Chapter 31: Other risk controls

Question 1

Name 5 ways risks can be diversified

Answer 1

1. Line of business
2. Within lines of business (by geographical area)
3. Reinsurance
4. Asset classes
5. Assets held within a specific asset class (in property can invest in office space and farmland)

Question 2

What is reciprocal quota share reinsurance

Answer 2

One company reinsurers part of its business to another in exchange for part of its business.

This allows concentration on a specific market but diversifies the risks

Question 3

What are the two processes involved in underwriting?

Answer 3

1. Assess risks
2. Set a fair premium

Question 4

What are the two processes involved in claims control?

Answer 4

1. Identifying fraudulent claims
2. Identifying excessive claims

Question 5

What are the reasons for the underwriting insurance business?

SAFARI

Answer 5

S - Suitable terms (defer cover a certain period, higher premium, lower benefit, exclusion clauses, decline)

A - Avoid anti-selection

F - Financial underwriting (reduce risk of over-insurance)

A - Actual experience is close to that assumed in the pricing basis

R - Risk classification so that risks can be grouped into homogenous groups so each group can be charged a similar premium. this makes admin easier

I - Identify substandard risks (defer cover a certain period, higher premium, lower benefit, exclusion clauses, decline)

Question 6

What are the four types of underwriting

Answer 6

Medical underwriting - Access applicant’s health (current, past, family medical history, height and weight)

Lifestyle underwriting - Occupation, hobbies, smoking and drinking habits

Financial underwriting - income, existing policies, type and level of cover applied for

Other - Contact details, address, age, sex

Question 7

How can a bank underwrite customers (6)

Answer 7

• Access capacity to repay the loan
• Consider credit history
• Customer identity
• income verification
• Credit bureau data
• Collateral valuation

Question 8

How are claims controlled for life insurance (2) and general insurance (2)?

Answer 8

Life insurance
* Death certificate
* Exclusions

General insurance
* Accept small risks
* Physically inspections

Question 9

Life 4 examples of how risks can be managed by management control systems

Answer 9

1. Good data recording
   * Hold good quality data, especially on risk factors identified in product development
   * This ensures adequate provisions are held
   * Reduce operational risk
2. Good accounting and auditing
   * Ensures correct provisions are held
   * Correct premiums are collected
   * Investors are ensured the company is managed correctly
3. Monitor liabilities being taken on
   * Protect against aggregation of risk, e.g., new business strain
   * Control mix of business being accepted, especially if there are any cross-subsidies
4. Care in options and guarantees: Consider cost and likelihood of biting

Question 10

How can risks be managed for options and guarantees?

Answer 10

• Choose assets which match the liabilities so that they move consistently with each other
• Match dynamically if underlying market conditions change
• Restrict eligibility date of options