18.2 Risk management and controls Flashcards
(36 cards)
Arrangement whereby one party (reinsurer) in exchange of a premium, agrees to indemnify another party (cedant) against part or all of L assumed by cedant under one or more insurance policies, or under one or more reinsurance contracts
Reduce claim payout fluctuations
Reduce NBS + increase capacity to write more business
Receive technical assistance
Improve capital and solvency position
Limit amt paid on single claim
Protect against aggregation of risk caused by having lots of workers in same building and possibly exposed to dangerous substances or fire
Limit total claims payout in period through stop-loss reinsurance
Reduce insurance parameter risk, esp if entering new market
Reduce claim payout fluctuations
Receive technical assistance e.g.
Data
Pricing models or basis
Uw and admin assistance for high volumes of new business
Reduce new business strain by reducing solvency requirements or through financial reinsurance
Increase profits, return or risk-adjusted ROC (by reducing risk cost or increasing volumes)
Reduce overall capital requirements by using reinsurer’s capital
Allow insurer to separate out diff risks from product»_space; can optimise risk mgmt and capital requirements
Financing arrangement»_space; improve solvency position
Help demonstrate financial resilience/strength + attract investors
Original terms
Risk premium
Catastrophe
Financing reinsurance of existing business
Cedant’s needs
Reinsurance cost
Technical expertise offered by reinsurer (e.g., product design advice, uw support)
Type of business
Maturity of business
Legal and tax conditions applying
Available forms of reinsurance coverage
Reducing NBS:
Original terms/
Risk premium w financing commission
Use financial reinsurance to secure additional capital to cover strain
Pure risk business:
Original terms- Level premium charged based on cedant’s premium rates
Risk premium- Premium based on current age based on reinsurer’s terms
W/p business:
Difficult to get original terms since reinsurer would have to follow cedant’s bonus rates
Some written where no mortality risk- requires closely matched investment strat and close agreement on bonus philosophy
Immediate annuity business:
Not usually sold unless large case
Must consider impact of mortality losses from lighter mortality and available reinsurance
Reinsurer may provide advice on impaired life annuities and smoker/non-smoker annuity rates
Cell captives
Used extensively since usually not enough capital for substantial mortality experience fluctuations
Substandard lives
Usually fac basis
Some reinsurers have specialties in some conditions and hence proposals sent for uw
Usually sending uw docs to many reinsurers and secure lowest rate
Catastrophe reinsurance
NB for group business where risk of many people being injured by same event is greater
Insurers consider:
Price
Provider’s credit risk rating- low probability but vey high sums
Profit shares:
Reinsurer charges slightly higher premium and insurer shares in profits
Advantages:
Closely aligns interests of parties re uw disputes
Easier to agree on rates to be charged
Attachment 1 of FSI 4
Risk mitigation provides for transfer of significant risk if there’s reasonable probability that mitigated event will occur. Insurers must be able to demonstrate this by meeting the following conditions:
…
If criteria not met, may use arrangement but not recognised for financial soundness calcs
Can’t use reinsurance to front classes or subclasses (aka reinsurer effectively writes business directly)
75% limit on premiums that can be reinsured or retroceded
If reinsurer within same group- limit – 85%
Limit applied separately to life and non-life
GOI 3 sct 6
Insurers must regularly perform sufficient due diligence to be aware of counterparty default risk …
… and be able to assess and manage risk.
More due diligence if reinsurer isn’t licensed in SA nor in foreign jurisdiction determined by PA to be equivalent jurisdiction
New unit-linked w limited capital
Requires low retention to reduce mortality/morbidity risk volatility while the portfolio is small.
Risk premium reinsurance is preferred to build retained premium income quickly and avoid challenges with original terms reinsurance for unit-linked policies
A financing commission arrangement will be needed to cover acquisition expenses and reduce new business strain
The reinsurance will likely be on a quota share or low-retention individual surplus basis,…
… possibly with profit-sharing
Cat cover may be considered if the target market has concentration risk (e.g., groups of people in one location).
Large established co w mainly w/profits business
Significant free assets»_space; can absorb high mortality risk and finance new business independently
Reinsurance is only considered for products requiring reinsurer expertise or exceptionally large risks
Unlikely to opt for original terms reinsurance, preferring risk premium reinsurance with high retention and no financing commission
While catastrophe cover may be considered, the available maximum cover might be too small relative to profits to be worthwhile
Established co entering PHI market
The company will seek reinsurer advice on product design, pricing, and underwriting, as it lacks initial experience in the new market
Reinsurers may provide underwriting and claims management support as part of the reinsurance agreement
Benefits are typically capped at 75% of after-tax income, limiting individual claim risk.
