Q&A Bank Part 2

Question 1

5 Reasons why persistency of business may be an important issue to a general insurer.

Answer 1

• with falling business volumes, it becomes more expensive to spread fixed costs over each policy
• as a large proportion of the costs may be fixed, this could have a material impact on profits
• it is usually more expensive to acquire/regain new business than it is to process renewals
• but the same premium is usually chaged on both new and renewed business
• it is a sign of customer satisfaction and so low persistency may imply a poor level of service and that premium rates are not competitive

Question 2

Explain why some classes of business are considered more risky than other classes of business

Answer 2

Classes that are highly uncertain have high levels of risk.

The uncertainty may be caused by:

• • large variance in claim amount distribution
• • large variance in claim frequency
• • possibility of accumulations or mutliple claims from one event.

For some classes, there is great uncertainty regarding the claims, based on lack o knowledge or data.

Long-tail liability classes are generally considered to have high uncertainty.

Question 3

5 Problems for an insurer associated with rapid growth in premium income

Answer 3

• if the increase is due to low premium rates, the increase may indicate future losses
• it could indicate deteriorating experience because of anti-selection or reduced quality underwriting
• administration strains could cause service standards to brokers and policyholders to fall, leading to bad publicity
• the solvency margin could be reduced to close to that statutory minimum level if the minimum is based on premium income
• internal controls may be weakened

Question 4

5 Areas of greates uncertainty for a general insurer when producing estimates of its claims

Answer 4

• claims emerging from the lates period of exposure, ie IBNR claims
• the possibility of new types of latent claims emerging from liability classes
• inflation of the longest-tail liabilities
• catastrophe claims, eg the uncertainty surrounding huge floods due to climate change
• claims arising from unexpired risks

Question 5

10 factors limiting the usefulness of industry-wide data

Answer 5

Main problem is the potentail for distortions within the data (heterogeneity)

The data supplied by different companies may not be directly comparable because:

• it relates to different socio-economic or geographical areas of the market
• policy conditions may differ
• other practices may differ, eg underwriting, claims settlement
• the nature of the data stored may differ
• the coding used for the risk factors might vary

Other potential problems:

• data is usually less detailed and less flexible than that available internally to a company
• often more out of date than internal data
• quality may be suspect if some contributors have poor quality data systems or supply incorrect information
• not all companies contribute

Question 6

6 Constraints that might prevent an ideal data system being maintained

Answer 6

• age (over time, the system will become out-of-date)
• mergers and acquisitions could lead to the existence of legacy systems or data being migrated on to one of the system, leading to potentially empty data fields
• new rating factors being added, leading to potentially empty data fields for historic data
• a reorganisation of class structres, with the insurer being unable to assemble the historic data into the new classes
• human error, which is inevitable
• conflicts between users, which could lead to a lack of data for some users and too much data for others

Question 7

14 Influences on data quality from different companies

Answer 7

• age of company
• size of company
• age of computer and information system
• existence of legacy systems
• integrity of systms, eg automated checks
• quality of managers
• quality and training of staff
• nature of organisation (direct insurer vs reinsurer)
• sales outlet used
• classes of insurance sold
• type of insured (eg large commercial risks vs small personal risks)
• product design
• rate of change in products
• simplicity and ease of use of computer systems

Question 8

9 purposes for which an insurer analyses claims data

Answer 8

• reviewing premium rates and risk acceptance criteria
• claims reserve estimation and analysing changes in claims experience or claims environment, including inflation
• comparing actual claims run-off against previous estimates
• assessing the relative profitability of different blocks of business
• monitoring the adequacy and use of reinsurance
• valuing a general insurer for sale, purchase or merger
• asset evaluation for capital modelling decisions
• monitoring the insurer’s asset / liability position
• financial planning for budgeting and solvency purposes

Question 9

9 Main areas of a gneeral insurer’s operations in which experience analyses are used

Answer 9

• rating
• reserving
• asset liability modelling and investment
• expense allocation
• risk management
• capital management
• financial planning (profitability monitoring and solvency)
• reinsurance programme performance
• marketing

Question 10

11 Reasons why insurers need to calculate reserves

Answer 10

• to determine the liabilities to be shown in the insurer’s published accounts
• to prepare separate accounts for the purpose of supervision of solvency and to determine the liaiblities to be shown in those accounts, if necessary
• to determine the liabilities that we show in the internal management accounts
• to value an insurer for purchase or sale
• to assess the adequacy of the company’s case estimate and/or IBNR claims reserve estimation in previous year-end exercises
• to provide information to management on how areas of the business are performing, and provide an indication on the profitability of business currently being written
• to compare best estimates against held reserves
• to calculate ranges of results
• to transform an underwriting year into an accounting year
• to calculate movements in reserves and analyse reasons for these
• to calculate reserves in order to estimate the cost of claims incurred as an intermediate step in the premium rating process.