Techinical risks/Techinical risk management Flashcards
What are technical risks
The risk of balancing risks - the risk that total actual damage from claims will differ from the expectancy value in a period
What causes technical risk
- Randomness
- Change
- Error
Randomness
Higher or lower expected values
Changes
Risks have changed since the were first calculated
Error
The reference value is not correct or there was a miscalculation
Expected reserves =
RB (Financial reserves at the beginning of the year) + P - Lexp
What are the 5 policies for risk management
- Reserves policy
- Premuim policy
- Loss policy
- Rinsurance policy
- Portfolio policy
What does premium policy involve
Saftey loading
What happens if the safety loading is too high
Product is uncompetitive and you cant pool as many risks
What is the gross risk premium/net premium/risk premium
Net risk premium + safety loading premium
What is in the gross premium
risk premium, loading for admin, profit, tax
What are the 4 methods of calculating gross risk premium
- Extended expectancy-value principal
- Variance principal
- Standard deviation principal
- Variation principal
Extended expectancy-value premium
GRP= u + (loading) u
What is the issue with the expectancy-value premium method
Expectancy value is not a great method of measuring spread
Variance principal method
GRP= Exp value + loading (variance = std squared)
What is the issue with using the variance principal
the answer is in €^2
Standard deviation principal
GRP=expectancy value + loading factor(square root of variance)
Variation coefficient
Exp. + (loading*standard deviation)/ exp
What is the issue with the variation coefficient principal
Spread is underrated
What does a safety loading do to the density function of a portfolio
Pushes it to the right
What are the advantages of a safety loading premium (2)
- Orignal expected value of profits increase
- Probability of a loss is reduced
Forms of premium policy (4)
- Safety premium
- Sharing losses with the insured
- Experience creating
- Premium adaptation clause
What is another name for sharing losses with the insured
mutuals
What is the advantage to the insurer in mutuals
No technical risks
Mutuals
All deviations (positive or negative) of the actual loss are borne by the policy holder
Experience rating
Premiums based on loss record
Premium adaptation clauses
Allow for risk-related changes to the premium, this must be agreed upon in the contract
Loss policy
The insurer tries to reduce or limit the loss
Methods of loss policy
- Active damage management
- Careful settlement of claims
- Practice of settling claims
active dammage managment
When the insurer has a service to prevent further damage (eg own hospital)
Portfolio policy
Size and composition of portfolio
How can an insurer affect their portfolio policy(4)
- Premium policy
- Product policy
- Commission for brokers, underwriting
- mergers and acquisitions
What types of portfolios (risk and spread) does an insurer have to choose between
- Higher exp. value and higher spread
- Opposite
How should an insurer choose between high or low spread
My sigma model
What is the advantage of higher reserves
Smaller chance of failure
What is the disadvantage of a reserve for the insurer
Opportunity cost
What is meant by the risk balancing process over time?
That the positive and negatives from each period balance out - Average damage should equal the total damage
How can we balance risk over time
Liquidation reserves
- Reinsurance
- Adapt contract by agreements and adaptation clauses to not cover certain things
- Change premiums
