Risk Flashcards
Why does risk arise in Life Insurance?
In most investigations, actuaries have to make assumptions about the future. Because we cannot predict the future with certainty, there are risks to making theses assumptions
List the three classes of risk
1) Model risk
2) Parameter risk
3) Random fluctuations risk
Model risk
The risk that the model is an over-simplification of the company and, as a consequence, behaves unrealistically.
Parameter risk
The risk that the parameters assumed for the underlying model are incorrect. This risk is reduced by the availability of good quality, relevant data
Random fluctuations risk
The risk of unpredictable fluctuations arising from sample error. This is greater the smaller the sample.
Why is availability of reliable and appropriate data limited for health and care products?
1) Smaller policy volumes and lower incidence rates (compared to life products) limit the credibility of available data
2) Changes in products and markets over time limit applicability of own past data
3) Heterogeneity of policies and markets limit applicability of industry tables
Which circumstances are health and care products particularly sensitive to?
IP - socio-economic market conditions
CI - medical advances
LTCI - longevity and health at older ages
Expense risk
The risk that actual expenses are higher than expected for whatever reason.
The risk that charges received are lower than expected is classified according to its cause e.g. Investment performance risk, persistancy risk, new business mix or volume risk
Main risk for each health and care product
IP - mis-estimation of transfer probabilities
CI - mis-estimation of rates of diagnosis of specified critical illnesses
LTCI - mis-estimation of transfer probabilities
Expense mismatch risk
When contributions to expenses from premiums and charges are significantly mismatched with the actual expenses incurred over time
List the main (broad) categories of risk
My Candy Land Bus Operates Externally
Market
Capital
Liquidity
Business
Operational
External
Sources of risk to a life insurer
Many Vaginas revolt MIDWIFE, Practically Careers off SCAFFOLD
Mortality/morbidity
Volume of new business
Regulatory developments
Mix of new business (nature, size, source)
Investment performance
Data
Withdrawals
Inflation
Fraud
Expenses
Policy data
Competition
Staff decisions (including board)
Counterparties
Accumulation of risks
Failure of management systems
Fiscal developments
Options and guarantees
Legal developments
Distributors
What may management decide to do to improve competitive position?
1) Reduce premium rates under new business contracts
2) Offer additonal options and guarantees under new business contracts
3) Increase bonuses under existing contracts
4) Increase commissions to boost sales
5) Keep charges too low under existing reviewable contracts
How may distributors deliberately cause risk to the insurer?
1) Encourage lapse and re-entry where this favours the policyholder
2) Take advantage of loopholes in product design
3) Take advantage of timing loopholes in unit pricing practices
Fraud
A general type of control failure, caused by deliberate intent
