Past papers (ASSA) Flashcards

Question 1

Q

Possible reasons for deterioration in experience

Answer

A

changes in:

mix of business
target market
number of policies
risk profile of the new policies
risk / economic environment
reinsurance arrangements
cover offered
terms and conditions of cover
salvage received / recoveries made
regulation
tax
judicial decisions
client behaviour (claiming patterns / risk purchase / risk management)

increase in:

crime
less qualified / inexperienced staff (extra PI claims)
claims handling expenses
fraudulent claims
catastrophic event affecting many insureds

Question 2

Q

Considerations for the process of premium revisions-

Answer

A

existing internal data could be used
data from other products on similar risks might be used
other external data might be useful (crime statistics)
Data would need to be adjusted
reinsurers may be able to provide useful information
consider competitor’s premium rates
actual experience of new policies might differ from older policies - consider the differences for these
different perils should be analysed and priced for separately to prevent cross-subsidisation
risks should be separated into broadly homogeneous risk groups
include all potentially relevant rating factors in the data
allocate expensses appropriately
rates should be loaded for required profitability
load for commission / other expenses
rates should be adjusted to reflect the cost of reinsurance

Question 3

Q

Premium revisions:

Why should past data be adjusted?

Answer

A

To ensure the experience is appropriate for the period in which the rates will apply.

Question 4

Q

Premium revisions:

What should past data be adjusted for? (8)

Answer

A

Unusually heavy / light experience
large / exceptional claims
trends in claims experience
changes in risk
changes in cover
inflation
court awards / legislation
different target market

Question 5

Q

Practical challenges when building an internal model

Answer

A

Costs of :
– developing the model
– purchasing software
– employing actuaries
– getting systems aligned
– fixing data
– implementation
time to completion may overrun
information / data availability
lack of experience in model development
difficulties in modelling catastrophe and operational risk
changing environment: due to the time taken to develop, the business environment could change

Question 6

Q

Explain the use test (internal model)

Answer

A

The insurer must be able to prove that it uses the model in its day-to-day running of the business as part of its risk management strategy.

It needs to consider all areas of risk faced by the insurance company.

The company needs to demonstrate that it has been using it successfully for at least a year prior to obtaining approval.

Question 7

Q

Give possible reasons for two insurance quotes on the same asset having widely varying premiums

Answer

A

Differing Policy terms & conditions
– excesses
– types of cover
Different assumptions around:
– volatility
– severity
– frequency
Different target markets
Different pricing methodology
Different data & experience
Different shareholder & capital requirements
Different expense loadings
Different allowance for cross subsidies between rating factors
Mistakes in pricing
Pricing arbitrage
Different reinsurance structures used by the company
Differing investment return / interest rate used
Underwriting discounts provided by some insurers
Different interpretation of where the market currently is in terms of the insurance cycle.

Question 8

Q

How would you convince a board that your pricing approach is justified

Answer

A

discuss pricing methodology and assumptions

Explain:

data used and adjustments made to data
the reason for rating factors chosen
all areas of uncertainty in assumptions
expense loadings
the actual statistical analysis & goodness of fit
return on equity and other loadings
the results of any profit testing analyses
whether or not prices are fixed for a set period of time or adjustable as market conditions change

Elaborate on any actuarial guidance used, and where you complied.

Question 9

Q

Define:

“Working Layer”

Answer

A

A layer of excess of loss reinsurance at a level where there is likely to be a regular flow of claims (Relatively higher frequency compared to other Non-proportional covers).

Question 10

Q

Define:

“Stability Clause”

Answer

A

A clause that may be included in a non-proportional reinsurance treaty, providing for the indexation of monetary limits (i.e. the excess point and/or upper limit) in line with a specified index of inflation / fixed rate agreed upfront.

Question 11

Q

Reasons for using a Working Layer

Answer

A

Used to increase capacity
Used where it is desired to significantly limit exposure to adverse deviations in claims experience or where the insurer has low risk appetite for volatility of earnings.

Question 12

Q

Reasons for using a stability clause

Answer

A

Used to ensure that the layers agreed maintain real value through time / maintain equity between the insurer and reinsurer.

Particularly useful in period of high inflation or where the term of cover is quite long.

Question 13

Q

Describe:

Surplus reinsurance cover

Answer

A

Proportional cover
The treaty will specify the maximum cession as a multiple of the cedant’s retention in each case, which will have a maximum value.
An insurer may require several layers of surplus reinsurance to cover all its risks.
The reinsurer will pay commission to the cedant that reflects the cedant’s commission to the insured, possibly plus over rider and/or profit commission.

Question 14

Q

Describe:

Risk Excess of loss cover

Answer

A

Non-proportional reinsurance

Relates to losses arising from a SINGLE EVENT at one time
It will refund the insurer the amount of a claim above a retention - up to a limit
the retention and/or limit may vary according to a particular inflation index
cover will usually be limited to a certain number of claims for the full amount
after a full loss to the layer, it may be necessary to pay to reinstate the cover for further losses
a company will normally need several layers of excess of loss cover

Question 15

Q

State the advantages of surplus
relative to risk excess of loss
for the REINSURER

Answer

A

May produce more income than non-proportional cover. This will depend on the excess point and number of lines of business, but the reinsurer gets proportion of each risk that breaches the retention limit.
Arguably easier to administer as information will be passed through on bordereaux.

Question 16

Q

State the advantages of surplus
relative to risk excess of loss
for the INSURER

Answer

A

May give ATTRACTIVE profit / ceding COMMISSION, usually exceeds the rate of commission paid by the direct writer
Provides UNLIMITED REINSTATEMENTS at no extra cost (apart from loss of profit commission)
Provides significant catastrophe cover, which leads to lower capital requirements. Usually states an event limit.

Question 17

Q

State the advantages of risk risk excess of loss
relative to surplus
for the INSURER

Answer

A

cedes only part of the risk - which reduces cost

- can choose to reinsure only from a certain level in line with the insurer’s risk appetite.

Question 18

Q

State the advantages of risk risk excess of loss
relative to surplus
for the REINSURER

Answer

A

Can set pricing for the layer, determined as a rate on line
Can limit downside risk by limiting reinstatements. Also by increasing retention for the cedant, reinsurer is not exposed to as many claims.

Question 19

Q

Define:

Bordereau

Answer

A

A detailed list of premiums, claims and other important statistics (e.g. largest risks and dates).

Provided by ceding insurers to reinsurers, so that payments due under a reinsurance treaty can be calculated.

Small claims are often provided as a summary, details are only given routinely for large claims, above an agreed threshold.

Question 20

Q

Describe the differences that you might see between the Reinsurance Company and insurance company premium and claim data triangles

Answer

A

Data provided most probably only quarterly/half-yearly so FREQUENCY of observation and reporting DELAYS are the main difference.
The reinsurer will not be able to see premium and claim movements at intervals shorter than the agreement allows for above.
Claims which are reported to the insurer just into the start of a new period will thus have an additional reporting delay of either 3/6 months depending on the term.
There will be a short delay between the close of a reporting period and the reinsurer getting the data to allow for processing time and the handover process.
Small claims are often aggregated so that the reinsurer will not be able to investigate individual claim attributes.
Premium definition may be different (e.g. gross or net of commission).
Some claim amounts will change several times in the period the reinsurer will not see all the claim amounts.
There could exist a 45 / 30 day delay in submission meaning that a reinsurer’s year-end may be missing the latest quarterly data.

Question 21

Q

IFRS 4

Insurance contract definition

Answer

A

In an insurance or reinsurance contract, one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Question 22

Q

Describe:

Risk attaching basis

Answer

A

Risks attaching contracts will cover all policies that incept during the contract period, irrespective of when the losses occur in the future.

Depending on how the original policies are worded, the losses could emerge several years after the policy period itself has expired.

Question 23

Q

Describe:

Losses occurring basis

Answer

A

The contract will respond to any losses that occur within the contract period.

Question 24

Q

Which is usually priced lower:

Losses occurring basis
Risks attaching basis

Answer

A

The price for a losses occurring basis is initially lower then for a Risks attaching basis.

But usually you have to buy missing cover later.

Question 25

Q

Which usually has a shorter reserving tail:

Losses occurring basis
Risks attaching basis

Answer

A

Losses occurring basis (given the most likely sunset clause implemented on claims).

Question 26

Q

8 Considerations when launching a new insurance product

Answer

A

Licence considerations
Marketing the product
Product features
Distribution channels
General administration
Pricing
Claims
Other considerations

Question 27

Q

Considerations when launching a new insurance product:

Licence considerations

Answer

A

If the insurer is not already authorised to sell such business, then it must seek to gain authorisation for those classes included in this type of contract in accordance with regulations.
The process of obtaining the licence may take time and influence the launch of the product.

Question 28

Q

Considerations when launching a new insurance product:

Marketing the product

Answer

A

Decide on a target market
Whether to sell directly / intermediaries
The effects of anti-selection need to be considered
If the insurer has similar products, they can leverage off those products for distribution advantages.
Need to determine the likely penetration of this product in the market. Who are the current competitors and try to think how they will respond to this product.
Need to think ahead on how your product will differentiate you in the market.
Consider any likely changes in the market (i.e. future disruption / tech)

Question 29

Q

Considerations when launching a new insurance product:

Product features

Answer

A

Perils to be covered
Period of cover
Policy Limits
Waiting periods
Terms need to be clearly defined
Policyholder options built in

Question 30

Q

Considerations when launching a new insurance product:

Distribution channels

Answer

A

Direct | Intermediaries | UMA
Will our current systems cater for this new product?
What management information will we require from the system?
What are the regulated commission rates for the product?

Question 31

Q

Considerations when launching a new insurance product:

General administration

Answer

A

Consider customers’ needs and resources.

Consider both POPI and TCF.

Question 32

Q

Considerations when launching a new insurance product:

Pricing

Answer

A

The level of selection inherent in taking up cover needs to be carefully considered by the pricing strategy.
Consider the likely rating factors
Consider premiums quoted by other insurers / protections societies.
Allowance for:
– expenses
– commission
– profit
– contingencies
– investment return

Question 33

Q

Considerations when launching a new insurance product:

Claims

Answer

A

When submitting a claim, proof will be needed
Consider what claims information should be kept helping with our future rating
Consider whether payments are made to the insured / directly to the service provider.

Question 34

Q

Considerations when launching a new insurance product:

Other considerations

Answer

A

Complaints procedures should be clearly set out in the documents
Any cancellation rights of the insurer / insured should be set out
A cooling-off period should be allowed
The insurance contract will be governed by the law of the country
Possibility of purchasing reinsurance
Capital implications under the current / new SAM regime and available capital

Question 35

Q

List the areas likely to be covered in a business plan

Answer

A

Include your role
Purpose of the report
Describe the main aims of the company
Description of current and likely future environment in which the company operated
Financial strategy, including Key Performance Indicators
Key measurable targets, detailed, against which the success of the financial strategy can be measured
Risk profile
SWOT analysis
Business risk analysis
Reinsurance strategy
Distribution strategy
Investment strategy
Income and Expenditure forecasts / projected technical account general business and balance sheet
Intention to diversify into other classes of business
Results of scenario testing
Capital implications
Solvency
ROE
under both Interim Measures and SAM

Question 36

Q

List assumptions needed in producing a business plan

Answer

A

Business levels

new business levels
lapse rates
premium income
acquisition costs
commission rates
expense levels
profit margins

Economic

Inflation (social / economic / legal / medical)
investment returns on assets
investment strategy
proportion of non-investible assets
tax
expenses

Insurance

Claims frequency
Claims average cost
Exposure profile
Claims handling costs
Reserving assumptions for claims outstanding
Reinsurance arrangements

External

Competitive environment
Regulatory Environment
Tax

Question 37

Q

3 Manifestations of social inflation

Answer

A

Society has a greater sense of entitlement to claims pay-out. This is driven by more liberal treatment of claims by workers’ compensation boards, legislated rises in compensation benefit levels and new concepts of tort and negligence.
Increasing use of lawyers. No win, no fee type advertising where the lawyer is compensated based on a percentage of the winnings.
Tendency to focus on pain and suffering. With individuals living longer even in extremely critical conditions, damages more frequently contemplate the catastrophic costs of long-term critical care for an injured plaintiff.

