Chapter 13 - Risk (1)

Question 1

List the key risks associated with using data

Answer 1

I RAP GIF

• data are INACCURATE or incomplete, leading to erroneous results or conclusions
• past data is not sufficiently RELEVANT for the intended purpose because data isn’t precisely comparable across companies
• the data might not be in a form that is APPROPRIATE for the intended purpose
• the data may be collected for a PURPOSE, so it’s not appropriate for a different purpose
• chosen homogenous data GROUPS may not be optimal due to:
  – the group being too small for analysis
  – if the data groups merged, it may not be sufficiently homogeneous
• INSUFFICIENT volume of data, which makes it not credible
• past data might not reflect what would happen in the FUTURE due to:
  HARD FROG
• HETEROGENEITY within the group
• past ABNORMAL events
• significant RANDOM fluctuations
• past data may not be up to DATE
• FUTURE trends not being reflected sufficiently in past data
• changes in the way that the data was RECORDED
• OTHER changes e.g. medical, economic
• changes in the balance of any homogeneous GROUPS underlying the data

Question 2

Possible reasons for heterogeneity when using industry wide data

Answer 2

GPS RN P

• companies operating in different GEOGRAPHICAL or socio-economic sections of the market
• POLICIES sold by companies differ
• SALES method may differ
• coding use for RISK factor may differ
• NATURE of data storage might differ
• companies will have different PRACTICES

Question 3

4 other problems with using industry data

Answer 3

LEND

• LESS detailed and flexible than internal data
• EXTERNAL More out-of-date than internal data
• NOT all organizations contribute, and those that do may not be representative of the market
• DATA quality depends on the quality of the data systems of all its contributors

Question 4

What are the risks associated with the assumptions regarding future mortality

Answer 4

• Model risk - the model, typically a probability distribution, chosen to represent future mortality, may not be appropriate
• Parameter risk - the parameters used with the model may not adequately reflect the future experience of the class of lives insured or to be insured
• Random fluctuations - the actual future experience may not correspond with the model and parameters adopted, even though these adequately reflect the class of lives insured or to be insured

Question 5

When is the Random fluctuations risk most likely to arise

Answer 5

• It is most likely to arise if the numbers to risk are not large enough for the law of large numbers to apply

Question 6

How can an insurance company that appears solvent one day become insolvent the next day following a change in asset values

Answer 6

A fall or rise in interest rates could lead to insolvency if liabilities are valued at market rates. If assets were invested with a shorter discounted mean term than the liabilities, then on a fall in interest rates the value of the liabilities would rise by more than the value of the assets.