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Flashcards in Final ST1 Deck (32):
1

Why do an Analysis of Surplus

We do an AoS in valuation runs, which use data.
"Independent, one-off financial trends"
Independence - independent check on valuation data and process
One-offs - identify non-recurring components of surplus
Trends - give info on trends in experience of company
Financial effect of Differences between valuation assumptions and experience
Financial effect of writing NB

2

Why do an Analysis of EV?

Big Mother Fucking Reptiles are MIA
MI- Provide MI
Accounts - Provide detailed information for published accounts
Bonuses - Help set exec remuneration
M&A
Reconcile values for successive years
FinCad - Validate calcs/assumps/data used

3

What do we validate and what do we check in AoS and AoEV? What is constant between the two?

AoS - check - independent check of valuation process and data
AoEV - validate C(alcs)A(ssumptions)D(ata) used
Data is the constant value

4

Reasons to calculate technical reserves?

MIAnAmAR
M&A value
Investment strategy influence
Accounts - Liabilities shown in published accounts
Accounts - Liabilities shown in solvency supervision accounts
Accounts - Liabilities show in internal management accounts
Reinsurance arrangements assessment

5

Give the wording for the accounts stuff in 'reasons to calculate technical reserves'

Liabilities shown in IMPS accounts

6

What are the principles of investment?

a). Select investments appropriate to NTC of liabilities
b). These should be selected to maximise overall return on assets (investment income + capital gains)
c). The extent to which (a) can be departed from to meet (b) depends, inter alia, on extent of company's free assets and risk appetite

7

What's the quick way to think about POI?

A appropriate to N/T/C of L, maximise overall return if enough money and within risk appetite

8

Reasons to reinsure

SAD LIFE Nife (RST)
Smooth results
Avoid single large losses
Diversify risk
Limit exposure to risk
Increase capacity to accept NB volumes
Financial assistance
Expertise
Regulatory/Solvency/Tax Arbitrage

9

Formula vs Cashflows

Formula (SS QE)

Short term e.g. PMI
Simple application
Quicker to run
Easy to check/audit

Cashflow

Long term e.g. LTCI
Multi-state modelling possible
Stochastic models possible e.g. Option/guarantee costs
To overcome formula problems

Formula problems

Cashflow timing not accurate
Assumptions/returns varying over time not possible (stoch)
Negative net cashflows no possible
Accumulation of reserves not possible

10

18 Risks

Group 1

Morbidity/mortality - parameter/model/random fluctuations
Lapse
Expenses and expense inflation
Commission/clawback

Group 2

Ops risk->fraud risk->Reputational risk
Option take up risk

Group 3 - NB volume/mix

Group 4 - Regs/legs/tax

Group 5 - Counterparty default risk/competition

11

What are the distribution channels?

1. Insurance intermediary (broker)
2. Tied agent
3. Own salesforce
4. Direct marketing - press/mailshot/telesales/internet
5. Worksite marketing

12

What is EV?

PV future shareholder profits in respect of EB plus release of shareholder owned net assets
Where net assets are assets held over those required to be held to meet liabilities

13

10 reserves, which ones are different and the same?

Different:

PV future claims + expenses - premiums LT
Guarantee/option cost LT
CIT ST
Equalisation/catastrophe ST

Same:

UPR (unearned premium reserve) e.g. £1200 paid for year, but only 1 month gone, so 1100 UPR
URR (unexpired risk reserve) - e.g. an amount over 1100 above, voluntary, held if don't think 1100 sufficient for risk (mispriced)
OCR
IBNR
IBNER
Mismatch

14

Risks (7 groups)

Data (own/insurance/population/overseas)
Claim amounts (by treatment/day/length/medical inflation)
Claim rates (inception/termination)
Mortality/morbidity -> non-disclosure -> early screening/diag
Lapse -> anti-selection
Commission/clawback
Expense and inflation

Ops
Management actions
Fraud
Internal audit
Rep -> customer service
Options/guarantees

