Chapter 45: Risk Management Tools II

Question 1

6 Risk Management tools

Answer 1

• Reinsurance
• Alternative risk transfer
• Diversification
• Underwriting at the proposal stage
• Claims control procedures
• Management control systems

Question 2

How might you diversify business?

Answer 2

Across:

• different classes
• different geographical areas
• different reinsurers
• different asset classes and stocks

Question 3

What is underwriting?

Answer 3

Underwriting is the assessment of potential risks to charge a fair premium.

Question 4

Why do providers underwrite business?

Answer 4

S - identifying and offering special terms to SUBSTANDARD risks
A - avoiding ANTI-SELECTION
F - reducing the risk of over insurance by FINANCIAL UNDERWRITING
E - ensuring that EXPERIENCE follows that expected in the pricing basis
R - using RISK-CLASSIFICATION to ensure that all risks are treated fairly

Question 5

Main ways in which special terms can be applied

Answer 5

• additions to premiums
• reductions to benefits
• exclusion clauses

Alternatively:

• risk may be declined
• insurance may be deferred.

Question 6

3 Different types of underwriting used by life insurance companies

Answer 6

• medical
• lifestyle
• financial

Question 7

Claims control systems can also be used to help manage risk.

What do claims control systems do?

Answer 7

They mitigate the consequences of a financial risk that has occurred, guarding against fraudulent or excessive claims.

An example of a claims control system would be the management of ongoing income protection or permanent health insurance claims.

Question 8

What are the 4 types of management control systems used to reduce risk?

Answer 8

• data checks
• accounting and auditing
• monitoring liabilities
• taking special care over options and guarantees