Risk and Uncertainty

Question 1

• The uncertainties face by a general insurer can be considered under two main headings

Answer 1

o Uncertainty as to the outcome of the business already written
o Uncertainty as to the premiums the insurer needs to charge in future to achieve a desired financial result

Question 2

• The elements that contribute to the uncertainties outlined above can be classified under four main headings

Answer 2

o Those that affect the claims experience
o Those that affect the expenses, including commission
o Those relating to the investments
o Business risks, including new business and lapse risks

Question 3

• Uncertainties relating to the claims experience stem from (16)

Answer 3

o The variability in the size of claims at any one time, and from one period to another
o The delays between the incidents giving rise to claims and the reporting and ultimate settlement of the claims
o The types of policy written and cover provided
o The characteristics of policyholders, including possible anti-selection
o The attitude of policyholders to claiming
o Crime states
o Economic conditions
o Judicial decisions
o Legislation
o Accumulations of risk
o Catastrophes
o Latent claims
o Currency risks
o Reinsurance risks
o Interpretation of wording
o Inflation and consequential rates of escalation of claims

Question 4

• The main expense risks relate to (5)

Answer 4

o Commission
o Mix of business
o Changes of the progression of staff and accommodation costs
o Changes in professional and legal costs
o Doubts about the allocation of expenses

Question 5

• Investment risks relate to (9):

Answer 5

o Market conditions
o Assets available for investment
o Timing of claim payments, in particular in relation to unfavourable conditions
o Poor investment management
o Liquidity
o Mis-matching
o Security of assets
o The quantity of free assets
o Movements in asset values or currency rates