Counterparty (distribution/reinsurance/outsourcing)
Competition

PAC risks - where P e.g IT failure
Catastrophe

NB vol/mix SSTN

Assets
Inv performance
Mismatch
Liquidity

Regs/legs/tax

15

What are the 5 main headings for data checks as a risk management tool? Give 2-3 points on each

a) Accuracy - Recording accuracy
1. Internal and external audit to consider this
2. Proposal form/admin system similar format

b) Vetting/spot checks - Regular vetting/spot checks
1. Compare paper (or electronic if phone underwriting) vs. facts stored periodically
2. Check policy records end to end, especially if passed between multiple systems

c) Acceptance - Controls on data acceptance
1. In-built checks to not allow erroneous input e.g age>120
2. If error isn't an error, then only staff at specified status allowed to overwrite
3. Audit trail kept of these

d) Compulsory fields
1. Certain mandatory firleds
2. e.g. age/sex/benefit
3. Claim not accepted if no policy number for cross checking

e) Staff training
1. Encourage feedback from input staff
2. Close liaison between input staff and software developers
3. Develop culture of accuracy and ability to spot wrong information

16

What are the main areas in risk management?

1. Reinsurance
2. Underwriting
3. Claims management
3. Policy/Claims data checks
4. Product design
5. Manage distribution process and customer relationships
6. Manage other counterparties
7. Other internal processes
8. Asset-Liability management

17

What are the different levels of underwriting? Explain the 3rd in 3 points.

1. Full medical underwriting
2. MHD - medical history disregarded
3. Moratorium

18

How does medical underwriting manage risk?

1. Identify substandard lives whom special terms must be quoted (want to offer most policies standard terms)
2. Fair rating of all risks
3. Helps ensure morbidity experience close to pricing basis
4. Reduces risk of overinsurance in large proposals
5. Helps protect from anti-selection, particularly from lives whose health is impossible to assess risk accurately

19

What is the general process of medical underwriting, how will it vary?

Vary by market practice/product/regulations

0. Customer decides what level of medical underwriting they want (full/MHD/moratorium)
1. Medical and other evidence
2. Interpret the evidence
3. Make a decision

20

What are the sources of medical evidence, when will the last 3 be used, what are the other factors effecting mortality that would be gathered for other evidence?

1. Questions on proposal form
2. Report from doctors of applicant
3. Medical exam carrried out at request of insurer
4. Specialist tests

2, 3, 4 incur extra cost, only carried out if expected loss of misestimating is higher than this cost

Other factors in determining premium..
1. Job
2. Normal country of residence
3. Leisure activities

21

How will medical evidence be interpreted?

Specialist underwriters make use of:
1. Any doctors specifically employed by company for this purpose
2. Underwriting manuals (internal or reinsurers)

22

Possible underwriting decisions

1. Accept on standard rates
2. Higher premiums/lower benefit
3. Reject if applicant too high risk
4. Delay if high risk is temporary
5. Offer different type of contract as lower risk
6. Reinsure on facultative, zero retention basis
7. Exclusion clauses

23

Give an example of an actuary looking at homogeneous risks?

So an actuary can work out an expected loss for wooden-frame houses by looking at just wooden houses, not brick houses too.

24

What is the main aim in claims management?

Ensure claims accepted are consistent with assumptions made when product designed and priced

25

How is claims management used in IP?

1. Make sure RR<1 (post tax and including state benefit)
2. Disability counselling, to establish severity and likely return to work date

26

How is claims management used in PMI? Why has it not been accepted everywhere?

1. Pre-authorisation, ensures insurer is happy with proposed treatment and doesn't have to rely on ph's own doctor
2. Make sure treatment is in policy
3. Direct insured to hospital best equipped to handle treatment at cost acceptable to insurer
4. Not widely accepted as infringes on rights to have free choice to get treatment where they want

27

How is product design used in risk management?

1. The following directly impacts risk level and type on a policy:
Form of benefits
Claim definition
Guarantees and options

2. The target market will also influence the design

3. T's and C's are also very important, they should be clear and consistent with pricing basis

28

6 techniques to manage counterparty risk? Including outsourcers

1. Due diligence
2. Diversify across several differant ones
3. Single counterparty exposure limits
4. Must be above certain credit rating
5. Credit insurance and derivatives
6. SLA's for outsourcers

29

What other internal processes can be used for risk management?

ERM
Experience monitoring and control
Quality of staff

30

What might experience monitoring and controls be used to do?

Expense controls
Policy retention team
Review NB strategy
ALM
Capital management

31

In terms of quality of staff in risk management, what comes under the heading?

Audit staff competence
Identify fraudulent behaviour
Time and motions analysis for staff reallocation or training

32

Explain moratorium underwriting in 3 points?

a. No formal underwriting at acceptance, examined at claim time
b. Can claim for any condition apart from those pre-existing in a defined period (5 years) before acceptance
c. This is often removed after 2-3 years if no further treatment