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Claim amount
Claim rate
Early screening
Early diagnosis
Moral hazard
Early lapses when AS<0
Expenses and inflation
Medical inflation

PAC risks

Counterparty (investment, reinsurer, outsourcer, distributor)
Customer satisfaction

Ops risk
Actions of management
Internal fraud
Internal audit
Options and guarantees

Investments - performance, mismatching, liquidity

Policy wording
Economic downturn
High inflation

NB volume/mix SSTN


Risk management

Policy/claims data checks
Managing distributors (MuCH u R QTtTCF)
Managing customer relationship (TCF/Customer survey)
Manage counterparties (Due DR MIL)
Other (ERM/monitor experience (man, comp networks ARE crap)/staff training)


Managing distributors acronymn and standings?

Cute distributor - MuCH u R QTtTCF

Monitor sales message
Churning (encouraging lapse)
High commission


Managing counterparty acronym and meanings?

Due DR MIL standing at the counter at party

Due dilignece
Ratings limits
Multiple counterparties
(Credit) Insurance / derivatives
Limit exposure to single counterpary


Monitoring experience sentence and meanings?

Man, Computer Networks ARE crap!

Capital MANagement
NB strategy review
ALM (3 letters like ARE)
Expense controls


Reasons to underwrite


Substandard lives are identified and terms changed
Avoid anti-selection
Financial underwriting against overinsurance
Experience in line with expected
Risk classification to set a correct premium for the risk
Reinsurance easier to obtain


What are the data checks?

Training (feedback, relationship with software staff)
Spot checks and vetting (regular) - end to end checking, paper vs stored
Compulsory fields - claim number, age
Data acceptance controls - error checking, overwrite by person of certain level
Data accuracy - similar format proposal form and input screen


What attracts customers, what are the customer satisfaction risk management points?

Attract them through design..

Meet needs
Peace of mind
Simple and clear
Guarantees, reviewable (financially attractive prices)
Financial security

Keep them satisfied by..

NIICU Nice to C U

Needs - actual needs should be met

Implications - if poor customer satisfaction, people leave and don't buy more products, profits loss, no x sales

Info and literature - regular info is expected, should not try and cross sell or customers may lapse

Claims management should be good, good service etc.

Understanding - both company and policyholder should understand what policy trying to do, else regulator may go with PRE


What needs does LTCI cover?

Cost of care
Of residential or domestic assistance
Of medical assistance after physical or mental breakdown
Not relying on friends and family
Not relying on state assistance
Ideally indemnity


What needs do IP, LP, CI, KP, PMI cover?

Income when out if job and employee benefit run out
Mortgage or loan payments

On each other
Short def period
Cost of salary and other for hiring temp professional

Mortgage paid
Convert to limo sum for income
Medical costs
Same lifestyle, lower paid job

Cover to buy out partner
Taken out on each other

Indemnify treatments
Waiting lists
Standard of treatment
Standard of accomodation
Choice of doctor


Principles of reserves

1. Should cover all liabs for EB
2. Should be prudent valuation
3. Prudent means appropriate MAD, not BE
4. Examples are expenses, lapses, commission, guarantees
5. Valn take into account NT of assets and valn meth
6. Appropriate g and approx
7. Int rate rake currency and current and future yields on existing assets
8. Some say expenses should be those if close to NB if higher
9. Methods and basis used to be disclosed
10. Method should recognise profit appropriately year on year, no discontinuities


Principles of assumptions


Relevant - data used relevant to risks
Accurate - parameters as accurately as possible given data
Flexible - flexible valn/reserving basis to reflect changes in risk

Financially significant - take care over most financially sig ass
Consistency between various assumps..(client)
Usage of assumptions considered
Needs of client, considered
Tax/regs/legs accounted for


Reasons to reinsure

Improve solvency
Credit rating
Good value
Sad life NIFE RST


How to do an investment strategy?

2, 4, 4, 4, 3, 3

1. Stochastic model for projecting assets and liabilities chosen
2. Appropriate time period for projection chosen

1. BE of future experience
2. Dynamic ones relating to investment conditions if possible
3. Model points or full data used
4. Sensitivity and stress testing to be used to find significance of getting assumptions wrong

Assets, Liabilities
1. Current assets as starting point
2. Stochastic investment model for income and capital growth
3. Stochastic inflation model for liabiltiiy expenses
4. Current basis used

Assets and Liabilities
1. Project A and L at end of each year on a supervisory basis
2. Value of interest is excess of A over L
3. Should cover the SCR comfortably
4. Comfy depends on nature of business, regs, competitors levels

1. Stochastic investment model with simulations can be used to find statistical distribution of A-L for each investment strategy
2. From this, we can find ruin probability for each strategy
3. e.g. Solvent in 995 out of 1000 scenarios, P(ruin)=0.005

1. Can rerun model using various strategies to find the optimal one e.g. 995/1000
2. If company has shareholders, can show effect of each strategy on shareholder earnings
3. Would be possible to find a strategy that maximises these for a given ruin probability.


