Types of Risk - Insurance Flashcards
What are the main types of risks faced by insurers (4)?
- Insurance risks
- Market risks
- Counterparty credit risks
- Operational risks
What are the main inherent risks faced by P&C insurers?
- Underwriting risks
- Reserving risks
- Claims management risks
- Claims reserving risks
What is underwriting risk?
Risk that inappropriate business is contracted. It includes:
- the impact of underwriting cycle
- selection of undesirable risks to insure
- fluctuations in the timing, frequency and severity of insured events, relative to expectations at the time of underwriting.
- inaccurate pricing of risk
- failure to apply policy eligibility criteria
What is reserving risk?
Risk that inappropriate reserves are held.
What is claims management risk?
Risk of claims exceeding expectations or that inappropriate claims settlements are reached.
What is claims reserving risk?
Risk of loss arising from inadequate or inappropriate claims reserving policy or process.
What are the main inherent risks faced by life insurers
- Longevity risk
- Mortality and morbidity risks
- Persistency risks
- Claims risk management
- Underwriting risk
- Product cycle risk
- Expense risk
What is longevity risk?
The risk that customers now and in the future live longer than assumed when pricing the product, or longer than assumed in the current embedded value and reserving bases, or through a change in the base level of mortality and future improvements to life expectancy.
What is mortality and morbidity risk?
The risks that the incidence of death (mortality) or sickness (morbidity) claims exceed, in either number or amount, what has been assumed in the product pricing bases and embedded value basis. Catastrophe risk is also there where multiple death claims exceed the reinsurance cover purchased.
What is persistency risk?
The risk of policyholders cancelling their policies in greater numbers or earlier than expected, or the policies are replaced by other insurers, resulting in losses from unrecouped expenses, lost future profits, and reputational risk from poor selling practices and customer servicing. There can be a material impact on reserving risk if more people cancel.
What is claims risk?
Risk that claims amounts are greater than expected through poor claims handling where claims are being paid when they should be rejected, or claims amounts being greater than acceptable.
What is underwriting risk?
Risk that arises when poor underwriting practices allows risks to be accepted at inadequate premium levels, or allows proposals to be accepted that should be declined.
What is product cycle risk?
The risk that an insurer’s management does not continually review the product in light of emerging experience, and as a result misses opportunities to review costs and/or remove poor products from sale.
What is expense risk?
sing from inadequate management of acquisition and maintenance costs that lead to them exceeding the premiums received and having an adverse impact to the Combined Ratio.
What is concentration risk?
Risk arising from the concentration of exposure in a particular market sector, reinsurer or geography. It is also the concentration of a particular type of risk across multiple products which individually are not material but aggregated are.
