBC Formula

A

Asset Risk for Affiliates
Business Risk
(AB)

Asset Risk - All Other
Interest Rate Risk
(AOI)

Asset Risk for Unaffiliated Common Stock and Affiliated NonInsurance Stock
Market Risk
(AUM)

Insurance Risk

Health Credit Risk

Health Administrative Expense Component Of Business Risk

48
Q

Categories of Risk

Financial Risks:

Non Financial:

A

Financial

  • Market and Economic
  • Interest Rate
  • Liquidity
  • Credit
  • Systemic
  • Foreign Exchange
Demographic Risk
Non-Life Insurance Risk
Environmental Risk
Operational Risk
Residual Risk (including Basis Risk)
49
Q

Four Types of Systemic Risk

A

Financial infrastructure

Liquidity

Common Market Position

Exposure to Common Counter Party

50
Q

Four Types of Mortality/Longevity Risk

A

Level: Risk that underlying mortality of population differs from assumed

Volatility: Risk that mortality experience differ from assumed because of finite number of lives considered (not enough data)

Catastrophic: Risk of large losses due to significant event beyond normal volatility

Trend: Risk that mortality improve over time at a rate different than assumed.

51
Q

Four Types of Non-Life Insurance Risk

A

Underwriting: Risk that average level of claims is different than assumed, insurance accepted when it should not have been.

Volatility:

Catastrophic: Large loss, significant event beyond normal volatility

Trend: Risk of unexpected changes from current level in the freq and severity of claims

52
Q

Various Types of Operational Risk (Basel Definitions)

A

Internal Fraud: involve 1 party internal to the firm
External Fraud

Business Disruption and System Failures: affect physical ability to carry out business in normal place of work
Damage to Physical Assets

Employment Practices and Workplace Safety

Client, Products and Business Practices: Risk of the way firm deals with clients. Product poor design, not suitable to particular client

Execution, Delivery and Process Management

53
Q

Various Types of Operational Risk (non-Basel Definitions)

A
  1. Crime Risk
  2. Technology Risk
  3. Cyber Risk
  4. Regulatory Risk
  5. People Risk (SUBLIST ON FOLLOWING CARD)
  6. Legal Risk
  7. Model Risk
  8. Data Risk
  9. Reputational Risk
  10. Project Risk
  11. Strategic Risk
54
Q

Various Types of Operational Risk

People Risk

A

Indirect Employment Related Risks

Adverse Selection

Bias

Agency

Moral Hazard

55
Q

Risk Identification Tools

A

SWOT analysis
Case studies
Risk-Focused Process Analysis

Risk Check Lists
Risk Prompt Lists

Risk Taxonomy
Risk Trigger Questions

56
Q

Risk Identification Techniques

A

Surveys, Interviews
Brainstorming
Independent group analysis: Silently write down, aggregate and discussion.

Gap analysis
Delphi technique: Surveys where experts are asked to comment on risks anonymously and independently

Working group: To investigate more thoroughly

57
Q

Factors To Be Included in Risk Register

A
  1. Unique Identifier
  2. Category Where the Risk Falls
  3. Date of Assessment of Risk
  4. Clear Description of Risk
  5. Whether Risk Is Quantifiable
  6. Likelihood of Risk
  7. Severity of Risk
  8. Period of Exposure to Risk
  9. Current Status of Risk
  10. Scenarios Where Risk Is Likely to Occur
  11. Details of Other Risks Linked to this Risk
  12. Risk Responses Implemented
  13. Cost of the Responses
  14. Details of Residual Risks
  15. Timetable and Process for Review of Risk
  16. Risk Owner
  17. Entry Author
58
Q

Definition of Economic Capital

A

Additional Assets or Cash Flows to Cover Unexpected Items

Amount Needed to Cover These Unexpected Events to a Specified Measure

Consider the Risk over a Specified Time Horizon

Common definition: additional value of funds needed to cover potential outgoings, falls in asset values and rises in liabilities at some given risk tolerance over a specified time horizon

