Risks Flashcards
What are the risks specific to PMI business?
- Indemnity: claim amount different to expected
- Capital strain due to ST nature of contract
- Third party claims assessors.
- Providers could provide poor quality care, to increase utilisation rates fraudulently (reimbursement methods)
- Risk management focus on overall volume and mix of in-force business rather than specifically on new business
What are the risks specific to CI business?
- Risk of mis-estimated critical illness incidence rates, due to lack of data
- High risk of anti-selection especially if standalone product
- Investment risk is small due to small reserves
What are the risks specific to pre-funded LTC business?
*Pre-funded policies carry a surrender value, risk of large number of surrenders.
* Risk of selective surrenders, thus worsening risk pool.
* High investment risk due to large reserves: investment returns are lower than expected
*Could misestimate transition probabilities
What are the risks specific to launching a new product?
- Being in new terrirory
- Risk of language problems
- Unknown regulations in terms of all product aspects
- Scepticism about foreign reinsurers
- Currency risks
- New product
- Lack of data
- Product design risks if a new product
- Policy wording risks
- Claims risk (exacerbated for indemnity)
- Lack of expertise/experience
- Investment risk (if large reserves)
- Marketability risk - adding guarantees / lower premiums
- Costs of research, product development, setting up infrastructure
- New customers
- Persistency risk
- Poor sales volumes - not recouping costs
- Selective withdrawals
- Demographic risk
- Risk of fraud (distributors, policyholders, providers, staff)
- External factors
- Competition risk
- Market research may have over-estimated demand
- Reputational risk if venture fails - could spill over to other operations
- Overall risk depends on the size of free assets / size of the overall venture1
What are some risk management techniques?
Processes(CREP worn during tennis give a DUCE and just answer MCQ)
- Claims risk management
- Reinsurance
- Experience monitoring and control
- Product design
- Data analytics and predictive modelling
- Underwriting (MHD, Full Medical Underwriting, Moratorium)
- Checks on policy data and claims data
- ERM
People
* Managing the distribution process and customer relationship
* Quality of staff
* Outsources and service level agreements.
* managed care protocols (case management, pre Auth, hospital networks)
How do you deal with high risk lives (post-underwriting)?
- Offered higher premiums / lower benefit
- Postponed (if the period of higher risk is deemed temporary)
- Declined (if the additional risk is thought to be too high)
- Offered a different type of policy (less risk intensive)
- Offered to a reinsurer facultatively with zero retention
- Can have certain specific causes and/or conditions excluded
How does community rating manage risks?
- ensures risk of insuring those with higher healthcare needs shared amoungst risk pool
- Important to review mix of lives insured annually
- any changes may not reflect the expected pooled experience of PHs which ain’t good.
- A risk equalization fund may be introduced to keep premiums attractive to “better risk” customers across insurers
What is a risk equalisation fund?
- Insurers can set premiums to reflect the expected claims experience of all insured lived in the territory (not just the particular insurer)
- Premiums received by each insurer in territory, are pooled to form the risk equalisation fund.
- Claims incurred by each insurer are paid out of this risk equalisation fund.
- This fund ensures that “better risk” policyholders are not penalised by paying higher premiums due to insurer having overall risky pool of policyholders.
- Reserves from excess premiums for insurers with a better quality of lives insured are used to subsidise the shortfall in premiums for insurers with riskier lives insured
What are the different types of risks?
CHER DRC BEV PR
Cher is a big risk to the DRC, so her PR team had to pring her a BEV.
Customers - risk of anti-selection, non-disclosure
Healthcare providers - increasing cost, poor outcomes, poor quality service (reimbursement method)
Employees - fraud, leaking confidential information, embezzlement
Regulator and tax - risk that regulation changes, and tax changes which changes profitability.
Distribution channel - broker delay premium, broker make false promises, different channels sell different amount which affects demographic and expenses
Risk pricing - data risk, parameter risk, random fluctuations risk, model risk
Competition - risk competitors have better products, risk that management takes on risk to remain competitive
Business mix - different to expected (big policy = high capital requirements)
Expenses - higher than expected, modelled incorrectly, inflation higher than expected
Volume of business - lower than expected (high expense per policy), higher than expected (high capital strain)
Persistency - lapse and re-entry, lapse when assets share is negative
Reinsurance - catastrophe risk, concentration risk, physical risk.
Why will management ignores actuaries recommendations and takes on unacceptable risks?
- Remain competitive
- Due to strategic company goals e.g. Increase size of business
- Maximise SH earning
- Achieve personal goals of executive
What are investment risks?
- Risk that 3rd party makes the wrong investments (if use 3rd party asset manager)
- Risk that bond issuer defaults on bond
- Risk that value of investment may go up or down (known as capital values risk)
- Risk that return may be modelled incorrectly
- Return needs to be modelled → model, parameter and random fluctuation risk.
- If stochastic model used, random fluctuations risk is accounted for explicitly
- Risk of exchange rates movements (if insurer pays claims in foreign currencies, might be exposed to exchange rate movements). To mitigate this risk, invest in overseas assets.
How can counter-party risk be managed?
1) Through due diligence on the counterparty before selection
2) Diversification across different counterparties
3) Single counterparty exposure limits
4) Restriction on the use of counterparties below a specified credit rating
5) Credit insurance or derivatives
Why are counterparties used?
- Can outsource specialist activities: underwriting, claims management, actuarial functions, administration, investment, marketing, systems and training.
- Provides a level of expertise and efficiency at a price that may be cheaper than in-house costs & leaves the insurer’s management to perform the other tasks where they feel the most competent (incl. strategic decisions).
- Once the third party has been chosen, a service level agreement (SLA) will be put in place.
- Should be certain that passing processes to experts is reducing risks -> need to have regular reports, checks and inspections to ensure that the insurer is not to suffer from reputational risks, business risks and security issues.
Quality of staff
- Quality of staff and exercise of judgement -> successful performance of the business
- NB - adequate systems of identification of competence levels at the various stages of business administration, of recruitment, of staff training, allocation and review and of recognition of the need for outside expertise
- Motivation and reward are key features
- Systems need to monitor fraudulent + incompetent behaviour
- Health and care insurance - more opportunity for fraud and judgement (claims can be falsified / exaggerated more easily)
- May perform an occasional audit of staff competence
- Time and motions analysis by independent experts may indicate a need for staff reallocation and training
Data analytics and predictive modelling
- H&C insurers can take advantage of tech developments and the analysis of large volumes of data (big data)
o E.g. bancassurers hold a large quality of info about a consumer who also has a bank account with them (spending habits etc)
o The ability to use such info to better understand the underlying risks will become increasingly important in insurance - Risk classifications are likely to develop as a result - allowing more accurate rating for each individual customer -> greater ability to select the preferred risks
- Monitoring the data -> drive better experience through early identification of changes in individual insured risks or potentially through being able to intervene and influence customer behaviours
- Multi-factor predictive modelling techniques (GLM) are also increasingly being adopted
o Can combine internally held customer data with external drivers, allowing for correlations and interactions between them - Risks for using big data:
o Reputational damage - privacy and data protection failures
o Regulations governing data may change
o Data may be inaccurate, incomplete or irrelevant
o Complex models used - risk of choosing the wrong model
o Expenses of collecting + analysing data > benefits of extra info