Question 38

Q

Describe the characteristics of liability claims

Answer

A

long-tailed
the basis affects development profile (claims made vs. losses occurring)
case estimates are highly uncertain
uncertainty in repsect of reported losses relates to the existence of liability as well as its quantification
settlement can be a lengthy process involving legal action, particularly for claims of significant magnitude
claims are heavily affected by inflation (wage / general and court award inflation)
legal and other claims handling costs are significant
claims are subject to re-opening
latent claims can be an issue
payments could be of a periodic / lump sum nature

Question 39

Q

Describe the characteristics of accident and health claims

Answer

A

arise from sudden and determinable events
notification delays are usually short
benefits usually paid as fixed benefit
claims are likely to be impacted by reinsurance arrangements
can be accumulation of claims

Question 40

Q

Describe the characteristics of credit guarantee insurance

Answer

A

usually the cover protects the amounts receivable from loss due to credit risks such as protracted default, insolvency and bankruptcy
short-tailed
very close relationship to economic conditions:
– interest rate
– liquidations
– insolvencies
– inflation index
– commodity prices
– exchange rate
– economic growth

Question 41

Q

List the Main components of an Asset Liability Matching (ALM) policy

Answer

A

Market risk related policy framework
Business requirements
Regulatory requirements
Definition and sources of ALM risk
ALM risk philosophy
Risk appetite
ALM Risk Management Framework
Investment mandate and risk limits
ALM operational policies
Risk identification, measurement, monitoring and reporting
Performance Measurement
Proportionality
ALM Governance Framework
Governance of the document

Question 42

Q

Advantages of a Portfolio Transfer

Answer

A

A one-off payment will transfer all product liability
The insurer will still be operational and future products can still be sold
No further need for any policy administration functions
No need to hold any capital to service the portfolio

Question 43

Q

Disadvantages of a Portfolio Transfer

Answer

A

The process is time consuming and admin intensive
Approval is required from the Regulator and the regulator will indicate whether he is satisfied
Policyholder consent needs to be obtained
The insurer will still be required to submit regulatory returns and hold a minimum capital requirement
The cost of the portfolio transfer could be very high
Reputational risk if the new insurer does not pay claims
Assets may need to be realised at unfavourable or tax inefficient times

Question 44

Q

Advantages of reinsurance (to close off business)

Answer

A

The insurer will still be operational and future products can be sold
Reinsurance will allow the insurer to hold a lower level of capital
Lower concentration risk
Should be the simplest and easiest method of transferring the liabilities
The insurer can still benefit from interest on reserves
No policyholder / regulatory consent is required

Question 45

Q

Disadvantages of reinsurance (to close of business)

Answer

A

The insurer will still need to run off the underlying policies
All court cases and claims will still be brought against and managed by the insurer
The insurer is still liable in the event of reinsurer default
the required reinsurance products may not be available or the cost may be prohibitive
The required reinsurance capacity may not be available locally
Depending on the reinsurance, there could be gaps in cover

Question 46

Q

Advantages to sale of license (business closure)

Answer

A

No further liabilities to worry about from the product
No further admin required
No requirement to hold regulatory capital

Question 47

Q

Disadvantages to sale of license (business closure)

Answer

A

Complicated and requires both regulatory and competition commission approval
Finding a buyer may prove difficult

Question 48

Q

Steps to be followed to perform a Section 36 Transfer

Answer

A

Application for Registrar Approval, filling in:

– Who requested the transfer and the effective dates of the transfer
– Who the affected policyholders are
– What the policy conditions are and the details of any difference
– Agree that policyholders have been given enough information in order to make an informed decision
– Agree that policyholder consent have been / will be sought
– Interim arrangements with respect to benefits while transfer is being completed
– List of assets and their fair value to be transferred
– Auditor certificate

The Registrar determines whether the information submitted is sufficient.

The Registrar indicates whether he is satisfied.
Within a period of 60 days after the transfer, the public officers fill in Annexure 6 stating that the transfer was done as per the Registrar’s approval.
The 2 insurers will negotiate the amount of the payment taking the following into account:
– Valuation of ultimate liabilities
– The uncertainty surrounding the valuation
– Administration costs or savings for each party
– The impact of future investment returns
– Any impact on outwards reinsurance
– Level in line with the insurer’s risk appetite

Question 49

Q

Factors to take into account for:

Calculation of the ultimate value of the liabilities

Answer

A

Size and nature of the risks
Risk management in place
Exposure to any accumulations of risk
Number of claims per policy
Average cost of claims
Likelihood of lawsuits with regards to claims
Court award inflation in the territory concerned
Chances of a class action lawsuit
Appropriate discount rate to employ for long-tailed liabilities
Need for an AURR

Question 50

Q

Factors to take into account for determining:

Uncertainty regarding the valuation

Answer

A

Uncertainty in case estimates
Accumulations and large risks
Quality of data available
Stress and scenario testing may help illustrate the uncertainty

Question 51

Q

How does EVT work?

Answer

A

EVT studies probability models for the occurrence of rare events
Commonly use distributions such as Pareto and log-normal for severity of insurance losses and binomial, Poisson and negative binomial for frequencies
EVT is commonly used for pricing excess of loss Reinsurance for either high layers or covered perils on rare events
EVT is used either in reserving for deriving recoveries from XOL protections or pure IBNR losses where the protections are either high layers or for covered perils which are rare events.
There is generally a trade-off between using a lower threshold and more data points and a higher threshold with less data points.
EVT is also used in Capital modelling fro deriving tail distributions for large or Cat losses
Two families of distributions are considered for severity, the GEV and GPD
The GEV is not generally used in practice for insurance. GPD is more useful for modelling the tails of the distribution.
Parameterization of the gPD is done by mean excess function, maximum likelihood estimation, method of moments, probability weighted moments and the Hill estimator.
The mean excess function can be very useful for determining thresholds.
For frequency distributions of this nature the variance tends to be greater than the mean, resulting in Negative Binomial distributions often being more appropriate than Poisson distributions.

Question 52

Q

Suitability of EVT for calculating highly uncertain liabilities

Answer

A

EVT can be considered to model the frequency of large losses especially loss of life and large property claims provided sufficient data are available to parameterise the distribution
EVT can be used to predict the severity of claims in the tail of the distributions provided sufficient data are available to parameterise an appropriate distribution
The ultimate claims including IBNR can be estimated in this manner
The level of uncertainty of the results need to be clearly communicated as the distributions will be parameterised using low volumes of data
The uncertainty together with the risk appetite of the insurer can then be used to select an ultimate value that is sufficiently unlikely to be exceeded
The distributions assume independence and identical distributions which may not be the case in accumulations of thatch risk

Question 53

Q

Give an overview of the SAM implications on the valuation of liabilities

Answer

A

Existing maintenance claims should be reserved for on a best estimate basis allowing for future development of costs and expenses.
Allowance should also be made for claims incurred but not reported.
The contract boundary of the premium liabilities of the policy will be the full term of the policy.
All future premiums and claims will have to be considered when determining the liability.
Costs should include direct handling as well as indirect costs.
Cashflows should be probability-weighted best estimate.
An explicit risk margin based on the cost of capital method should be held.
Explicit allowance for inflation given uncertainty.
Consideration should be given if discounting will be applied at risk-free rate.
Should make allowance for known and expected trends in costs.
Net of reinsurance recoveries.

Question 54

Q

Give an overview of the SAM implications on the solvency capital requirement

Answer

A

Reserve risk capital will be held based on the volatility of the claims reserves
It should be considered if the industry standard factors are indeed appropriate for non-traditional risk.
Premium risk capital will be held based on the volatility of the premium reserves.
An allowance is required for catastrophe risk.
An allowance will be made for market risk depending on the underlying investments of the premiums received before claims are paid as well as capital kept.
If assets are invested in another currency, a currency capital charge will apply.
SAM also requires an allowance for operational risk based on turnover or reserves.
Allowance can be made for the loss-absorbing impact of tax.
Only reinsurance with reinsurers in equivalent jurisdictions are recognised for capital relief.

Question 55

Q

Describe the claims arising from Employer’s liability cover

Answer

A

Bodily injury claims of various sizes, including some very large ones
Large individual claims can arise where bodily injury is such that cost of medical care is very high
Likelihood of some large claims will depend on size of past exposure and trades covered.
SA has specific legislation covering employers liability: The Compensation for Occupational Injuries and Diseases Act (COIDA) applies to: all employers; and casual and full-time workers who, as a result of a workplace accident or work-related disease: are injured, disabled, or killed; or become ill during employment.
Occasionally catastrophes can affect this class, although this is less of a feature than for household business.
Catastrophes will depend upon trades covered.

Question 56

Q

Describe the claims arising from Product Lliability

Answer

A

Property damage and bodily injury claims of various sizes, including some very large ones
Likelihood will depend upon the products covered
Claim size distribution is generally more skew for product liability than for public liability or employer’s liability
Class does lend itself to aggregation of claims and large individual claims
Class action law suits are also a feature of this class

Question 57

Q

Describe the claims arising from Professional Indemnity

Answer

A

Claim sizes generally depend on professions covered within the account
Likelihood of a large claim depends upon policy terms and conditions and generally frequency is more variable than for other classes
A professional negligence claim against a large firm of accountants may result in a very large claim if a company became insolvent as a result of negligent advice
Market-wide issues such as pensions misselling claims on professional indemnity for financial advisors, may be considered as catastrophe claims.

Question 58

Q

Why is it necessary to adjust claims data for reserving in respect of large individual claims?

Answer

A

If left unadjusted in aggregate data, individual large claims might distort the projection of the OCR
This is the case if individual large claims have a different claims development pattern than non-large claims and the mix of non-large and large claims varies from year to year.
Leaving large claims in the aggregate data could result in unstable chain ladder development factors and average development factors for each development year might be distorted by unusually high or low large loss experience in recent year and even when the averages are not distorted, applying an average chain ladder development factor might be inappropriate for those years of account with unusually high or low large loss experience.
Catastrophes can cause a similar problem to large claims.
Although the various individual claims arising from a catastrophe may develop at a similar speed to non-catastrophe claims they may bias the average date of occurrence.
The inflationary effect on a large claim is likely to be different to that on smaller claims.

REINSURANCE CALCULATIONS
It might be necessary to assess current and future recoveries on excess of loss and catastrophe reinsurances. And this may be easier to do by removing the elements of large claims that are recoverable and projecting them separately.