59
Q

Uses of Internal Capital Model

A

Determine how much capital it should hold to protect against adverse events
Gives better understanding of financial implications of current strategy
Assess impact of changes in investment strategy and capital structure of organization

Pricing of new products

Decide how to allocate capital across business lines
Measure performance (calculating return on capital)

Assess amount of economic capital to be held as products develop over time

Determine optimal mixes of assets and funding sources

Look at how organization copes with extreme events

Carrying out due diligence for corporate transactions (M&A)

Provide information on the financial state of an organization to regulators

60
Q

Factors to Include in Margin

A

Uncertainty implicit in the product

Extent to which the product acts as a diversifier to other businesses

Volume of product sold

Experience that emerges from the product

61
Q

Designing an Economic Capital Model

A

Agree What Model Is For

What Risks Will be Modeled

What Approach Will be Used

  1. 1 Factor Table Approach
  2. 2 Deterministic Approach
  3. 3 Stochastic Approach

Will Model be Run on Enterprise-Wide Basis or Run for Each Individual Business Line and Aggregated

Nature of Output Required

62
Q

Management Actions that Require Decisions or Changes to the Capital Model

A

Changes to Investment Strategy in Response to Performance
Changes to Sources and Amounts of Capital

Decisions on Withdrawal of Particular Products

Premium Rates
Dividends Payable

Levels of Reinsurance

Bonuses Payable on With-Profit Policies

63
Q

Measures of Economic Capital

A

Return on Capital

Economic Income Created (EIC)

Shareholder Value (SV)

Shareholder Value Added (SVA)

64
Q

Two Common Approaches for Coinsurance

A

Quota Share

Fixed/Excess share

65
Q

Two Types of Excess Reinsurance

A

Individual Excess (Specific Stop Loss)

Aggregate Stop Loss

66
Q

Other Purchasers of Medical Reinsurance

A

Self insured employers

Providers providing prepaid benefit plans

HMO organizations providing services

Traditional insurers offering first dollar insurance and excess of loss coverage

67
Q

Bases for Medical Reinsurance Coverage Periods

A

Loss occurring: Claims only covered if occurring during the agreement year

Risk attaching: Reinsurance period for underlying risks coincides with the insurer’s policy year

68
Q

Primary Approaches to Medical Reinsurance

A 
Specific Stop Loss
Aggregate Stop Loss
Combined Specific and Aggregate
Quota Share
Carve out coverage
69
Q

Key Questions Regarding the Source of the Business for Medical Reinsurance

A
  1. Is it coming from HMO?
  2. Does plan include PPO networks?
  3. How do benefits vary inside and outside the networks?
  4. How are reasonable and customary limits applied?
  5. What employer groups are targeted and how are occupational hazards handled?
  6. What amounts are self-insured employer groups required to retain?
70
Q

Additional Uses of Reinsurance (Other Than Traditional Coverages)

A
  1. Captive reinsurers for employee benefits
  2. Stop loss for providers who offer per capita services
  3. Securitizations of health insurance (with a special purpose vehicle)
  4. Capital relief with a portfolio reinsurance agreement
71
Q

Issues to Consider for Insurers and Reinsurers Relating to Compliance

A
  1. Proper disclosure and communication of terms and conditions and appeals process
  2. Prompt and fair claim adjudication
  3. Fair access to discounts and networks for all insureds
  4. Benefits must meet or exceed ACA requirements and state regulation
72
Q

Key Aspects of Why CO-OPs Fail

A

Outsource critical health plan functions

High vs low enrollment

Pricing strategies

Premium stabilization program

Marketing

Benefit design

Adjusting to Market Conditions

73
Q

3 Key Decisions by Federal Policymakers That Increased Chances That CO-OPs Would Fail

A

Allowed states to permit individuals and small employers to remained enrolled in pre-ACA policies (for a transitional period)

Disabled ACA’s risk corridor program in late 2014 by mandating that it be budget neutral