Due to the cyclical nature of PHI claims, quota share reinsurance is appropriate, with the reinsurer likely requiring a reasonable business volume in exchange for technical support.
Original terms reinsurance is the preferred method, but individual surplus cover may be arranged on original terms or risk premium basis
Catastrophe cover may be considered if the company has significant group exposure in PHI
Experience refund agreement typically suitable
Large proprietary rapidly expanding and declining free assets
Option 1
Risk premium + financing commission + retention s.t. reduces new business strain
Profit share
Option 2:
Financing reinsurance agreement based on large in-force portfolio
Cat cover
Co writing large volumes of GLA and G PHI
GLA:
Large = individual surplus and high retention
Risk premium or quota share
Cat cover
PHI:
Quota share on original terms
Stop loss cover = reduce regulatory and internal capital requirements
Experience fund arrangements possible
Factors to consider:
Retention on other products
Nature of future increases in SA or addition of disability (incl. income) and sickness benefits
Level of free assets and importance attached to stability of profits and free asset ratio
Terms on which reinsurance can be obtained and dependence of terms on retention limit
Level of familiarity with uw type of business involved
Ave benefit level for product and expected benefit distribution
Existence of profit-sharing arrangement in reinsurance treaty
Effect on regulatory and internal capital requirements of increasing or reducing retention limit
Counterparty
Legal
Operational
Aims to align risk assessment criteria in pricing to pool of lives insured
GOI 3 requires uw policy
The insurer’s marketing channel influences underwriting needs and expected experience.
Direct response marketing allows minimal underwriting but includes higher mortality margins, while broker-introduced business requires stricter underwriting.
In South Africa, many potential policyholders lack doctors with detailed medical records, reducing the usefulness of medical reports.
The ASISA life register helps insurers track individuals previously declined or given loaded premiums, preventing non-disclosure.
Genetic testing constraints affect underwriting; insurers cannot request tests but can use existing test results.
The industry faces pressure to limit the use of genetic and family history information in underwriting.
Underwriting requirements vary based on the insured benefit amount, with more extensive checks for higher sums.
Small sums assured may only require a medical questionnaire, while large sums may need medical exams and financial underwriting.
Some companies underwrite at the claims stage if non-disclosure is suspected, though this is ethically questionable.
Annuities generally do not require underwriting unless offering enhanced benefits for unhealthy applicants.
Sickness, disability, and critical illness contracts involve underwriting at entry, claim inception, and ongoing claim payments.
Group benefits often have free cover limits, with underwriting required for amounts exceeding these limits.
Factors to consider:
Extent and financial significance of potential anti-selection
More detailed uw = greater homogenisation of risk that may be achieved
Interaction between the level of underwriting and the potential level of sales – the lower the level of underwriting, the lower the administration expenses but the …
… higher the risk charge. The overall competitiveness of the product will depend on the interaction of the two.
People (and their brokers or agents) may be more inclined to take out contracts with lower levels of underwriting, …
… and the less underwriting, the quicker new business proposals can be processed.
Competitors
Effectiveness of the proposed underwriting – benefit exclusions may be difficult to police, or limiting medical evidence may make it difficult for staff to underwrite effectively
Claims underwriting may deter people from taking up a contract, due to the uncertainty as to whether a claim may be accepted
Effect of the Constitution and the Employment Equity Act on group policies particularly
Interaction between underwriting level and terms offered by the company’s reinsurers
Expenses associated with the level of underwriting proposed.
Promotion of Equality and Prevention of Unfair Discrimination Act
Prevention of unfair discrimination in, inter alia, life insurance and pension provision on specific grounds
Race
Gender
Disability
HIV status
Purpose- eliminate unfair discrimination leading to “systemic… social and economic inequality”
Process-based
Model mortality rate trends from biomedical perspective
Only effective to extent that process causing death are understood and can be mathematically modelled
Extrapolative
Project historical trends into future
Subjective elements e.g. period over which trends are determined
Stochastic
Generate many scenarios regardless of probability
Must understand drivers of possible future change and consider events related to major causes of death that can lead to future reductions
Old age assumptions uncertain and limited data- may use limiting age
Smoking affects mortality improvements but other factors too
Consider interactions