Question 59

Q

4 Ways of defining large claims

Answer

A

Predetermined Threshold (90-95th percentile) based on own claim distribution
Use a suitable excess function
Consider the point just below the XoL threshold
Fixed amount based on class and underwriters definition of large claims

Question 60

Q

6 Different approaches to large claim extraction

Answer

A

Do not extract large claims from the data
Extract whole of each large claim and associated history if its incurred claim amount exceeds a certain threshold
“Once large always large” - even if incurred claims for a loss falls back below the threshold, still treat it as “large”
Apply indexing to the large claim definition (e.g. to account for inflation)
Only extract the part of each large individual claim that is in excess of the threshold

Question 61

Q

What are the advantages and disadvantages of:

Not extracting large claims from data

Answer

A

+ Simple and quick
+ Fairly robust if large claims experience has been fairly stable from year to year
+ Ensures reasonable allowance for unreported large claims

May result in over/underestimation of IBNR if large loss experience has not been stable
Does not recognise trends in large experience

Question 62

Q

What are the advantages and disadvantages of Extracting whole of each large claim and associated history if its incurred claim amount exceeds a certain threshold

Answer

A

+ Non-large claims triangulation is not distorted by part-history of large claims

Will need to restate history of non-large triangulation each year as non-large claims become large
Difficult to reconcile with last year’s data
Difficult to allow for claims currently classified as non-large to become large

Question 63

Q

What are the advantages and disadvantages of
“Once large always large” => even if incurred claims for a loss falls back below the threshold, still treating the claim as “large”

Answer

A

+ Reduces the need to amend history of non-large triangulation each year
+ Recognises the potential for large claims to become non-large and therefore avoids over-estimation of reserves for large losses

May distort any large claim average cost analysis

Question 64

Q

Outline the typical risks that would be covered under a cyber liability product

Answer

A

FIRST PARTY RISKS:
- Corruption of own data
- Virus transmission
- Loss of own data
- Cost of data recovery
- Theft of own data
- Business interruption as a result of cyber risks
- Data breach / privacy crisis management
- Investigation expenses
- Breach remediation expenses
- Legal and court attendance costs
- Other professional fees (auditors, industry expert consultations)
- Extortion, losses and professional fees to deal with extortion
Financial losses from electronic transactions / Fraud

THIRD PARTY RISKS

Defacement of website
Intellectual property rights / copyright / trademark infringement
Media liability - electronic disseminated information / reputation
Regulatory fines
Loss of third party data

Answer 65

A

Owners of websites / email service providers
Business / individuals that are active on social media
Business in possession of third party data
Individuals that often carry portable devices with valuable data
Business / individuals with large electronic assets
Business / individuals with secure networks
Business / individuals in possession of confidential / sensitive information
Companies that would like to mitigate risk of digital fraud

Answer 66

A

Benefits from the syndicate’s expertise and guidance.
The syndicate will design the product, terms and conditions on behalf of the company.
The syndicate will take a view on how to rate this product, after it had completed proper underwriting investigations.
The syndicate’s support can enhance the attractiveness of the product offering.
Retrocession will be placed by the syndicate - less time and cost for the company to source and place reinsurance.
The syndicate might also find cheaper retrocession cover through existing relationships with reinsurers.
The company need not take any risk at first, it can receive a fixed fee for administering the product on behalf of the Syndicate in the local market, with the opportunity to potentially underwrite this product later on.
Alternatively, the company can enter into a non-proportional coinsurance arrangement, or underwrite a minority of the risk on a quota share basis and earn reinsurance commission.
With little or no risk retention, there will be little or no impact on the company’s technical provisions.
Easier to discontinue this line of business with little or no adjustments that need to be made to the company’s internal model or reinsurance structure.
Quicker to put the arrangement in place.
Could get other service from Lloyd’s as well.
Company’s focus can therefore be to:
—- administer the product
—- market the product
—- selling (building relationships with brokers / UMAs)

Answer 67

A

Insurer has no control over claims and underwriting, which might make it more difficult to manage the relationships with brokers, UMAs and clients.
Uncertainty about the future development of the relationship with the syndicate unless agreed in writing (eg if the insurer accepts no risk at first but plans to do so at a later stage)
Lack of physical present in South Africa and shared focus by the syndicate might hamper the development of the product and to gain a better understanding of the risk exposure in South Africa.
More challenging and costly to communicate with the syndicate as opposed to having all stakeholders in-house.
Business support offered might not be relevant to the local market.
The commission received by the insurer might not be sufficient to cover all expenses relating to launch and grow this product line effectively, unless coinsurance takes place.
Syndicate might not be very flexible on certain requirements (eg reporting) that might be onerous on the insurer to implement and execute.
Risk of no reinsurance if business is not renewed (by Lloyd’s) in future

Answer 68

A

Specialised focus to develop, launch, grow and maintain a product
Larger potential income through underwriting profits, although higher risk as well given that competition and expected loss ratios are low
Higher potential returns on capital if the market is attractive
Quicker and less costly communications with stakeholders
More flexibility on designing, marketing and managing the product operationally
More flexibility on how much risk the company wishes to underwrite, retain and reinsure, within reinsurance and capital constraints.

Answer 69

A

Large upfront investment
More costly to build systems and support structures
Will need to appoint additional staff or more underwriters to offer support in various areas
Underwriter might have limited knowledge about other aspects of launching the product, eg marketing and selling
Can take longer to launch the product without syndicate’s upfront support
Higher risk involved - potential underwriting losses.
More onerous and costly capital requirements.
Capital availability and high costs might restrict capacity to underwrite.
Can be a long time before profits are shown on the book.
Reinsurance appetite is uncertain
Reinsurance might be relatively more costly than through a syndicate
More difficult to discontinue the product line

Answer 70

A

The process of determining premium rates for fleets
Different techniques, largely based on the size of the fleet and the amount of claims history available, will be used from those that would be used for the individual risks in a fleet.
Small fleets may be largely rated according to book rates per vehicle with some adjustment for expense savings.
Large fleets may be rated using some for of experience rating with the credibility of a fleet’s past experience increasing with the size of the fleet.

Answer 71

A

Exposure data
Claims data
Information on changes in policy structure and dealings with the company in order to standardise claims data
Information on business practises

Answer 72

A

Amount of kilometres travelled would be ideal, especially if vehicles are equipped with telematics fleet management devices.
Number of vehicle years
Amount of vehicles at a particular time of the policy year
Accumulation of risk
Sum insured

Answer 73

A

Determine the appropriate claims DEFINITION, by incident/reported/settlement
Split between large losses and attritional claims
Reinsurance recoveries / salvages
Determine a one-to-one link between claims incidence and exposure to risk
Do the claim amounts include claims expenses or not
Data on the amounts of each individual reported claim:
– Type of claim
– Outstanding payments / case estimates
– Amount paid, gross and net of reinsurance
– IBNER adjustment based on past experience
Relevant DATE of each individual reported claim:
– Accident date
– Reported date
– Settlement date
An IBNR adjustment to cohorts of claims that are not fully run off
Past claims inflation adjustments appropriate to the underlying claim types

Answer 74

A

Each policy year
Different types of vehicle
By area, if data volumes are sufficient.

Answer 75

A

Average vehicle age of the fleet
Average vehicle turnover of the fleet
Driver experience and endorsements
Driver turnover
Types of goods transported
Past driver convictions, lawsuits
Grade/level of fleet management telematics system, changes in the system.

Answer 76

A

The net insurance cost will be lower since a captive insurer would avoid paying for the expenses and profit margins of another insurance company.
Rover can deduct the premium as a business expense and build up reserves from pre-tax profits.
Captive would benefit Rover directly as it would be incentivised to improve its risk management processes.
Matching of timing and cash flows. A captive is able to reserve from current funds for future claim payments, thereby matching revenue and expenses attributable to each financial year.
The captive can be used to insure not only Rover’s fleet of commercial vehicles, but may also provide cover to and draw premium from other lines of business to increase cost savings and further improve efficiency.
The captive can expand its book of business by offering insurance to related third parties.
Rover might not be able to find a better insurance offering in the current market.
Reserves for unpaid claims and unearned premium, otherwise kept by the insurer, can be held by the captive and invested.
Broader, simpler and tailored insurance cover specific to the insured’s needs, can be developed.
There may be tax advantages in setting up a captive - e.g. by setting a captive up in a different territory where less tax may be payable.
They can get direct access to reinsurers and Lloyd’s
Insurance profits can be paid back to the parent in the form of dividends.

Answer 77

A

Rover must contribute the capital required to support the captive’s business plan, as determined by the insurance regulator in the captive’s chosen domicile.
While these funds remain within Rover, they may not realize the same return as they would have if invested in other operations or opportunities.
Rover might not have internal insurance expertise and may be reliant on consultants (which has a further cost implication).
Future costs and risks of maintain the captive are uncertain (including regulatory costs)
The time and costs involved to manage the captive might not justify the expense saving in either insuring outwards or retaining the risk.
For the same reason, risk managers may be distracted from risk improvement that might generate much more savings
Within a competitive insurance environment, Rover will lose out on the opportunity to exploit insurance cycle movements.
Continuation of cover will be less secure than in the case where the risk is transferred to a large insurer with a likely larger capital base.
There may be a lack of risk transfer, if no reinsurance cover is brought.
Takes focus away from core business.
May not be able to get favourable rates from reinsurer.
Might not be a viable option for such a small scheme.

Answer 78

A

A well publicised statement of the risk management policy by senior management.
Stringent reviews of employment applications, requesting evidence of qualifications, references from previous employment.
Examination of the original driver’s license.
Regular and detailed inspections on the fleet by the fleet manager.
Full written records on vehicle accident and service history needs to be held.
Drivers should be provided with all the necessary equipment to optimise effectiveness and minimise risk.
A strong disciplinary policy is essential.
There needs to be a continual focus on new and improved initiatives to reduce risk, e.g. having an internal risk management committee and regular brainstorming sessions on how to improve the current risk management system.
Compliance with Road Traffic legislation and regulation is essential - compliance should be rewarded and non-compliance penalised.
Health and sight check on drivers.
Install telematics devices.
Ensure safety of vehicles where they are stored, e.g. safe storage facilities, emergency evacuation procedures, fire drills, keep keys in safe, etc.

Answer 79

A

Incorporate realistic targets and timescales to reduce measures such as frequency and average cost per claim and regularly monitor experience against those targets.
Do a routine route assessment on telematics statistics
Monitor the distance travelled
Analyse claims by:
– particular driver
– route (location)
– type of vehicle
– time of day travelled
Closely monitor the mix of claims in relation to different perils and claim reasons and the trends thereof over time.
Request more frequent bordereaux / update risk register
Request immediate notification of claims above a certain level.
Reconcile claim payouts on the system / bank statements with those on policy records / bordereau
Identify systemic risks and claims patterns that might not be necessarily tied to the fleet.
Monitoring should be cyclical. Any issues highlighted by the monitoring process should be addressed and once counter-measures are implemented, the effectiveness of these measures should be closely monitored.
Award the insured for good risk management practices (e.g. premium discounts).

