Risk Flashcards
(18 cards)
significant level of uncertainty around the cost of cover (PMI)
Frequency risk x claim amount risk
PMI: average cost of claim will vary as inflation increases and as the mix of insured members changes
The indemnity nature of cover also introduces a significant level of uncertainty around the cost of cover:
1. The effect of innovation on the cost of medical treatment
- the wide use of more sophisticated medial technology may increase the cost of treatment
- innovations in surgical procedures may shorten the required recuperation time in hospital
2. Changes in lifestyle and the prevalence of medical conditions
3. Changes in demand side or supply side - which may result in higher or lower utilisation of medical services
4. Poor claim control and fraud , which may result in claims being paid that should have been excluded due to benefit limitations
5. The effect of introduction and updating of claims management processes such as preferred providers and negotiating pricing agreements
6. The ageing population - which will resul in greater demand for healthcare treatment
7. The early detection of diseases due to greater access t diagnostic services ad advances in sensitivity of diagnostic tests
8. Hospital capacity changes, which influence the likely stay s in-patient for a given procedure
9. Current fluctuations - which may result in volatility in cost of medical treatment
Frequency risk x claim amount risk
PMI: average cost of claim will vary as inflation increases and as the mix of insured members changes
The indemnity nature of cover also introduces a significant level of uncertainty around the cost of cover:
1. The effect of innovation on the cost of medical treatment
Enterprise risk
Extent to which the benefit provider is over exposed to a particular risk or region as a result of specialition of product or concentration of distribution
Catastrophe risk
Single event that gives rise to many individual claims. The risk is not from an individual immense loss but an aggregation of claims.
Investment risk
For some long term insurances with significant reserves, particularly pre-funded LTCI and immediate needs LTCI to a lesser extent, the investment assumptions and hence risks may be major considerations.
Mismatching risk
Extent to which the value of assets and the value of liabilities have different sensitivities to factors such as inflation, changes in interest rates and currency.
For retirement funds, the asset liability mismatch ris tends to be most sig in relation to stat bases, bases used for accounting disclosures , and bases used to determine the individual transfer values.
For prefunded LTCI- hard to find assets that are suff long term - to the extent that investment proceeds exceed short term benefit out go , there wil era need for benefit provider to ireinvest those proceeds. This creates reinvestment risk
Reinvestment risk
Investment conditional at the time will result in higher prices than previously anticipated and so lower expectations for future investment returns.
Liquidity risk
The uncertainty regarding the timing and the amount of claims makes liquidity a key concern for this product
Default risk
Where the investment involves counterparties there is a risk to the investor that counterparty will either make no further payments or that payments will be lower than promised.
Risk depends on - quality of counterparty and the type of asset held
Funding risk
Funded benefit could be unfunded because:
1. Parameter risk : assumptions about future experience were unduly optimistc, that is the contributions or premiums were unrealistically low
2.Random fluctuation risk: the assumptions were reasonable but the experience turned out to be unfavourable
3.Model risk: the reserving model adopted was inappropriate
4. In a retirement fund, the sponsor did not pay what was required - due to poor commercial performance or even insolvency
5.Benefits are larger than originally intended - due to benefit improvements perhaps forced by legislation or benefit options that were not cost neutral
In DC , members are entitled to the balance of members accumulated fund but insolvency may still arise from operational issues
- Assets move continuously but for writing - they updated daily or less frequently
Therefore, the liabilities can exceed assets due to errors either in reported asset values or to the fund return recited to the members accumulated fund credits
This insolvency risk is passed to the member as the insolvency will be resolved by negative fund return declared
Key uncertainties for overall cost of benefits
- Proabbaility of individuals being eligible to accrue the benefits
- The probability of individual being eligible to receive the benefits
- The level fo benefits
4.The effect of inflation on the level , or the real level of Benitez’s
5.The investment return achieved on contributions - The tax treatment on contributions, premiums, investment returns and the benefit payments
- Any other influence on the real cost of benefits
Key aspect of funding risk - available of capital. The capital requirement associated with a new insurance policy or a new life in a benefit arrangement :
- The relationship between the pricing and reserving bases, accounting for any regulatory requirements
- Any other general regulatory requirements
- The level of initial expenses
- The level of first premium
Funding risk can be mitigated:
- Having controls in place to ensure the correct contributions and premiums are received timeously
- by managing model and parameter risk
- Reinsurance to cater for random fluctuation risk
- The choice of funding and or financing method can also have a significant impact on the risk
The choice of valuation method and basis will influence how effective this control is.
Excess asset risk
In DB fund - risk that sponsor is not able to use these excess funds for other purposes or there may be financial penalty if it though that the excess was as a result of an attempt to take advantage of special tax arrangement
Risk that sponsor itself my become insolvent as a result of excessive contributions and this may lead to job losses
Sponsor covenant
The ability and willingness of the sponsor to make these contributions as and when they fall due. These payments arise when experience is more adverse than expected when the sponsor CR was last calculated.
risk equalisation
to allow for cross subsidies in case of guaranteed acceptance and community rating
For groups with healthier members will ontribute excess premiums to the risk equildatok fund hixh I’ll be used to subsidies the
claims groups with higher risk
