Chapter 28

Question 1

1. What are the statements released according to the risks?

Answer 1

• Risk appetite statement is released in public accounts
• The risk profile statement is released which identifies the material risks that the company is currently and will be exposed to
• The risk tolerance statement is released which includes the quantifiable (expressed in probabilistic terms) and non-quantifiable (expressed as risks accepted and those not accepted)
• Is done in a holistic way to ensure synergy and to avoid concentration risk
• The risk limits are released which is the maximum level of risk the organization can take on
• Then finally the risk metrics are released which measure if the company is operating within the risk limits (this includes indicators that flag that the limit is being reached or crossed)

Question 2

2. Relationship between all the risk terminologies

Question 3

3. What are the features of a company that may influence its risk appetite?

Answer 3

• Size
• Structure
• Length of operation
• Level of regulatory control
• Capital
• Any guarantors
• Risk appetite of the owners or other providers of capital

Question 4

4. What do the board of directors set risk appetites with reference to?

Answer 4

• Solvency level
• Earnings
• Economic value
• Credit rating
• Ability to pay dividends
• Combination of the above

Question 5

5. What makes a risk efficient market?

Answer 5

• A good risk transfer market

Question 6

6. Describe the different components of product design that relate to risk:

Answer 6

• The premium = risk covered + profit
• But if there is no profit, the product must be a loss leader or must increase diversification
• Complexity (e.g. adding options) may increase marketability with high net worth individuals and may make it competitive but it may come with additional costs and additional risks which bring about additional costs
• Risk that product design does not meet the beneficiaries’ needs (solutions: market research, focus group, small product trial)

Question 7

• Appropriate cost of a policy is found by:

Answer 7

• Placing the risks in homogenous sub groups
• Charge Premium rates according to the risks in each sub group

Question 8

• Pricing assessment of a product:

Answer 8

• Cost of funding in order to raise the funds lend
• Margins for cost and profitability
• Risk premium

Question 9

7. What are the advantages of risk classification?

Answer 9

• Combats anti selection
• Encourages product specific underwriting
• Homogenous groups can be formed
• There is a trade-off with credibility

Question 10

8. What makes a risk insurable?

Answer 10

• Policyholder must have an interest in the insurable event
• Risk must be financial and reasonably quantifiable
• Amount must have some relationship with the financial loss incurred
• Risk pooling must be able to occur

Question 11

9. What are the desirable criteria of an insurable event?

Answer 11

• Individual risk events should be independent of each other.
• The probability of the event should be relatively small.
• To ensure that the premium is less than the benefit otherwise it defeats the purpose of insurance
• Large numbers of potentially similar risks should be pooled to reduce the variance and hence achieve more certainty.
• There should be an ultimate limit on the liability undertaken by the insurer.
• Moral hazards should be eliminated as far as possible because these are difficult to quantify.
• There should be sufficient existing statistical data/information to enable the insurer to estimate the extent of the risk and its likelihood of occurrence.