Answer 80

A

• Report on the sufficiency of rates:
o Net and Gross (of reinsurance) written premium and net paid claims
o Loss ratios over time

• Report on the exposure:
o Volumes (for example policy count, motor fleet size)
o Estimated Maximum Loss / large losses
o Aggregation / accumulation of exposure

• Report regularly to underwriters about:
o how they are performing against budget
o where current rating is not sufficient to cover claims and expenses and meet
profitability targets

• Based on the company’s own claims experience, show underwriters the risk areas which they can exploit and areas they should avoid

• Demonstrate how proposed changes are likely to affect key indicators
o What-if / scenario analyses e.g. the effect of different excesses on rates and expected future profits
o Impact analyses – to assess suggested rate changes on the current book and future
new business take-up

• Where data is concerned, give an indication of credibility attached to the company’s own data and how it compares with the credibility attached to external sources, e.g. data provided by reinsurers/ reinsurance brokers

• Demonstrate how the following cost items were allowed for to arrive at the final rates:
o expenses (fixed and overhead)
o allowance for profit / return on capital
o investment income
o catastrophe spreading
o cross-subsidy assessments

• Illustrate the effect of the reinsurance structure on the overall experience, e.g.
o Proportion reinsured and total profit ceded under the current structure
o Results of a dynamic reinsurance model / optimisation to demonstrate the effect of alternative structures and to compare it against the current structure

Report on the performance of the various brokers and broker commissions paid
Report on prevalent broker expectations on the rates offered and reasoning behind it
Compare current rates with available competitor rates and highlight areas of the book that are vulnerable to competitors

Answer 81

A

ODMWA

ONLY COVERS CARDIO-RESPIRATORY DISEASES

(such as pneumoconiosis, tuberculosis, chronic airways obstruction, occupational asthma and progressive systemic sclerosis)

which, “in the opinion of the Certification Committee (of the Medical Bureau for Occupational Diseases), is attributable to the performance of risk work at a controlled mine or works.”

Answer 82

A

COIDA

COVERS ALL EMPLOYEES

and provides for the medical examination, certification and compensation of all employees who are injured on duty or who suffer from an occupational disease excluding that covered by ODMWA.

Answer 83

A

TEMPORARY TOTAL DISABILITY

– 75% of an employee’s loss of earnings for a period of up to six months to a person who is suffering from tuberculosis which does not render him permanently unfit to do his ordinary work.
– a temporary total disability benefit also applies to the 12-month period immediately after the date on which he performed risk work for the last time.

LUMP SUM BENEFITS

for persons suffering from compensatable diseases in accordance with the formula: (A x 12) x B
– “A” represents the persons monthly earnings up to a maximum of R2 000
– “B” represents an annuity factor depending on the extent of the disability and whether a previous payment has been paid or not.
The minimum benefit payable is a lump sum of R7 000.
If a person who has died is found to have been suffering at the time of his death from a compensatable disease, amounts equal to those payable to living persons will be payable to his dependants and such amount shall be divided amongst them in such proportions as the Compensation Commissioner for occupational diseases may determine.
Double compensation (Between ODMWA and COIDA) is prevented by Section 100 of ODMWA.

Answer 84

A

Provides for the compensation for temporary total or partial disablement and subject to a minimum and maximum amount prescribed by the Minister.
Compensation for total temporary disablement shall be equal to 75% of the employee’s monthly earnings and for partial temporary disablement, such portion thereof which the Commissioner considers equitable.
The employer must pay such compensation for the first 3 months, after which the Commissioner (or mutual association) takes over the payments and repays the amounts already paid out by the employer.
Compensation for temporary disablement is usually limited to a maximum of 12 months but may in certain circumstances be extended to 24 months.
Disability benefits provide for loss of earnings and take the form of either a lump sum or monthly pension, depending on the degree of disability.
In the case of death, a lump sum benefit is paid that provides for loss of earnings, pension and reasonable funeral costs.

Answer 85

A

Volume of business (written premium)
Expenses
Commission
Technical Provisions
Cost of Capital
Discount rate (or investment return)
Reinsurance
Profit loading
Claims estimate
Tax
Lapse / churn

Answer 86

A

Need to determine what volume of business is necessary to obtain critical mass.
If premiums not sufficient it will reduce underwriting profit or lead to losses.

Answer 87

A

Level of expenses important: need to recoup initial development and running costs.
Do expense analysis to allocate expenses appropriately to new product, otherwise profitability of different products (existing and this new one) may be skewed.
Projection should ideally distinguish between marginal and fixed costs.
Reduces underwriting profit.

Answer 88

A

Allow for commission paid depending on sales model (i.e. direct vs. using brokers)
Commission is regulated, make sure that maximum amount is not exceeded.
Reduces underwriting profit.

Answer 89

A

Allow for technical provisions according to regulations for this product line.
Leads to reduction in underwriting profit in first year. Subsequent years will depend on the movement in these provisions - increase in provisions will lead to a decrease in underwriting profit and vice versa.

Answer 90

A

Allow for the cost of capital needed to underwrite this product.
Reduce underwriting profit.

Answer 91

A

Allow for discounting cash flows in future. Leads to lower present values. The underwriting result will only be neutral if the actual return achieved is equal to the discount rate used.

Answer 92

A

Allow for reinsurance premium, commission, effect on technical provisions and capital.
Effect of reinsurance is not clear: can be “effective” (i.e. increases underwriting profit on a net basis) or not, depending on premium payable and programme as a whole and may or may not be effective on either an expected or actual outcome basis.

Answer 93

A

Additional / explicit profit loading will increase underwriting result.

Answer 94

A

Estimate of claims paid (i.e. loss ratio) - will reduce underwriting profit.

Answer 95

A

Allow for estimate of tax based on current legislation. Will reduce insurance profit (if profitable business) rather than underwriting profit.

Tax losses can be accumulated to be offset against future tax liabilities.

Answer 96

A

If the business is profitable, lapses will decrease the underwriting result.

The effect on expenses that can’t be recouped will also reduce the underwriting result.

Answer 97

A

A CLAIMS MADE BASIS, leads to very specific impacts on the reserves - there will be no AURR and the IBNR is short-tailed (even though the claims run-off might still be long-tailed)

OCR will be based on case estimates
Case estimates will be determined by claims assessors. This is a new line - accuracy of OCR will depend on the expertise and experience of claims assessors.
OCR need to allow for expenses including possible litigation cost (unknown to the insurer)
Written on a claims made basis, therefore cover is only applicable to claims reported during the underwriting period.
IBNR will be short-tailed (There might be a short reporting delay at the end of the period).
There may be a more significant IBNER that needs to be taken into account, to provide for underestimated outstanding claims reserves.
But you will not have an accurate history on what the likely size of the OCR underestimation is.
The UPP can be calculated on a similar basis (e.g. 365th method if the risk is evenly spread throughout the policy year and if an annual premium is paid) to other policies.
For policies written on a claims made basis, an unexpired risk provision will (similarly to IBNR) not be large, as claims need to be reported in the period to be valid.
In summary - at the end of the first year, the insurer is unlikely to have enough information to determine the technical provisions accurately.
Could use the statutory requirements as an indication of the “average” technical provision of the market
Statistical techniques will not be appropriate without enough credible data
But we may need an additional margin for prudence/uncertainty
The statutory requirement may not be the preferred / applicable method for financial reporting
Compare own results with industry history and statistics to determine whether results are appropriate

Answer 98

A

Claims made basis

Answer 99

A

reduced costs
seek coverage not available in the traditional reinsurance market
can access financial markets as an alternative source of capital
restructure and manage aggregate risk
alternative to catastrophe provisions
reduce the cost of capital under regulatory requirements
optimise performance under accounting, regulatory and taxation requirements
stabilisation of underwriting result
the company wants to diversity from the current reinsurance used / get an additional source of capital / expand the spectrum of cover

Answer 100

A

This is a traditional quota share arrangement, but written for the primary purpose of a financial arrangement involving the commission payment.

Financing is achieved, e.g. by overcompensating, (i.e. paying more than a normal reinsurance commission), in the initial period and under compensating, (i.e. paying less than a normal reinsurance commission), over a period thereafter.

Answer 101

A

Insurer pays annual or single premiums to the reinsurer for coverage of specified claims.
These premiums accumulate with interest (contractually agreed) in an experience account.
The balance of the experience account is settled at the end of a multi-year period.
Definition of a claim such that it cannot be much greater than the sum of the premiums.

Answer 102

A

Useful where insurer is exposed to potentially large risk that may occur from time to time - spread the effect of a big loss over several years.
The reinsurer is taking limited risk only and can therefore offer this at low charges.
Very limited underwriting risk (limited risk transfer to the reinsurer)
Helps to reduce the volatility of the insurer’s reported results.
Less volatility should reduce the requirement for capital allocation and therefore improve return on the capital employed.
Less volatility reduce buffer capital thereby freeing up this capital for other uses.
But then also need to allow for the credit risk of the reinsurer.

Answer 103

A

The SAM structure consists of 3 major pillars:

Pillar 1:

Stipulates the quantitative requirements that insurers must satisfy to demonstrate that they have adequate financial resources.
Valuation of assets and liabilities on an ECONOMIC TOTAL BALANCE SHEET approach.
Setting of CAPITAL REQUIREMENTS using either the standard formula or internal model approach.

Pillar 2:

Qualitative requirements
Standards and guidance on corporate governance, internal controls (or control functions), risk management and supervisory processes.

Pillar 3:
- Reporting and Disclosure

Answer 104

A

Credit ratings from credit ratings agencies
Reinsurers
Media reports
Investment schemes / fund managers
Credit ratings as determined internally by insurer
Merchant Banks / Investment analysts’ reports
Credit bureaus

Answer 105

A

List of assets with credit risks:
– Banks - deposits, NCDs
– Government bonds
– Other bonds and debentures
– Outstanding reinsurance balances
– Debtors
– Reinsurance asset
Outstanding duration of each item
Market value of each item / Exposure
International local currency credit ratings
Internal ratings of items (where available)
Methodology used to determine internal ratings
Collateral held from reinsurers
Countries the insurer is operating in
Table to compare credit ratings of different credit rating agencies
Loss given default assumptions

Answer 106

A

Catastrophe models available from vendors in the market
South African Industry data on natural catastrophes that have already happened / data from SAIA
Information on probability and severity from industry specialists on specific risks (e.g. seismologists)
Information from reinsurers
Company specific scenarios of possible events relating to its own risk profile

Answer 107

A

List of risks/policies on the insurer’s book that are exposed to natural catastrophe claims.
Internal data: List of catastrophe claims as far back as possible
Sizes of claims / Severity / EML / Exposure
Probability function / Probability of occurrence / Expected frequency
Reinsurance recovered
Exclusions / Deductibles
Number of reinstatements
Settlement delays

Answer 108

A

The Head of the actuarial function is responsible for expressing an opinion to the board of directors on the reliability and adequacy of the calculations of the insurer’s technical provisions on:

the appropriateness of the methodologies and underlying models used and assumptions made
the sufficiency and quality of the data used in actuarial calculations
best estimates and associated assumptions against experience when evaluating technical provisions
the accuracy of the calculations
the effect of risk mitigation instruments
the appropriateness of approximations or judgements used in the calculations due to insufficient data of appropriate quality.

Answer 109

A

The accuracy, appropriateness and completeness of the data used in the calculations should be ascertained:

Data should be split into homogeneous classes of business.
The split should achieve a balance between homogeneity and statistical reliability.
For smaller classes of business, the number of claims may be too few to apply traditional actuarial reserving techniques. In this case, simplifications or approximations should be used.
For simplicity, the same classes of business as the SAM classes of business should be used.
Large claims should be extracted from the claims triangles and dealt with separately.
Reinsurance: Calculate both gross and net of reinsurance. Net of re triangles may not correctly reflect the current re programme if it has changed over time.

