Chapter 31: Other risk controls

Question 1

Controls for management of risks that a company retains

Answer 1

• Claims control procedures - these mitigate the consequences of a risk event that has occurred
• Diversification
• Underwriting at the proposal stage - this ensures a fair price for the risk
• Management control systems - these reduce exposure to risk

Question 2

What can risks be diversified within

Answer 2

• lines of business
• geographical areas of business
• providers of reinsurance
• investments - asset classes
• investments - assets held within a class

Question 3

Why would an insurer reject a prospective policyholder as opposed to charging a higher premium

Answer 3

• It may be difficult to properly rate the risk
• The risk of a claim may be so high that there is little hope of recouping the initial expenses involved
• The appropriate premium might be so high that there is no realistic hope of actually sellilng the policy

Question 4

Advantage of accepting a large proportion of the risk at standard rates

Answer 4

• Makes all aspects of the administration easier - premium collection, valuation, claims handling
• Easier to present to customers

Question 5

Special terms for substandard risks

Answer 5

• Increasing the premium for a given benefit level
• Decreasing the benefit for a given premium
• Exclusion clauses
• Deffering the cover until more information is known
• Declining cover

Question 6

How will the insurer assess the longevity and health risks of a prospective policyholders

Answer 6

• asking questions on the proposal forms
• obtaining reports from a policyholder’s doctor
• carrying out medical examination
• performing specialists tests on the applicant

Question 7

Bank underwriting

Answer 7

the process by which a bank decides whether a potential borrower is creditworthy and should recieve a phone

Question 8

What would bank underwriting entail ?

Answer 8

• assessment of the customer’s willingness and capacity to repay a loan
• considering the credit history and the past perfomance of the customer
• customer identity and income verification
• credit bureau data including othser credit products taken by the customer
• internal scorecard assessments to determinine creditworthiness
• collateral valuation and assesssment on the case of secured lending

Question 9

Claims controls systems

Answer 9

mitigate the consequences of a financial risk that has occured.
They guard against fraudulent or excessive claims

Question 10

Examples of good management control systems

Answer 10

• Data recording
• Accounting and auditing
• monitoring of liabilities taken on
• Options and guarantees
• Performance of due dilligence before entering into a contract with another party

Question 11

How can risk management optimise the risk return profile of the organisation

Answer 11

supporting selective growth of the business
* Establish a process for assessing new business opportunity. This should include a way to assess risk adjusted returns
* Allocate capital and other resources to business units or activities with high risk-adjusted returns

supporting profitability through risk-adjusted pricing
* Prices should reflect the cost of risk in addition to funding costs and operational expenses

Use limit setting to control of the size and probabillity of potential losses
* Set basic exposure limits - to provide absolute limits on exposure
* Set stop loss limits
* set sensitivity limits
* employing techniques to manage existing risks
* Active portfolio management
* Reduce risk
* Transfer risk to a third party