Budget agreements slashed program’s $6 billion allocation by almost 2/3rds (to $2.4 billion)

74
Q

Key Policy Decisions to Reduce Some Hurdles for CO-OPs, made by the Obama administration

A

Flexibility to sign up large employers

Relaxed marketing restrictions to engage the public

Repayment of federal loans subordinate to payment of members’ claims

75
Q

Why LTC Insurance is Susceptible to Mispricing

A

Relatively new product (little experience)

Limited actuarial data

Potential payments far in the future (up to 50 years)

76
Q

Assumptions Relevant to LTC Insurance Pricing

A

Interest Rate

Lapse

Mortality

Claim Incidence
Benefit Utilization
Claim Termination

77
Q

Reasons for Failure/Insolvency of Penn Treaty

A

Policyholders lived longer than expected

Medical expenses higher than expected

Lapse assumptions were lower than estimated

78
Q

Process Supported by ORSA

A

Risk Identification and Prioritization
Risk Measurement
Articulation of Risk Appetite and Tolerances
Implementation of Risk Limits and Controls
Development of Risk Mitigation Strategies

Capital Adequacy Assessment

Governance and Risk Reporting

79
Q

ORSA Practical Considerations

A

Be the responsibility of the company

Incorporate forward-looking assessment of all material risks

Be embedded in the decision-making processes of the business

80
Q

Insurer Requirements Under ORSA

A

Regularly conduct an ORSA to assess adequacy of its risk management framework, and current and estimated projected future solvency position, done at least annually

Internally document the process and results of assessment

Provide a confidential, high-level ORSA Summary Report annually to the lead state commissioner and, upon request, to the domiciliary state regulator

81
Q

Primary Goals of ORSA

A

Foster an effective level of ERM at all insurers to identify, assess, monitor, prioritize and report on material and relevant risks identified by the insurer, using appropriate techniques for the nature, scale and complexity of the risks, in a manner that is adequate to support risk and capital decisions

Provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view

82
Q

Exemptions from Filing ORSA Summary Report

A

Individual insurer’s annual direct written and unaffiliated assumed premium less than $500 million (including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program); AND

Insurer is a member of an insurance group and the insurance group’s annual direct written and unaffiliated premium is less than $1 billion (including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program)

83
Q

Major Areas of ORSA Summary Report

A

Section 1: Description of the Insurer’s Risk Management Framework

Section 2: Assessment of Insurer’s Risk Exposure

Section 3: Assessment of Group’s Risk Capital and Prospective Solvency

84
Q

ORSA Summary Report should identify

A

Accounting basis (GAAP or statutory)

Date or time period that the report represents

Short summary of material changes to the ORSA from prior years (including rationale)

Scope of the ORSA, such that the report identifies which insurers are included in the report

85
Q

Effective ERM Framework Key Principles Under ORSA

A
  1. Risk Culture and Governance
  2. Risk Identification and Prioritization
  3. Risk Appetite, Tolerance and Limits
  4. Risk Management and Controls
  5. Risk Reporting and Communication
86
Q

ORSA Section 1 Items

A

Section 1: Description of the Insurer’s Risk Management Framework

  1. Provide a high-level overview of principles
  2. Describe how insurer identifies and categorizes relevant and material risks and manages them
  3. Describe risk-monitoring processes and methods, provide risk appetite statements and explain risk tolerances and the amount and quality of risk capital
  4. Identify assessment tools used to monitor and respond to changes in risk profile
  5. Describe how insurer incorporates new risk information to monitor and respond to changes in risk profile
87
Q

Approach and Assessment of Group-Wide Capital Adequacy Considerations Under ORSA

A

Elimination of intra-group transactions and double-gearing where same capital is used simultaneously as a buffer against risk in two entities

Level of leverage from holding company debt, if any

Diversification credits and restrictions on the fungibility (ability to be substituted for) of capital within the holding company

Effects of contagion risk, concentration risk and complexity risk

Effects of liquidity risk or calls on the insurer’s cash position

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