Reinsurance IBNR:
- Proper calculations will need to be performed to determine a reinsurance IBNR. This will need to reflect previous reinsurance programmes that were in place.

Tail factor:
- The inclusion of a tail factor will be important if claims aren’t fully run off in the triangles.

Methodology selection:

Alternative methodologies such as incurred chain ladder and Bornhuetter-ferguson methods could be applied.
The final estimates can be combinations of different methodologies.
The ACPC method can be considered for large claims.

Margin:
- Best practice tends towards holding a best estimate plus a risk margin - e.g. holding the IBNR at the 75th percentile.

Discounting:
- If the liabilities are sufficiently long-tailed (DMT > 4 years) the company should consider introducing discounted liabilities at an adequate discount rate.

Answer 110

A

IFRS BASIS:

Various prudency levels exist between insurance companies, eg some companies might keep reserves at a 75th percentile whereas others might keep them at a best estimate level.
The basis is not a market valuation of liabilities.
The margins are not explicit and can be calculated using different approaches.
No release of profit on day 1.
OCR, IBNR, ULAE, UPP, DAC usually explicitly stated on financial statements.

SAM BASIS:

Generally speaking, the SAM reserving basis can be considered a market valuation of the insurer’s liabilities since the provisions should be based on a fair value.
Consists of calculating a best estimate and a risk margin.
Best estimate makes explicit allowance for future cash flows.
Any margins within current provisions are immediately released to own funds, e.g.:
– inherent profit margins in UPP
– inherent case margins within OCR
– Inherent prudent margins within assumptions for IBNR
Discounting is introduced releasing the future investment return on provisions immediately / Profit is allowed to be earned on day one.
The risk margin calcualtion methodology is SPECIFIED with no room for overlaying judgement in determining the explicit risk margin.
Risk margin is calculated using a cost of capital approach.
Explicit ULAE is required.
No IBNR, OCR and UPP, but instead split between premium and claims provisions.

Answer 111

A

The gross premium income received by an insurer in relation to business that is covered by a non-proportional reinsurance treaty.

The reinsurance premium is calculated as a percentage of OGPI.

Answer 112

A

A layer of excess of loss reinsurance at a level where there is likely to be a regular flow of claims (Relatively higher compared to other Non-Proportional covers).

Answer 113

A

Own view of capital - the regulatory formula for capital was designed for an industry and may therefore not reflect all the unique aspects of the company’s business.
An own view of capital can therefore provide the company with much better insights into the company’s risks.
Given that this company is quite unique in nature, it will be important for it to have its own view of capital.
Better view on risk management - the company’s own model should be more responsive to their risk management efforts. It will give them better information on how to manage the risk within the organisation.
The governance regulations under SAM requires that the company should justify whether the SCR is relevant to their organisation. This can be done through the implementation of an ECM.
Potential consideration for internal model approval - this will be useful if the reduction in capital outweigh the cost of implementation and the cost of establishing an actuarial team that can maintain the model.
An economic capital model, even if not approved by the regulator, will require internal expertise or consultants - need to weigh up the costs compared to the benefit.
Cost of capital modelling software will also need to be a consideration.

Answer 114

A

The company will need to define which of their risks are quantifiable and which of those risks will be modelled using an ECM.

— Market risk and credit risk

— For more complex investment strategies, they will need to have a more complex approach that might require an Economic Scenario Generator.

Non-life underwriting risk
- Claims can be modelled as follows:
– attritional claims modelled using loss ratio distributions
– large claims modelled using a frequency-severity approach
– Catastrophe claims can be modelled using external CAT model providers
- The company will also need to model RESERVE RISK.
Operational risk

The company will need to decide on a risk measure (eg VaR or TailVaR)

Answer 115

A

Data collected will be split between policy and claims data at a risk item level.

POLICY DATA:

a risk item number
measure of exposure (either in vehicle years or kilometers for the risk item)
relevant rating factors (age, gender, make, model, power to mass)
split by exposure years to allow for inflationary adjustments

CLAIMS DATA:

risk item number
loss date to link to the relevant policy exposure period
distinct description of the peril
best estimate of the ultimate claim amount
consider removing of / capping of large claims

Answer 116

A

Accident:
– potential splits between Own Damage, Third Party and write-off.
Theft including hi-jack
Glass
Other including fire and hail

Answer 117

A

Gamma error structure for severity models
Poisson error structure for the frequency models
Models can then be either combined at a peril or overall level

Answer 118

A

RISK FACTOR
A factor that is expected, possibly with the support of statistical evidence, to have an influence on the intensity of risk in an insurance cover. Not necessarily statistically measurable.

RATING FACTOR
A factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the intensity of the risk.
It must therefore, be a risk factor, or a proxy for a risk factor or risk factors.

Answer 119

A

Data for Binder Holders will be held on the Broker system. The level of data held on the insurer system needs to be checked.
Data for Non-Mandated Brokers will be held on the broker and insurer systems. The quality of the data held on the insurer system needs to be checked.
If data is not available on the insurer systems appropriate data extracts need to be requested from brokers.

Data needs to be verified as follows:

Check that premiums and claims tie up to the totals reflected by brokers in the income statement / bordereaux.
Check that loss ratios make sense to the staff looking after the broker portfolios.
Check vs data from previous pricing exercise.
Check that the number of policies and average premium per policy are sensible and agree with broker staff expectations.
Check that there is a policy / risk item number that can link exposure and claims data.
Check how well rating factors are populated.
May need to use external data to clean up if data is not well populated - MM codes or ITC
Prepare exposure data and clean up rating factors are populated.
Prepare claims data, consider capping for large losses and ensure that there i a link to the exposure data.
Perform one way analyses by rating factor to check that results are sensible.

Answer 120

A

the amount and type of risk that an organisation is willing to take in order to meet their strategic objectives

Answer 121

A

The degree / amount of risk that an organisation is willing to tolerate in order to meet their objectives.

Generally refers to the amount of variation the entity is willing to accept around strategic objectives.

Answer 122

A

Increase the amount of own funds the company has. This could be via a shareholder loan, share issues, group capital injection etc.
Increase the amount of reinsurance ceded / purchased.
Adjust the business plans and strategy to underwrite less risk in the future.
Reinvest assets into less risky perceived classes as per the standard formula (i.e. asset optimization as per Standard formula).

Answer 123

A

+ Will directly increase the own funds and hence the capital coverage ratio

+ Could be relatively straightforward depending on the company’s capital and group structure.

Will diminish the return on capital and more return will be required to maintain the Return On Equity hurdle.
Could be inefficient to raise more capital. (Loans may be available at high interest rates, and share price might not be favourable).
May be difficult to raise in stressed economic times.

Answer 124

A

+ Relatively straightforward to arrange.

+ Could be done with good profit sharing and commission structures in place.

Will also cede away some of the profit.
Will need to be ceded to reinsurers with good credit quality otherwise counterparty default risk will increase the SCR and the overall benefit will not be as good as anticipated.
Might not be available or only at a high price.
This will diminish the Return on Equity achieved as reinsurers generally price in a profit margin.

Answer 125

A

+ Will reduce the underwriting module contribution and lead to a lower SCR.

+ Could be beneficial in uncertain economic times (i.e. sticking with stricter underwriting guidelines to renew all business)

Will cause pressure on fixed expenses percentage contribution as there will be less premium to spread costs over.
Might not be in line with shareholder expectations. Will want to achieve profitable year-on-year growth.

Answer 126

A

Rebalancing the asset portfolio as to decrease the shocks applied in the standard formula.

This could be in the form of:

- having less exposure to equities
- ensuring enough spread between counterparties
- changing the structure of strategic participations (i.e. creating a central administration company thereby reducing the participation shocks).
- invest in high quality equities and bonds (Consider only highly credit rated bonds and equities to invest in).

Answer 127

A

Could lead to lower overall returns achieved, due to less perceived riskiness.
Might need to adjust investment mandates with appointed investors (Could be complicated)
Might not adequately match the nature, uncertainty, currency and term of the liaiblities.
Might need board approval for changes in policy etc. Could prove admin intensive.

Answer 128

A

What a UMA is:

Manages underwriting, administration, premium collection and claims of 1 / more classes of business that it is a specialist in.
Typically underwrites classes of business not underwritten on an intermediated or direct basis by the insurer on whose licence it is underwriting.
Will not underwrite the same class of business with multiple insurers.
May underwrite different classes of business with different insurers.
Considered experts in the classes they choose to underwrite.

How a UMA functions:

A UMA is a separately registered company
A UMA does the underwriting for the policy but the risk is written on the licence of the insurer with shom they are contracted as a UMA.
A UMA cannot deal directly with the public, but only via brokers
A UMA depending on mandate performs the folowing functions:
– Pricing
– Underwriting
– Premium Collection
– Claims Settlement
– Reporting to the insurer

Answer 129

A

Who provides the Capital:

This can be provided by the shareholders of the UMA who may be a combination of external parties as well as shareholding by the insurer.
There may be a loan arrangement between the insurer and other shareholder of the UMA.
The owners of the UMA may choose to use their own capital or obtain capital from external sources.

Insurance Capital:

The Insurance Company needs to provide the underlying Insurance Capital.
The UMA agreement may include a profit participation clause that shares a portion of the insurance profits with the UMA. This may defer profit share with the UMA after a few years of underwriting losses.
All the liability for ensuring that claims are paid remains with the insurer.

How are the owners of a UMA remunerated:

The owners are remunerated by a percentage of premium written, a percentage of underwriting profit or a combination of the 2.
The owners of the capital will be entitled to receive the investment income.

Answer 130

A

High level of reinsurance
If the insurer loans capital to the shareholder in the UMA to launch the business, failure to meet growth targets and hence income can lead to a significant risk of the loan being impaired.
One of the main risks to your Balance Sheet would be writing too much business and business that is not profitable.
Increase the percentage of remuneration based on underwriting profit.
Decrease the percentage of remuneration based on Premium.
Encourage the owners of the UMA to stand surety for a percentage of underwriting losses.
Ensure that pricing of products is adequate. Consider a cash-back reward structure for not claiming.
Initial input into setup of the UMA to ensure that amongst other, the following is propertly setup:
– Policy Administration systems
– Claims systems
– Policy Wordings
– reporting
Allowing the UMA to work on your Policy and Claims systems saves costs and promotes the longevity of the relationship.

Answer 131

A

Include UMA in your management discussions where the strategy of the company is clearly understood.
Include the UMA in the budget cycle.
Set out clearly defined objectives for the UMA.
Encourage sales of product and profitable growth.
Share performance of the UMA with regards to their profitability and ROE.
Assist in pricing and performance reviews.
Align staff performance bonuses to the objectives of the insurer.

Answer 132

A

They need to register as a Financial Services Provider (FSP)
A UMA cannot trade directly with the public.
They will need to approach a broker to be the intermediary with their members.
They cannot own shares in the brokerage.
Their sales staff and advice-giving staff will need to be FAIS accredited.
Consider any legislative changes that could affect the selling practices of the UMA.

Answer 133

A

Aggregate non-proportional excess of loss reinsurance that provides protection based on the total claims, from all perils, arising in a defined class / specified portfolio during a defined period.

