C30 : Other Risk controls Flashcards
(16 cards)
List tools ( other than reinsurance and ART) for managing and controlling the risks that are retained by a financial product provider.
The following can be used to aid the management and control of risk for a financial product provider:
1. diversification
2. underwriting at the proposal stage – this ensures a fair price is paid for the risk
3. claims control systems – these mitigate the consequences of a risk event that has occurred
4. management control systems – these reduce the exposure to risk.
Describe how a provider can diversify its business in order to reduce risk
Risk can be diversified within the following:
lines of business
geographical areas of business
providers of reinsurance
investments – asset classes
investments – assets held within a class.
Describe the use of Reciprocal Quota Share reinsurance to Diversify Risk
Reciprocal Quota Share to Diversify Risk:
- Marketing and selling a wider range of contracts is expensive
- Also gives the reputation of being a ‘generalist’ rather than a specialist player, which may not be company’s desired strategy
- Reciprocal QS, where one company reinsures a part of another company’s business and vice versa, enables insurance company to concentrate its marketing, sales and administrative effort on its chosen segment of the market. This should be more efficient.
What is Underwriting at the proposal stage
Underwriting generally refers to the assessment of potential risks so that each can be charged an appropriate premium.
Describe 5 ways in which underwriting can be used to manage these risks
SAFER
1. Substandard risks – identify and offer special terms to substandard risks while aiming to accept as many lives as possible on standard premium rates
2. Avoid anti-selection
3. Financial underwriting to reduce the risk of overinsurance on large policies
4. Ensure that claims experience follows that expected in pricing basis
5. Risk classification to ensure that all risks are treated fairly (homogenous groups)
Describe the characteristics of a class of insurance that would make underwriting important for that class.
Underwriting is important for those products where the potential risk to the provider is large.
- the size of the policy is large
- the gains to be made from anti-selection are large (eg term assurance)
- cover is optional rather than compulsory,
List three types of life insurance underwriting
Life insurance underwriting process
- medical underwriting – assessing the applicant’s health
- lifestyle underwriting – assessing the impact of lifestyle (eg occupation, leisure pursuits, country of residence) on the level of risk
- financial underwriting – to reduce the risk of over-insurance
When medical underwriting may be needed?
Sources of collecting medical evidence and its interpretation.
Company is at risk on death or sickness under a contract e.g. Term, annuity
Sources of medical evidence
Proposal form
Doctor’s report
Medical exam
Specialist medical tests, e.g. electrocardiograms
Who interprets the evidence?
Medical evidence is interpreted by specialist underwriters with help from doctors employed by the company and reinsurers’ U/W manuals
Cost vs benefits, dishonesty allowed in premium if based on insurer experience.
Explain Lifestyle underwriting
other factors that can affect the mortality or sickness risk need to be investigated, namely any risks associated with the
applicant’s occupation
leisure pursuits of the applicant
applicant’s normal country of residence.
Suggest factors relating to the applicant’s normal country of residence that might influence mortality risk.
The expected level of mortality may be affected by:
standard of living
diet and lifestyle
climate
prevalent diseases
access to medical care and the quality of care
levels of violent crime
terrorism / war risk.
Explain Financial underwriting
Financial Underwriting
- To assess whether the proposed sum assured is reasonable relative to the financial loss that the applicant would suffer if the insured event occurs
- Aim is to reduce the risk of overinsurance.
- Information obtained may include:
1. Applicant’s occupation and salary
2. Proposed sum assured selected by the applicant
3. Details of other insurance policies held by the same applicant
4. Whether applicant has as insurable interest in the insured life
Sub-standard risks : List the main ways in which the special terms can be specified
Application of special terms to substandard risks
1. Addition to premium, commensurate with the degree of extra risk
2. Reduction in benefit , commensurate with degree of extra risk
3. Exclusion clauses
4. Deferral of cover
5. Rejection of cover
What are Claims control systems?
Claims control systems :
1. Mitigate consequences of a financial risk that has occurred
2. Guard against fraudulent or excessive claims
Describe claims control systems that a life insurer can implement at the claims stage.
For death claims, the insurer can check that the
1. Claim is genuine (not a fake death) e.g. by reviewing the death certificate
2. Details declared at policy proposal were correct.
3. Continuing validity of the claim at regular intervals in sickness contracts
Describe four types of Management control systems used to reduce risk
Management control systems used to reduce risk
1. Data recording – hold good quality data on all risks and risk factors identified during underwriting to ensure adequate provisions to be established and to reduce operational risk
2. Accounting and auditing – to enable adequate provisions to be established, regular premiums to be collected and providers to be reassured as to the financial position of the company
3. Monitoring liabilities – e.g. of NB volumes to help ensure the provider is not exceeding the resources available; NB mix to monitor the risk to profitability due to cross-subsidies
4. Options and guarantee: Taking special care over options and guarantees – in particular since a change in market conditions could make options and guarantees more or less valuable
