Ch 24: Nature of risks

Question 1

Sources of risk

Answer 1

• Policy and other data
  * Data is inadequate, inaccurate or incomplete
  * Model points do not represent the characteristics of the actual portfolio well enough to produce valid results
• Claims
• Investment performance
• Expenses
• Persistency
• Mix of business by nature and size of contract
• Mix of business by source
• Volume of business

Question 2

Classification of risk

Answer 2

• Model risk - risk that underlying model is not adequate
• Parameter risk - risk that parameters assumed for underlying model are incorrect
• Random fluctuations risk - Risk of unpredictable fluctuations arising from sample error - this is greater the smaller the sample

Question 3

Factors contributing to the uncertainty in the cost of PMI claims

Answer 3

• Effect of medical innovation on cost of treatment
• Changes in lifestyle and prevelance of medical conditions (more obesity)
• Changes in PH and medical professional behaviour which may result in higher utilisation of medical services
• Poor claims control and fraud
• Effect of introduction of claims management processes such as preferred providers
• Ageing pop
• Early detection of diseases due to greater diagnostic services and advances in sensitivity of diagnostic tests
• Currency fluctuations, which may result in volatility in the cost of medical treatment that relies on imported pharmaceuticals or equipment

Question 4

Persistency risks

Answer 4

• Financial risk that surrender value is higher than the asset share at the time of withdrawal
• Risk that mortality and/or morbidity experience due to select effect of withdrawals is worse than expected
• Risk of increasing per-policy fixed expenses due to loss of business volume from withdrawals