It indemnifies the ceding company against the amount by which its losses incurred exceed either:
– a predetermined monetary amount, or
– a percentage of the company’s subject premiums (loss ratio) for a specific period.
The Excess Point and the Upper Limit are often expressed as a percentage of the cedant’s premium income rather than in monetary terms, e.g. cover might be for a claims ratio in excess of 110% up to a limit of 140%.
Where this form of reinsurance exists in practice, it is common for the cedant to be required to retain a proportion of the risk in the reinsured layer, to reduce any moral hazard.
Stop loss is often used to smooth profit results.
There is a maximum amount / upper limit on the cover provided by the Reinsurer. Losses beyond this limit revert back to the insurer.

Answer 134

A

Get historical information on:
— gross claim incurred (i.e. claims paid and reserve movements)
— gross earned premium
to determine historical gross loss ratios.
Adjust historical information for inflation/trends
The information is needed in total, but can be more granular for further analyses.
Make sure that the historical claims incurred and earned premiums are obtained in a way that is consistent with the terms of the reinsurance treaty
Fit a statistical distribution to the observed loss ratios / Determine aggregate claims cost distribution
Do a stochastic projection to project possible future outcomes
The premium can be estimated as follows:
– For each simulation where the projected loss ratio is larger than the treaty attachment point loss ratio
– get the difference between the projected loss ratio and the treaty attachment point loss ratio
– multiply this by the expected gross earned premium of the following year
– multiply by the quota share retention percentage
– allow for upper limit where stop loss cover ceases
– allow for loss sharing between lower and upper limits
– the premium can be estimated by the average of the above result for the simulations where the projected loss ratio is larger than the treaty attachment point loss ratio.
Compare the estimated premium with the premium with the premium from the reinsurer / Are expected recoveries larger than the premium payable?
– Would expect this “premium” to be lower than that determined by the reinsurer
– Reinsurer needs to make allowance for uncertainty - replace the average in the calculation above needs higher percentiles of the distribution to estimate what level of uncertainty the reinsurer is targeting
– The reinsurer must allow for its own costs and profit
– The reinsurer might not have had detailed information from the insurer in determining the price and may have used other industry information it has access to.
Perhaps approach a reinsurance broker to try and find if similar contracts exist and whether the terms and premium is commensurate with what is available elsewhere.
Since stop loss has no reinstatement premiums applicable, there is no allowance for reinstatement premiums.

Answer 135

A

If the claims are thought to be completely once-off (or catastrophe claims), and not likely to be repeated in the future, exclude them altogether from the data and account for them elsewhere.
If the claims are likely to occur occasionally, include only part of the cost of such claims, corresponding to the probability of their recurrence and the length of the periods being analysed and projected.
Personal short tail classes may include larger risks and the potential for individual large claims. However, it would not be expected that a single large claim would influence the results so much as large volumes of claims.
Make sure that the data used treat excesses / deductibles consistently over the period of consideration.
Consider the definition of large claim (e.g. where policies have multiple perils)
Having a limited number of large claims might mean there is little data to base a separate allowance for large claims, but not excluding them can mean that an “all claims” analysis shows unstable experience due to distortion from those few large claims.
Claims at the start of development have higher levels of uncertainty and may still develop into large claims.
Large claims are often subject to limited data and can occur in the tail of development where their relative importance becomes greater.
Judgement is needed to select the “cut-off” claim size representing the border between large and attritional claims.
The point at shich a claim is considered large might balance a “natural” cut off that might be observed in the data and a point that would allow meaningful analysis.
Threshold could be based on a percentile (e.g. exclude the largest 5% of claims)
Monitoring claims close to but below the adopted threshold can give the actuary a sense of the “pipeline” of potential large claims that are yet to emerge.
Development observed across a group of large claims can be a mixture of movements of reported incurred cost across individual large claims, and changes in the group of claims considered large.
In order to better separate these impacts, analysis can include claims that have been large at any point in the past, although they may or may not be currently large.
An alternative is to use a “cap and excess” analysis, where rather than to separate claims into small and large, all claims are analysed together with a large claims cap.
Only the portion of a claim above the cap is excluded and analysed separately.
The excess above this cut-off amount could be spread over the experience of all other relevant groups.
A large claims theshold may be held constant or indexed over time.
Where no indexation adjustment is applied, the actuary needs to be aware than in real terms, the pool of large claims should be expected to change over time.
Analysis of reinsurance recoveries and the net position can be simplified where the large threshold is chosen to mirror the reinsurance retention.
Considering splitting large and attritional on gross and net of reinsurance basis.
Commenting that peril can affect way claims develop and so should be a factor ins separating claims.
Considering the purpose of reserving, e.g. Statutory method does not require splitting claims (using premium volume measure)
Splitting into homogeneous groups while considering credibility of remaining volume of data.
Settlement pattern of large losses is usually longer - consider discounting before applying threshold / indexation applied to future settlement date.
Use mean excess plots / graphical analysis.

Answer 136

A

————————————–GENERAL:

one should separately disclose information explaining the amounts that are recognised in the financial statements and the assumptions used for quantifying these amounts
Sufficiency should be tested on a sensible segmentation on the business
To be complete, the documentation should include:
– variance analysis
– sensitivity analysis
– back-testing
These calculations should be performed at least once a year
Purpose is to estimate the level of uncertainty in the provisions
Sufficiency should be tested on both a gross and net of reinsurance basis
In future, according to the IFRS4 level of sufficiency, based on a percentile approach, must be reported
Compare actual versus expected run-off

DATA REQUIRED

OCR on a per policy basis (Gross and net)
IBNR per line of business (Gross and net)
Claim payments (Gross and net)
Date claim was reported
Accident date of claim
Payment date(s) of claims
Claim numbers linked to policy numbers
Written premium per policy (gross and net)
Earned premium per policy (gross and net)
Expenses split by initial and ongoing expenses
Deferred acquisition cost
Loss ratios per segment - expected for the next period
Use information to calculate expense ratio and combined ratio
Separately noting ULAE
Policy start date (for UPP)

Answer 137

A

Outstanding Claims Reserve (OCR)
Incurred but not reported (IBNR)
Unearned premium reserve (UPR)

Answer 138

A

Components needed to test sufficiency are:

– 1. OCR at the start of the period
– 2. Claims paid from the beginning of the period to the end of the period which were reported until the beginning of the period
– 3. OCR at the end of the period for claims reported until the beginning of the period

Result of the test is
(1) - (2) - (3)

If the result is <0, then the provision at the start of the period was not sufficient.

Very high positive amounts could be a sign of a conservative approach, and may cause excessive prudence which is not allowed under IFRS.

Answer 139

A

Components needed to test sufficiency are:

– 1. IBNR at the start of the period
– 2. Claims paid from the beginning of the period to the end of the period for claims incurred until the beginning of the period but reported from the beginning of the period to the end of the period.
– 3. OCR at the end of the period for claims incurred until the beginning of the period but reported from the beginning of the period to the end of the period.
– .4 IBNR at the end of the period for claims incurred until the beginning of the period.

Result of the test is:
(1) - (2) - (3) - (4)

If the result is < 0 , then the provision at the start of the period was not sufficient.

Very high positive amounts could be a sign of a conservative approach and may cause excessive prudence which is not allowed under IFRS.

Answer 140

A

According to IFRS, if the expected value of claims and expenses attributable to the unexpired period of policies in force at the balance sheet date exceeds the unearned premiums provisions in relation to those policies after deduction of any deferred commission expenses, the insurer assesses the need for an unexpired risk provision (Or AURR - Additional Unexpired Risk Reserve)

According to the FSB, the insurer needs to hold an AURR if an underwriting loss occurs and after consultation with the insurer’s auditors.

Answer 141

A

The test is performed assuming that the insurer is a going concern.
To create future cash flows, one needs a combined ratio
Loss ratios (per line of business) should be based on future expectations.
Expenses must include ongoing expenses, i.e. initial / acquisition expenses can be deducted.
Expenses should be allocated per line of business.

Components needed to test sufficiency are:

UPR at the start of the period * Combined Ratio = URR (Unexpired risk reserve)
AURR = max (0, URR - UPR)

Answer 142

A

Before signing off on the actuarial report, the member should ensure that the results obtained from the actuarial valuation are reasonable, both in aggregate and for each valuation unit within the insurer’s total portfolio.
Reasonableness should be assessed in relation to:
– comparable results for that valuation unit in the previous year
– development in the valuation unit over the inter-valuation period
– the experience of the valuation unit since the previous valuation
– changes in economic assumptions, particularly investment and inflation assumptions
– changes to the actuarial model
– available industry results or benchmarks

A useful reasonability check is an analysis of movement in the technical provisions since the previous valuation.

The member should be satisfied that the differences between the previous result and the present result can be explained in terms of the experience in the intervening period and changes in the valuation model and assumptions.

The member should compare the results to the results under the prescribed statutory method, although detailed explanations of deviations will not be required.

Answer 143

A

GENERAL COMMENTS:

comparison needs to be over a few years (on all elements) to determine trends and/or outliers
comparison needs to be with similar insurers
comment on evidence of the underwriting cycle and where the insurer (and industry) is currently estimated to be
comment on any catastrophes that could impact/distort the results of insurers
noting publicly available data not granular enough to allow detailed comparison and adjusting for differences between insurers

COMPARE THE SIZE/MARKET SHARE OF INSURERS:

Gross written premium over time
Gross earned premium over time
Similar net premiums as above - give an indication of net exposure and use of reinsurance
Compare growth in premium with an index such as CPI to determine real growth
indicate if significant growth is due to exceptional circumstances (e.g. take-over of another company)

COMPARE PROFITABILITY:

Underwriting loss/profit - use underwriting margin (underwriting profit / earned premium) to eliminate any size differences
Compare total profit/loss (after taking investment income into account)

COMPARE KEY RATIOS

Comparison should be both gross and net and as detailed as possible, depending on the disclosure in the financial statements
Claims ratio (claims incurred / earned premium) or Loss ratio
Acquisition cost ratio (acquisition cost / written premium)
Commission ratio (commission paid / written premium). If reinsurance is significant take account of reinsurance commission received as well.
Expense ratio (operating expenses / written premium)
Combined ratio (claims ratio + expense ratio) or Operational ratio

ASSETS:

Compare investment performance of assets and compare with market performance.
This is done by considering the total consolidated invested assets and income on invested assets.
Use above to calculate a return on the average invested assets.
Look at the composition of assets and changes in the composition of assets over time.
Investment income / GWP - gives a sense of the investment return based on production.
Investment income as % of total profit to indicate split between UW and investment profit.

CAPITAL AND SOLVENCY:

Compare statutory solvency margin (free assets / premium) or compare capital cover ratio over time.
This is done by considering the available capital / Free Assets / Own Funds / Available financial resources.
Less capital requirement
Gives the free surplus
Compare whether insurers are on MCAR of SCR from the notes in the statements.
Calculate a ratio of capital requirements / premiums to determine how “efficient” the capital is being used.

OTHER:

Suggesting tracking return on capital as a key metric to track capital efficiency and profitability.
Gross UPR divided by GWP to establish frequency of business and UPP period
Reporting delays - IBNR divided by premiums.
Settlement delays - OCR divided by premiums
Comparison of share prices / PE Ratio, as this is the market’s perception of insurer value.

