Risk Management Flashcards
Whose risk appetite is catered for in design of a contract?
Company
Stakeholder groups
Individuals within stakeholder groups
What can a stakeholder do with his risks?
What does his decision depend on?
Retain - immaterial, diversified, mental
Transfer - some or all
Minimise - locks on front door
Depends on - probability, surplus, price of insurance
How is risk classification used in the design if a contract?
Price charged more accurate
Remove useless parts like child rider
The fundamental rationale of insurance is what?
If price one company will accept a risk is lower than expected cost of keeping it to an individual then insurance is mutually beneficial
Why must there be credible and volumous data in insurance?
To make accurate frequency and size assumptions of risks
What is the process of underwriting?
Collect data (form, report, exam, tests)
Assess customer risk (specialist underwriters, see if required standard for normal rates)
Give special terms if high risk, or reject
Set premium commensurate with risk (fair price paid)
How does underwriting manage risk?
Substandard lives identified and terms set
Avoid anti-selection
Financial underwriting against over insurance
Experience equals expected when contracts priced
Risk classification to ensure fair price charged
Reinsurance is easier to obtain
What special terms are possible after underwriting?
Standard premium plus extra for risk
Standard benefit minus extra for risk
Exclusion clause, no payment if claim due to specific event
What factors effect mortality and morbidity ratings factors?
Current health
Occupation
Leisure pursuit
Normal country of residence
Why is medical underwriting done?
Find if applicant meets required standard of health, if not, how bad is it?
What’s the big decision in whether to reinsure?
Risk held versus cost of mitigating plus assistance in other ways from reinsurer
What are the 3 main benefits of reinsurance?
Reduce variability of claims (smooth profit, reduce capital requirements, reduce risk of insolvency)
Limit large losses (aggregate and single)
Benefit from reinsurer expertise and financial assistance
How can a reinsurer provide financial assistance?
Administration costs
Actuarial services costs
Other actuarial advice costs
What risk is retained with any reinsurance?
Default of the reinsurer
What two overall types of reinsurance are there, what are the 3 categories, with products?
Reinsurer takes risk completely on Reinsurer pays insurer at time of claim Proportional (surplus, quota share) Non proportional (risk, aggregate, catastrophe, stop loss) Financial reinsurance
Why would the value of benefits expected to be paid by reinsurer be lower than the price to purchase reinsurance?
Profit plus expenses plus contingencies
What is the process of deciding on reinsurance?
Assess holding risk vs reinsurance cost plus benefits of reinsurance
Find expected value of benefit to be paid
Sensitivity test this using various assumptions to find expected cost and variance
Weigh up liquidity risk if not purchasing reinsurance
Give 2 points about proportional reinsurance?
Administered automatically
Requires a treatee
What is quota share reinsurance, what are its 3 uses?
Fixed percent of risk is reinsured
Spread risk
Write larger portfolio of risk
Encourage reciprocal business
Explain surplus reinsurance.
What type of business is it used, what is specified in treaty
What are the disadvantages to the reinsurer
The disadvantages to the insurer
When might the disadvantage happen?
What might be the outcome of the disadvantage?
Fixed percentage of each risk reinsured
Retention limit
Maximum level of cover
High volume business, fixed percent in treaty
Low volume, percent varies per risk
No cap on total pay out if reinsurer or insurer
Bankruptcy
Events are 1 large claim, many claims overall, many from 1 incident
Give 2 advantages of non proportional reinsurance and what they mean for the company
Give a disadvantage and what you can do about it?
Liability to insurer is capped (accept business with risk of very high claims)
Reduces variation of claims (smoothing, solvency more secure, capital requirements lower)
It may come back to the insurer if over the maximum cap
Purchase more reinsurance
3 point on risk xl
Relates to individual losses
Affects only 1 insured risk at a time
Has total claim limit to protect against use as a cat xl substitute
Give 2 points and an example on cat xl
Reduce risk relating to non independence of risks insured
Renegotiate premiums each year
Eg. Hurricane destroys 50 houses insured by insurer
Give 7 point on aggregate xl
Reduces risk of many claims over a year leading to large outgo
Better than risk xl for this as that wouldn’t protect against many small claims
Retention level
Upper limit
Defined perils
Defined period e.g. 1 years claims
If all perils covered on whole account it’s stop loss reinsurance
What is ART?
What is the mnemonic for them and their uses?
Tailor made covers for risks conventional markets regard as uninsurable
DIPSIS
DESCARTES
Uses of DIPSIS covers?
Discounted cover, don’t need to fully finance un discounted liability
Integrated risk cover, avoid buying excess cover, smooth results, lock into attractive terms
Post loss funding, funding on specific loss
Securitisation, managing catastrophe risk
Insurance derivatives e.g. Weather options
Swaps, swap oppositely correlated risks
Explain discounted covers and uses
Don’t need to fully finance un discounted liabilities
Manage solvency
Capping losses
Risk transfer
Explain integrated risk covers and uses
Between insurer and reinsurer Alternative to debt and equity Avoid buying excess cover Smooth results Lock into attractive terms
Explain securitisation and uses
Transfer insurance risk to capital markets
Used for managing catastrophe risk
Not correlated with market risk
Explain post loss funding and uses
Pay fee now for funding on specific loss
Funding will be loan or equity
Explain insurance derivatives
Example is weather options
Explain swaps
Swap negatively correlated risks
E.g. Gas (cold weather) or water company (hot weather)
Explain DESCARTES
Diversify risks Efficient risk management Smooth results Cheaper Available where regular insurance say uninsurable Solvency management Reduce capital requirement Increase security of company and payments Tax
How can a company diversify risks?
Line of business e.g. Term and annuity Geographical area Different reinsurers Asset classes, multiple Within asset classes, multiple
What are 2 problems of diversifying by business class (line of business)
Many products, different risks - expensive admin, staff training etc,
Many companies with many products - all generalists, no niche players
How do you solve the main problem in diversification by business class (many products, expensive admin)
Why does that help?
Reinsurance with other company who will reinsure some parts of their business to you, reciprocal quota share
Business exposed to more risks but can concentrate marketing, sales, administration on core products
What type of fat sir is reinsurance?
Transfer of risk
What type of fat sir is claims control?
Mitigation of consequence of financial risk that’s happened
