Chapter 14 - Risk (2)

Question 1

What are the sources of risk to a life insurance company

Answer 1

MAGICAL FAMED VAC W

• MORTALITY and morbidity rates
• ACTIONS of the board of directors or staff
• GUARANTEES and options
• INVESTMENT performance
• COMPETITION
• ACTIONS of distributors
• FRAUD
• failure of APPROPRIATE management system and controls
• MIX of new business by nature and size of contract, and by source
• EXPENSES, including the effects of inflation
• policy and other DATA
• VOLUME of new business
• AGGREGATION and concentration of risk including credit failure
• COUNTERPARTIES
• WITHDRAWALS

Question 2

How can a change in mix of new business be a risk to the company

Answer 2

• A significant change by nature or size could lead to significant change in the risk profile or capital needs of the company that were not within the resources available to it
• A change in the mix by source (distribution channel) may invalidate the parameters for the mortality and expense assumptions

Question 3

How can the volume of new business be a risk to the company

Answer 3

High volume
- writing too much business puts pressure on the capital and administrative requirements

Low volume
- May cause there to be less policies to spread overhead costs

Question 4

How can guarantees and options cause risk to the company

Answer 4

The company is offering terms in advance of the happening of the event. There will be risks associated with the choice of parameters and choice of model used to determine the cost to the company of doing this

Question 5

How can competition cause risk to the company

Answer 5

The need to compete in a free market, may lead the management of a life insurance company to take decisions which will increase its risk profile beyond that which can be supported by the available resources

Question 6

What are some of the decisions management can take to increase its competitiveness in the market

Answer 6

BEARS

• increase BONUSES under existing contracts
• on EXISITING business with reviewable charges, either do not increase the charges or reduce their rate of growth relative to what may have been originally intended
• offer ADDITIONAL guarantees and options under new business contracts
• REDUCE premium rates or charges under new business contracts
• increase SALARIES or commissions in the respective distribution channels

Question 7

How can actions of the board of directors increase risk to the company

Answer 7

The directors of the company may not follow the recommendations of the actuary so that it stays within its risk profile due to:
- Competitive reasons
- Strategic company goals such as maximising new business volumes or amount of funds under management
- So as to maximise shareholder earnings

Question 8

How can actions of distributors increase risk to the company
And give examples

Answer 8

The actions of distributors may be in their own interests or the interests of their client, which may give rise to financial risk to a life company.
Eg:
- encouraging business to lapse and re-enter where there are no exit penalties or there is no clawback of commission payments
- Taking advantage of loopholes in the product design

Question 9

How can failure of appropriate management systems and controls increase the risk to the company

Answer 9

The failure in controls may result in:
- Financial losses for the insurer
- Regulatory intervention
- Reputational damage

Question 10

How can counterparties increase risk to the company

Answer 10

There is a risk that the entity will not be able to fulfil their obligations under the agreement. Or they will perform them to an unacceptable standard.

Question 11

How can the legal, regulatory and fiscal environment increase risk to the company

Answer 11

This can happen if rules are changed adversely