Answer 144

A

Perform analysis on historical contents over experience
Written reports and documentation may not include summarised claims information, but this will most probably not be detailed enough to analyse experience across different postal codes.
Consider competitor performance structures and policy wordings if available (industry data).
Consult underwriters for opinions, both internally and externally.
Ask the company’s claim managers / claims department for input and any additional information on claims experience by postal code / suburb / province.
Consult internal and external loss adjusters for input.
Can ask large brokerages, especially ones with national representation for information on external claims data.
Can consult reinsurers / reinsurance brokers.
theft is the main peril under a typical contents section.
So can check external / public information and statistics on house break-ins by area and use relative differences between area incidence rate to derive relativities for area grouping.
Also, can use buildings claims data to approximate contents relative claims frequency by peril, as they are likely to be correlated.
Identify any future trends that is likely to influence relative experience between postal codes.
Allow for expected future trends in rating factor relativities.
Check whether the factor can be implemented on the company’s system.
Postal code may be too granular to be feasible.
If not feasible, group postal codes into more manageable cohorts.
Compile information from all sources into a set of relativities.
Have underwriters review final set of relativities and invite further input.
Can apply new rating factor to active book and test the distribution of premium between are groups / postal codes.
Need to measure the likely impact on total premium as a result of introducing the new rating factor to ensure adequate total premium collection.
Introducing this rating factor is expected to reduce anti-selection risk. Need to estimate how new business volumes, cancellations and profitability will be affected.
Need to set rules by which the new rating factor will be introduced on existing business.
Will it be once-off or as policies go through annual renewal?
Need to develop a process to deal with new postal codes that will be introduced in the future.
Need to ensure that appropriate data fields are captured on the system such that experience across postal codes can be stored and analysed.
Ensure that appropriate data back-up systems are now set in place.
Have to set up appropriate monitoring systems to review performance of the book as well as the effectiveness of the are group / postal code rating factor.
Reviews should be conducted frequently such that undesirable trends can be identified and corrective measures deployed without delay.
Can consider other potential rating factors and measure significance against location factor.
Users of the system need to be trained on any system changes.
Need to determine if “postal code” plays / will play a statistically significant role in this book of business / determine the size of its effect.
Is granularity available to link between the postal code and the actual location of the risk.
The total cost of introducing the new rating factor should be considered against the expected benefit, e.g. better selection, better underwriting margins, increase in sales, etc.
Pilot rates on a subset of the books
Need to communicate to policyholders.
There is lapse- and re-entry risk (end policy and take out new policy under a different address that will result in a lower premium).

Answer 145

A

Useful when there is not enough data to use advanced mathematical / statistical modelling techniques that rely on large volumes of data for parameterisation.
Can be used when the standard form and assumptions underlying more advanced methods are not suitable to contents insurance claims data.
Easy to create and update / simple method
Less costly as it does not require specialised software
Can use standardisation methods to remove or standardise for the effects of other factors

Answer 146

A

Lack of homogeneity / Presence of interaction effects in one-way and two-way groupings - only view statistics relating to one factor at a time.
One way analyses are affected by correlations between factors.
Therefore it is difficult to conclude whether any trends can be ascribed to the actual factors, or whether it is driven by the mix of exposure across the different levels within the factor.
As the mix changes, conclusions from the analyses are likely to change.
Standardisation of factor levels is an approximation.
Lack of statistical information in conclusions, e.g. no estimates of parameter uncertainty or significance. Conclusions mostly based on judgement.

Answer 147

A

Data needs to be put into the model in the appropriate format
Specify the time period of the analysis
Link exposure and claims data
Identify catastrophe claims and large once-off claims
Identify any other anomalies or errors in the data
These claims should either be removed or capped so they don’t distort the result.
Can allow reinsurance recoveries in claim amounts, but account for gross reinsurance costs in the pricing elsewhere.
Modelling should be on net cost of claims, allowing for excesses, salvages and recoveries.
Ideally, frequency and severity should be modelled separately.
A Poison model can be used to model frequency, but need to check that frequency is sufficiently high for a Poisson model to be appropriate.
A Gamma model can be used to model severity, but need to check goodness of fit of the claims distribution.
If not possible to model frequency and severity separately, then the risk premium can be modelled using a Gamma or Tweedie distribution.
Need to assign an appropriate link function to each GLM.
Identify rating factors to test for significance against model responses.
Test each factor using:
– Statistical significance test, e.g. Chi-Square Test
– Consistency tests, across time or across random factor levels
– Reasonability checks - can the modelled and observed trends be explained?
By interacting one factor with one or more other rating factors, complex interactions can be tested for significance.
The cost of capped and removed claims need to be allowed for.
Model validation checks need to be performed on final models.
Compare actual claims experience against predicted claims on either:
– A randomised hold-out data sample
– An out-of-time validation set
The intent of the model is to predict future claims experience. Therefore, model predictions should allow for future expected trends.
Claims must be fully developed to ultimate / make an adjustment for IBNR.
Adjust historical claims for inflation to today’s values.
Consider how nil claims will be dealt with.
Need to know whether expenses are included in the claims data or not.

Answer 148

A

Ultimately the level at which the IBNR is set needs to be such that the company’s senior management as well as the regulator are convinced that the reserve will be sufficient to meet claims run-off in most instances.
According to APN401, IBNR should be held at a margin above best estimate (75% is often used) in order to ensure sufficiency.
The underlying assumptions of the BCL might not be appropriate to reserve for the class of business if it has a volatile run-off pattern.
The company could use:
– An adjusted cohort BCL method, i.e. with ratios for December based on cohorts of data for previous December claims. This will allow for the effects of seasonality.
– A loss ratio method across all months.
If there is a cohort effect, a straight chain ladder method is not going to work and therefore, a straight chain ladder method is not going to work and therefore a BF approach will also be inappropriate.
Request more data to get better stability in the parameters for any method used.
A stochastic reserving method, such as the Mack Method, can be used to determine the margin above best estimate at which IBNR will be set.
If year-on-year run-off experience is stable enough, an IBNR at the 75th percentile is likely to be sufficient to cover the run-off of claims in most years.
However, with unstable development any method, including Mack, is going to be difficult and determining the reserve at the 75th percentile particularly difficult.

Answer 149

A

SCR coverage = (Own Funds) / (Solvency capital requirements)

To increase SCR coverage have to increase own funds, or decrease SCR, or both.

INCREASE OWN FUNDS

Capital injection:
– Quick and immediate way to increase own funds:
– but increasing capital employed reduces return on capital
– there is a limit on the amount of capital that could be injected before the insurance operation doesn’t make economic sense.
– In practice likely to use injection in combination with other suggestions.
– Raise funds in capital market / issue more shares (if listed).
Retain dividends:
– Future profits retained and not distributed are a good form of capital
– But takes time for future profits to realise and be retained.
– For listed insurers retaining dividends could be perceived poorly by shareholders.
– Especially if the insurer has a history of distributing high portions of profits.
– Again, a limit on the maximum capital that could be retained before ROC reduces below economically viable levels.
Financial reinsurance / Alternative risk transfer:
– Here a portion of future profits could be realised now through a reinsurance arrangement
– This could be put in place relatively quickly, i.e. less than a year
– But would require negotiation with a willing reinsurer to demonstrate the viability and sustainability of the future stream of profits.
– Accounting for the reinsurance arrangement should be confirmed, especially given rules around significant risk transfer.
– And confirming the sustainability of the reinsurance arrangement within the SAM regime.
– If the insurer has other existing reinsurance arrangements, this could be put in place quickly.
– Would likely increase counterparty default risk
Reduce technical provisions:
– Discounted cashflow modelling of technical provisions can produce a smaller technical provision compared to allowed simplifications.
– This reduction in technical provisions will increase Own Funds.
– Extent of the “reduction” depends on the tail of provisions.
– For example technical provisions relating to liability could provide more relief than (say) motor type business.
– Could take time to implement this change, as cashflow model must be developed.
– Will introduce cost for the regular revaluation on a cashflow basis.
– Sign-off of the model is also likely to be more easily obtained, especially if the insurer has an actuarial control function in place.

DECREASE SCR

Reinsurance to reduce SCR:
– Possible to reduce the SCR under the standard formula by having large non-proportional and stop loss reinsurance protection. Proportional reinsurance will reduce premium and reserve risk.
– Quick to put in place, provided the market terms required by reinsurers are reasonable.
– If the non-life underwriting risk component contributes significantly to the SCR, then the impact of reinsurance could be significant.
– But having multiple reinsurance arrangements complicates the standard formula calculation.
Application of the SCR formula:
– Broadly speaking, a factor-based approach is more capital intensive than standardised scenarios.
– SCR could be reduced if catastrophe risk capital is evaluated using the standardised scenarios.
– Relatively quick to implement, provided the detailed exposure data is available.
– Other areas of potential SCR reduction include:
– Obtaining a credit rating where credit ratings are not available.
– Data availability and resource cost to realise this needs to be considered against the potential SCR reduction.
– Reduce business volumes / stop writing business with high CAT risk / stop writing business in more volatile lines.
– Ensure that future growth assumptions are not overestimated.
– Make sure that the technical provisions are at best estimate level (and not too prudent).
Change counterparties / market risk
– Generally speaking, poorly rated counterparties attract more capital than highly rated counterparties.
– Reduce foreign currency risk by investing in local assets only.
– Reduce Type II credit risk by reducing receivables.
– Reduce concentration risk by spreading assets over more counterparties.
Change underlying business:
– Standard formula is risk based, so you can reduce the SCR by moving away from capital intensive business.
– Takes time for a reduction in SCR to come through, as volume measure looks at a rolling 12 months GWP.
– Not a quick strategy to implement, as business units responsible for capital intensive business needs to be re-deployed.
– Likely that capital intensive business is also profitable.
– Writing business across multiple classes than in a single class can introduce some benefit for diversification of risk.
Apply for undertaking specific parameters
– Could apply under SAM for use of undertaking-specific parameters to be used in the standard formula calculation.
– These USPs are tailored to the insurer’s specific risk profile and could be higher or lower than the current standard formula.
– A view on being higher or lower is obtained when undertaking the Own Risk and Solvency Assessment that is required under SAM.
– Assuming USP could reduce SCR, not a quick strategy to put in place.
– Notable uncertainty on whether the regulator will approve USP application.
– Application costs should be evaluated against potential SCR reduction.
Apply for partial or full internal model
– Such a model provides SCR tailored to the insurer’s specific risk profile and could be higher or lower than the current standard formula.
– Good strategic solution, but takes a notable amount of time to put in place, > 3 years.
– Requires skilled in-house / consulting resource assistance to develop model, test, document and go through the application process.
– Costly to develop and maintain going forward.
– Regulatory approval process very onerous and approval is uncertain.

Additional points:

lapse risk is not a significant issue for ST insurers
operational risk (cant do much about it)
Check for errors in the calculation
consider co-insurance arrangement with another insurer
Make sure the loss absorbing capacity of deferred tax asset is allowed for (reduces SCR)
Consider the tiering of funds - make sure that most of the assets are Tier 1 for inclusion in Own Funds. Tier 1 assets must be at least 50% of SCR and at least 80% of MCR. Tier 3 assets must be less than 15% of SCR.
Unlisted shares in the holding company is deducted - minimise these
Listed shares in excess of 5% in the holding company is inadmissible
If there is a bank in the group - make sure that less than 10% of the cash is invested there.
Transfer participations to the holding company, or other parts of the group.
Reduce exposure to ancillary funds (e.g. letters of credit)
Reduce intangible assets (80% of capital charge)
Reduce “other liabilities” as far as possible.

