Risks (13 – 15)

Question 1

Sources of risk (16)

Answer 1

– policy & other data

– mortality & morbidity rates

– investment performance

– expenses

– withdrawals

– new business mix
> nature + size
> volume

– guarantees & options

– competition

– actions of
> board
> distributors

– failure of systems & controls

– counterparties

– legal, regulatory, fiscal developments

– fraud

– aggregation & concentration of risk
+ credit failure

Question 2

Classification of risks

Answer 2

1. Model risk
2. Parameter risk
3. Random fluctuations risk

Question 3

Improve competitive position (5)

Answer 3

– lower premium / charges
– increase options & guarantees
– increase bonus rates
– increase commissions / salaries
– lower / same reviewable charges

Question 4

Main fraud parties

Answer 4

1. directors / staff
2. policyholders
3. outside parties

Question 5

Measure risk in relation to

Answer 5

– company’s capital / other resources

– impact on supervisory solvency

– cost of failing to meet regulatory requirements

Question 6

Aims of insurance company

Answer 6

1. max profits
2. max ROC

Question 7

Credit failure: credit rating
+
Impact of downgrade

Answer 7

External assessment of aggregation of all risks

Downgrade risk
– higher cost of debt
– adverse publicity
– lower new business sold

Question 8

Data issues H&C

Answer 8

– smaller policy volumes (CI/LTCI)
– lower incidence rates (CI/IP)
– change in products and markets
– heterogeneity in products

Sensitivity towards
– economic conditions
– medical advances
– longevity & health (older ages)

Question 9

Components that influence expense risk

Answer 9

1. Inflation
2. Actual expenses incurred
3. Investment performance (charges)
4. Persistency risk (recoup initial)
5. New business mix (overheads)

Etc…

Question 10

Selective withdrawals impact

Answer 10

1. Mortality assumptions
2. Expense assumptions
   • fixed costs
   • recoup
3. Negative asset share = financial risk

Question 11

New business mix risk

Answer 11

1. Nature and size
   • class of business
   • type of contact
   • contract design
   • premium frequency
   * capital required
   * charges
2. Source
   • financial sophistication
   • pressure of sale
   * withdrawals
   * mortality experience

Question 12

Failure of controls results in

Answer 12

1. Reputational risk
2. Regulatory intervention
3. Financial losses

Question 13

Distributors actions against insurer

Answer 13

– encourage lapse and re-entry
• no commission clawbacks
• no exit penalties

– advantage of loopholes

– advantage in pricing

Question 14

Principal elements in pricing

Answer 14

Mortality

Expenses

Withdrawals

Profit target

Other
• reinsurance
• capital

Etc