Chapter 31: Other risk control measures Flashcards
List 4 risk management tools available to a financial product provider, other that reinsurance and ART.
- Diversification
- Underwriting at the proposal stage
- Claims control processes / procedures
- Management control systems
How can an insurer diversify its business?
- Different lines of business
- Different geographical areas
- Different reinsurers
- Different asset classes
- Different assets held within a class
- Reciprocal reinsurance arrangements
Why might an insurance company use reciprocal QS reinsurance to diversify its risks in preference to selling a wider range of insurance contracts itself?
Marketing and selling a wide range of contracts is expensive. It also gives the insurance company the reputation of being a ‘generalist’ rather than a specialist player, which might not be the company’s desired strategy.
Reciprocal quota share reinsurance, where one company reinsures a part of another company’s business and vice versa, enables the insurance company to concentrate its marketing, sales and administrative effort on its chosen segment of the market (whilst still achieving a diversified portfolio). This should be more efficient.
Underwriting
Underwriting is the assessment of potential risks so that each can be charged an appropriate premium.
How can underwriting be used to manage risk?
SAFARI
Suitable special terms - identification of the most suitable approach and level for special terms to be offered to substandard risks.
Avoid anti-selection
Financial underwriting to reduce the risk of over-insurance on large policies
Actual claims experience being in line with that expected in the pricing basis
Risk classification to ensure that all risks are rated fairly (premium commensurate with the risk)
Identify substandard risks, for which special terms will need to be quoted - while aiming to accept as many risks as possible on standard premium rates.
What are the 3 types of initial underwriting for a life insurer?
- medical - assessing the applicant’s health
- lifestyle - assessing the impact of lifestyle
on the level of risk - financial - to reduce the risk of over-
insurance
Who might interpret medical underwriting information?
Medical evidence is interpreted by specialist underwriters employed by the company.
How can an applicant’s lifestyle be assessed during lifestyle underwriting?
- Applicant’s occupation
- Applicant’s leisure pursuits
- Applicant’s normal country of residence
What is the purpose of performing financial underwriting for a life insurance contract, and what information on the applicant may be obtained in order to carry it out?
The purpose of financial underwriting is to assess whether the proposed SA is reasonable relative to the financial loss that the applicant would suffer if the insured event occurs. The aim is to reduce the risk of over-insurance.
Information obtained may include:
- The applicant’s occupation and salary
- The proposed SA selected by the applicant
- Details of other insurance policies held by
the same applicant
- Whether the applicant has an insurable
interest in the insured life
List the possible decisions that can be made following underwriting.
- Accept on standard terms
- Reject / decline
- Deferral of cover
- Addition to premium, commensurate
with the degree of extra risk. - Reduction in benefit, commensurate with
the degree of extra risk - Exclusion clause(s)
Claims control systems
Claims control systems mitigate the consequences of a financial risk that has occurred by guarding against fraudulent or excessive claims.
Provide examples of claims control systems.
- Requiring claimants to submit a claim
form - Requiring evidence of eligibility to claim,
e.g. death certificate - Requiring continued evidence of eligibility
to claim, e.g. for LTCI - Requiring estimates of the extent of a loss,
e.g. by the policyholder, or a company
approved by the insurer, or by a loss
adjuster
Explain why insurers may encourage income protection insurance benefit claimants to make a partial return to work, with a continued benefit.
This will benefit the insurer in terms of paying a lower claim amount, plus the longer-term health of the policyholders may be improved by entering active employment again. This can reduce the time to recovery from the current claim and reduce the likelihood of future claims.
Describe different types of management control systems used to reduce risk.
- Data recording
The company should hold good quality
data on all risks insured and on the risk
factors identified during underwriting, to
ensure that adequate provisions are
established and to reduce operational
risks. - Accounting and auditing
Effective procedures enable adequate
provisions to be established, regular
premiums to be collected and finance
providers to be reassured. - Monitoring liabilities
This protects against aggregation of risks
to an unacceptable level. Also, by
monitoring new business volumes, it helps
ensure the provider is not exceeding the
resources available; new business mix to
monitor the risk to profitability due to
cross-subsidies. - Taking special care over options and
guarantees
Monitoring will determine whether the
options and guarantees are likely to bite.
Outline how the risks associated with options and guarantees can be managed.
- Liability hedging and asset-liability
matching can be used.
Example:
- Where the benefit is linked to an external
index, the liabilities can be hedged using
derivatives linked to the same index.
- Put options can be used to hedge
guaranteed minimum benefits under UL
or WP products.
The hedging can be dynamic, i.e. rebalancing the underlying hedging portfolio as market conditions change.
- Restricting option eligibility conditions.