Answer 150

A

During the light and comprehensive parallel run, having an SCR coverage below 1 times (on the SAM standard formula) does not trigger formal regulatory interventions.
Under SAM it would trigger regulatory intervention.
Although the legislation is still being drafted, this intervention is likely to follow the “ladder of intervention”
Where the regulator increases the amount of scrutiny as the SCR cover ratio deteriorates.
But start the intervention when the SCR coverage is still 1 times.
Examples of implications when breaching the 1 times SCR coverage:
– more frequent reporting
– regulatory request for formal financial recovery plan or to recapitalise
– If breach deteriorates, for example drop below the MCR, then more penal regulatory restrictions, including suspending the insurer’s new business, may take effect.

Answer 151

A

Two major areas of risk and uncertainty in agricultural crop production relates to:

volatility in the levels of production, driven by all forces that impact the production process
price volatility in the market, driven by market forces.

These risks are expected to increase in the future due to expected changes / liberation in:

trade (price risk)
climate change (production risk)

Agricultural investments are generally risky and therefore justify a role for insurance.

Traditional agricultural crop insurance will offer protection to production.

Price volatility is more likely to be addressed using derivatives and other instruments in the securities markets.

Policies offer protection against natural and man-made catastrophes, and usually takes the form of a multi-peril policy uniquely designed according to the policyholder’s needs.

Policyholders are liable to be affected by the same catastrophic events which inter alia will mean much reliance on the strength of insurance and reinsurance companies.

Agricultural insurance therefore assists to:

- protect financial stability of farmers
- and all other role-players in the agricultural produce value-chain
- serve as security for banks as a source of upfront capital
- support the South African Government, both financially and technically, in its efforts to provide protection to farmers.
- ensure long term production capacity in the agricultural sector by sharing the insured’s financial losses during catastrophes or other losses.
- gives farmers the ability to focus on what they’re good at - farming.

Overall this means more stability in the South African agricultural sector as a whole and the important role it plays in the South African economy.

Answer 152

A

drought
fire
pests / disease / plague
storms / flood
deterioration of or damage to produce
theft

Answer 153

A

DATA PREPARATION:

Frequency and severity need to be modelled separately.
Need to understand whether data provided are from the ground up losses.
Split between attritional and large losses.
Claims data and exposure data over the period would be required.
Granular for both data sets so effects at different times of the year can be evaluated.
Claim amounts need to be adjusted for inflation.
Data must be standardised for the following:
– Cresta Zone, province or some geographical grouping
– Crop type
– Price volatility
– Season
Adjustments for changes in technology or farming practices needs to be allowed for.
Need to consider IBNR / IBNER for most recent claim years. Some manual or statistical adjustment might be necessary.
Model-input needs to allow for expected future exposure by each rating category.

FREQUENCY / INCIDENCE:

The most practical way to model frequency would be to model the incidence of hail storms and not hail claims in particular.
However the incidence of hail claims could be modelled if a reliable estimate of hail cover exposure is available, which is unlikely and difficult to determine.
Whichever method is chosen, the model should output the number of hail events over a time period t for exposure u of crop type v.
A simple probability could be selected, perhaps split by Cresta Zone, province, or defined area / group.
Otherwise, a standard Poisson distribution could be fitted.
If the variance > mean, could use a negative binomial distribution.
At least, the claim model should be able to differentiate between attritional and large claims based on claim size.

Parameterisation:

Can fit using Method of Moments (MOM)
or by using Maximum Likelihood estimates (MLE), which is the same in the case of the Poisson distribution.

SEVERITY / COST:

BELOW THRESHOLD:

Claims below the threshold will be modelled using an appropriate statistical distribution
– eg Gamma, Weibull / positively skewed distribution
Parameterisation is ideally by means of MLE
Statistical goodness of fit tests include Chi-Square, AIC / BIC
Visual goodness of fit tests include a QQ plot
The distribution will be truncated at the chosen threshold level

CHOICE OF THRESHOLD:

When fitting a GPD, the selection of threshold u above which one approximates the claims distribution to the GPD is a trade-off between the quality of the approximation and the level of bias in the fit we achieve.
For high u, we have high accuracy, but high bias. For low u, we have less accuracy, but less bias.
The most useful graphical tool for determining the threshold is the mean excess function.
If Y is a random variable with right endpoint yF, then the mean excess function is defined as:
– e(u) = E(Y − u | Y > u), 0 ≤ u < yF
For claim amounts Y, the mean excess over a chosen threshold u, is plotted against increasing values of u.
For the GDP, we would choose a threshold above which the mean excess of claim amounts over u is linear.
Another graphical diagnostic tool is the Hill plot, that plots the Hill Estimator against a parameter k in order to find the optimal threshold.

ABOVE THRESHOLD - FIT GDP DISTRIBUTION

Parameterisation can be done as follows:

Maximum-Likelihood Estimation
– either on total claim amounts or on excess of claim amounts above threshold
– preferred and most commonly used method to parameterise a GDP
Method of moments estimator
– Not reliable for small datasets
– Use Hoskins and Wallis probability-weighted moments to parameterise the GDP
Hill estimator
– Also an MLE for the GDP

Answer 154

A

Government may collect and channel funds towards the fund in various ways.
Specifically, the Government may allocate part of the disaster recovery budget towards the fund.
Corporate sponsors with vested interest in the agricultural sector may support the fund.
Fees could be collected from farmers / premium collected via tax.
In return, farmers could spend a lot less on agricultural insurance cover because: risk could be managed, priced and transferred better as the fund will
– pool a much larger and diversified set of risks together, and
– more effective distribution of overhead expenses will be achieved
Possibly access to better and/or cheaper reinsurance.
Reducing credit risk of non-recovery of reinsurance claims.
Reduced anti-selection if participation is obligatory.
May operate at a much lower profit / ROE requirement than insurance products as the investors may subsidise required capital and view rewards as better stability in the agricultural sector output / increased confidence in the industry / creating jobs
Willingness to participate in agriculture / more farmers being insured
more awareness around the importance of risk management in agriculture
fund would probably pay benefits only during extreme events
Administration of the fund could be similar to other government funds e.g. RAF, SASRIA
may offer cover to previously uninsurable events / guaranteed cover / additional benefits not currently provided for (or expensive) in the current insurance market
Funds may have a mutual nature / if surplus in a year, either distribute or keep to reduce future premiums
May have longer settlement delays

Answer 155

A

CURRENT STATUTORY BASIS

Generally speaking, the current reserving basis can be considered prudent basis
Current statutory requirements prescribe the calculation of the IBNR and UPP on a deterministic basis / formula approach
Margins with current calculation are not calculated or reported separately
E.g. profit margins that exist within the UPP are released evenly over the term of the policy.

SAM BASIS

Generally speaking the SAM reserving basis can be considered a market valuation of the insurer’s liabilities since the provisions should be the amount paid between a willing buyer and a willing seller to transfer liabilities between insurers.
This consists of calculating an explicit best estimate and explicit risk margin.
Best estimate makes explicit allowance for all future cash flows, so implicit margins are not allowed.
Any margin within current provisions are immediately released to own funds, for example:
– inherent profit margins within the UPP
– inherent case margins within the OCR
– inherent prudent margins within the assumptions selected for the IBNR
Discounting is introduced releasing the future investment return on provisions immediately / Profit is allowed to be earned on day one.
The risk margin calculation methodology is specified with no room for overlaying judgement in determining the explicit risk margin.
Simplifications are allowed.
Risk margin calculated using a cost of capital approach.
Explicit ULAE is required
No IBNR, OCR and UPP, but instead split between premium and claims reserves.
Adjustment for binary events.

Answer 156

A

PREMIUM PROVISIONS - best estimate

Contract boundary is likely to be 1 month - no UPP
For the few annual premium policies make use of simplification formulae
Calculate best estimate as unearned proportion of premium with allowance for discounting.
No claims bonus: discounted cash flow model where future benefit is discounted and partially accrued on a time basis.

Best estimate Premium Provision =
[Pro-rata of unearned premium over the life of the premium + Adjustment for any expected insufficiency of the premium in respect of future claims and expenses ] / ( 1 + risk-free-interest rate / 3)

CLAIMS PROVISIONS - best estimate

OCR needs to be at a best estimate
Should have sufficient detailed information to derive claims reporting pattern and claims payment pattern of business using conventional run-off triangle techniques.
Could create a discounted cash-flow model, but settlement would be a matter of months.
Instead revert to use of simplifications for outstanding reported claim as number of claims times average cost of claims less incurred to date.
Estimate IBNR as a number of IBNR claims times average cost of IBNR claims.
The size of claims incurred in a year should have a small variance and should have sufficient number of claims to allow average cost to be representative.
Include allowance for future inflation and discounting.

Formula for outstanding reported claim:
n
∑((N i × A i ) − P i )
i

where:
Ni = number of claims reported, incurred in year i
Ai = average cost of claims closed in year i
Pi = payments for claims incurred in year i

Formula for IBNR:
IBNR reserve year t = C_t x N_t

where:
C_t = average cost of IBNR claims
N_t = number of IBNR claims expected based on historic reporting patterns

RISK MARGIN

Determine the SCR for the insurer at the valuation date.
Project the SCR forward.
Run the SCR down based on cash flow run-off profile.
Multiply with cost of capital rate -> 6% is prescribed.
Discount to a present value to allow for time value of money.

UNALLOCATED LOSS ADJUSTMENT EXPENSES

Need to establish the indirect cost of administering the business
Could be derived making use of any activity-based costing analysis previously done.
Project future indirect cost at a slower rate than the cash-flow run-off (reverse of economies of scale).
Need to allow for indirect cost inflation outstripping general inflation as staff salaries are likely to be a significant proportion of cost base.
Discount to a present value the future indirect costs.

Answer 157

A

All risk generally considered to provide wide form of cover spanning property type claims (fire claims) and liability type claims (3rd party property damage / bodily injury claims).
Despite being a large insurer with plenty of data, claims data expected to show erratic patterns from large losses.
Implement a discounted cash flow model that considers:
– future premiums
– receivables for salvages and recoveries
– contingent commission provisions (Reinsurance profit sharing)
– claim payments
– administrative expenses
– investment management expenses
– claims handling expenses
Up to the contract boundary
Include allowance for taxation
Derive claims reporting pattern and claims pattern of business using conventional run-off triangle techniques, while smoothing out effects of large losses.
Discount to present value to allow for the time value of money.
Model must be able to separately report premium provisions from claims provisions

RISK MARGIN

Determine the SCR for the insurer at the valuation date.
Project the SCR forward.
Run the SCR down based on cash flow run-off profile.
Multiply with cost of capital rate -> 6% is prescribed.
Discount to a present value to allow for time value of money.

UNALLOCATED LOSS ADJUSTMENT EXPENSES

Need to establish the indirect cost of administering the business
Could be derived making use of any activity-based costing analysis previously done.
Project future indirect cost at a slower rate than the cash-flow run-off (reverse of economies of scale).
Need to allow for indirect cost inflation outstripping general inflation as staff salaries are likely to be a significant proportion of cost base.
Discount to a present value the future indirect costs.

Answer 158

A

ORSA itself is a process followed within an insurer and not just a reporting requirement.
With the documented outcome of the ORSA process often referred to as an ORSA report
Depending on size of insurer -> principle of proportionality, possible for insurer to have an ORSA policy and have a ORSA process document

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