What is the introduction of expense experience?

8 points.
1. Expenses to be split down and analysed into required cells
2. The first split would tend to be group/fund/product level
3. Then by RP or SP
4. And then by direct expense or overheads
5. Then by initial/renewal/termination/claims/investment expenses
6. Then split on whether proportionate to premium/sa/number of pols
7. There may be exceptions
8. Commission is excluded


Full expense experience investigation

1. Expenses to be split down and analysed into required cells
2. The first split would tend to be group/fund/product level
3. Then by RP or SP
4. And then by direct expense or overheads
5. Then by initial/renewal/termination/claims/investment expenses
6. Then split on whether proportionate to premium/sa/number of pols
7. There may be exceptions
8. Commission is excluded

One possible approach is to split by:

1. Salary and other staff-related expenses
a. Make up a large part of expenses as admin is labour-intensive
b. Will generally be fixed (in real terms) in short term
c. In long term will vary to the needs of the business
d. Will vary to do with the degree of automation in administering the business
One possible split of the expenses is:
i. Staff whose work is related to one cell - directly allocate to risk cell
ii. multiple cells - split by timesheet
iii. Only overheads
iv. Overheads and direct costs - split pragmatically between each

2. Property
a. If property owned by company as part of assets of long term fund a notional rent will be charged
b. Includes heating costs, maintenance etc.
c. Split by floorspace and allocate according to salary

3. Investment expenses
a. Already covered in pricing, not included here

4. Computer costs
a. Cost of buying new computer to be amortise over useful lifetime of the computer and added to ongoing computer costs
b. Split by usage or other sensible method

5. One-off costs excluding computer
a. If part of long term fund, allocate it to overheads
b. If exceptional, non-recurring don't include
c. Amortise over useful lifetime of purchase


How to determine a retention limit?

Method 1:
1. Consider the total of
a. Cost of reinsurance
b. Cost of financing a risk exp fluct reserve
2. As retention level, R, increases, (a) decreases and (b) increases
3. R that minimises the sum of (a) and (b) will be optimal
4. (b) will be found by using the simulation technique below

Method 2:

1. Set a retention level, R, such that the probability of ruin is below a certain specified level
2. Use a stochastic model of expected claim rates
3. Project expected claim rates and assets and liabilities of the company forward
4 Using simulations, R can be found such that the company stays solvent in 995/1000 scenarios, for example.


Relative merits of a formula vs cashflow approach to pricing?

(short, simple, quick and easy)

Short term e.g. PMI
Simple application
Quicker to run
Easy check/audit

(LM - ST0)
Long term e.g. LTCI
Multi-state possible
Stoch models e.g. Gtee and option costs possible
To overcome problems with formula approach

Problems with formula approach:
1. Timing of cashflows not accurate
2. Time varying assumptions/returns not poss
3. Negative net cashflows not possible
4. Accumulation of reserves not possible


What is risk if NB:
Mix wrong by nature and size
Mix wrong by source
Volume too high
Volume too low

1. Change in risk profile/capital requirements caused by it are not within resources. Also a mismatch of expenses and charges
2. Parameters invalidated for mortality/morbidity/other
3. If vol too high, may not be able to cover capital requirement as high strain, may not have administrative resources to cover work
4. If too low risk of not recovering fixed costs of development that have already occurred.
Also parameters for future expenses are based of an assumed volume of new business, if this is wrong, then the parameters are.


Explain ERM

1. Risk management framework considering risks of enterprise as a whole, not individual risks in isolation
2. Diversification effects of risks allowed for across whole business
3. "The holistic, integrated approach to risk management"
4. Actuary should regularly advise directors of nature/size of risks
5. Most sensitive and financially important get most attention
6. Management strategies designed to protect against risks the insurer chooses to try and control
7. Risk management strategies should be agreed, documented and implemented
8. Strong governance and controls are vital to strong risk management framework
9. Strong risk management framework allows company to identify and assess strategic opportunities
10. Good ERM allows educated risk taking.


Explain an AOS

1. Insurer will want to analyse surplus/profit arising over a year to understand trends/drivers and hence make appropriate business decisions

Short term insurers:
1. Consider and analyse various claims and expense ratios for cohorts of business, comparing actual ratios against expected.

Long term insurance:
Independent 1-off financial trends
1. Independent check on valuation process/data
2. Identify non-recurring components of surplus, to enable appropriate decisions about distribution of surplus
3. Financial effect of NB
4. Financial effect of getting valuation assumptions wrong, exposing the financially significant ones
5. Identify trends
6. Comply with regulatory requirements


Explain an AOEV?

Big MF Rattlesnakes gone MIA

1. Exec remuneration data
2. M&A
3. Validate calcs/assumps/data used
4. Reconcile values year on year
5. Management information
6. Detailed info for published accounts or those of parent company


5 aims of state provision

Protect nations health
Subsidise poor
Balance the budget
Meet political promises
Keep with social culture