2011185

Question 1

i) Policyholders’ reasonable expectations (PRE) – This is the expectation that they have on the
benefits ,the coverage, term and all the details about their insurance coverage. What they
believe/expect to receive out of the coverage

What affects PRE:

ii)
• Life insurance – The policy holders expect to be provided a lump sum payment upon time of
the claim (death). The could be expected to cover for different time periods and may also be
offered different sum assured amounts.

• General Insurance – To pay out at the time of a loss due to specified policy events, like car
accident or home damage. They expect to receive the full amount that the agreement
specify to cover for in a timely manner.

• Retirement benefits scheme – Expects to receive their investment fund either as a lump sum
or as an annuity that pay provide them with income when they retire. They expect their bets
interest to be at hand in terms of taxes and investment of their fund.
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Question 2

i) ERM – Is a risk management technique, where instead of managing each business units risk
individually ,we look at the risk management of the different business units at a more enterprise
level. It is a comprehensive approach in managing risk at an enterprise level.

It may be beneficial for insurance company to adopt ERM since they are holistic, consider risk in a
consistent manner , consider the upside and downside to risk , and allow for corporate strategies to
align (instead of using different strategies for each business unit).
Stakeholder involved are line managers, business unit managers, central risk function , etc

ii)

a) Is a strength of the ERM programme – since it allows us to regularly monitor the process which is
an important aspect in risk management (monitoring phase). Since the management techniques are
all streamlined it may be easier to monitor all the individual business units and hence the enterprise
as a whole.

b) Although this is good it may incorporate other risks factors , such as management risk , expense
risk , exposure risk , operational risks ( risk factors affecting the daily running of the business units/
enterprise such as system crashes).

c) Weakness, they should also include with-profit products even though they are a small portion of
the risk

d) Strength, cost efficient

e) Weakness, the data should be considered together, as there may be some health data that affect
life data, and could be useful to include in the ERM process.
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Question 3

i) The regulator might be concerned with the number of policy holder that the retailer is
underwriting. If proper regulation is being complied with. Whether tax regulations are met.

ii)

The reserves the insurance company may need to cover:

• Any outstanding reported claims that were not made by the policyholders may be covered
by the reserves.

• If there is a sudden catastrophe then the reserves may be needed to pay out this large influx
of claims, which may be of great risk to the business and hence reserves are set aside for
situations like these.

• Any claim event that may have occurred but may not yet be reported (IBNR) may surface as
a risk to the retailer and thus reserve may need to be set aside for such sudden claims. i.e.
methods such as basic chain ladder method may be used to calculate the amount for these
reserves.

• Reserves may also be side aside to handle the expenses that the retailer may face when
claims are made or when there may be any issues in the policy pricing (that may cause more
expenses).

• Reserves may be set aside for claims that have still not yet occurred so that the retailer is
prepared for any risk or circumstances that might come.

iii)

Investment return – the expected return from future premiums is an important assumption.

Mortality – important to predict the expected number of deaths in order to determine the
appropriate premiums to charge for life insurance policies.

Expenses – admin and other expenses are an important consideration in the pricing process.
Lapses- Lapses refer to policies that are terminated before the policyholder dies.

Lapses: Lapses refer to policies that are terminated before the policyholder dies. They reduce the
expected future income.
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iv)
Investment return – Yes, it should be stochastically modelled since risk may arise from the model if
investment returns are deterministically model. Several factors affect the investment returns, such
as the amount being investment ,interest rates and these factors are constantly changing ands
hence it should be stochastically modelled.

Mortality – No, mortality tend to remain constant over the long run and does not change constantly
hence it may be deterministically modelled (the use of actuarial mortality tables would be
appropriate enough)

Expenses – Yes , several factor affect expenses and hence it should be stochastically modelled

Lapses- No , lapses tend to not have much measurable value in models (i.e. default to predict
lapses) and thus it would be better to use a deterministic model for this.
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Question 4

i) Why traditional insurance products may not be appropriate:

by assessing the likelihood (frequency) and severity of the risk it may not be such a great threat to
the company and thus insurance may not be a great idea , since the outcome does not have high risk
affect.

There may not be much flexibility in the choice of the cover provided by the insurer .

There could be credit risk from the insurer, in that he may not pay out when a claim is made.

There may be increased cost to the business therefore we may first need to access the feasibility of
and implementation cost of the insurance.

ii)
More appropriate risk transfer methods may be methods such as integrated risk cover, securitization
, post-loss funding, insurance derivative, swaps . these option are cheaper, more stable , and cover
event that may not have been insurable.

Securitisation – transfer of the risk to the banking/capital markets. It would useful since although
highly unlikely a catastrophe could occur and have high financial consequences and hence
securitization may be an appropriate approach. There is also no credit risk.

Post-loss funding – in exchange for a commitment fee, a loan will be provided for a specific event
with reagreed terms. A loan is provided for a commitment fee only if a specific financial
consequence occurs. This is also a very cheap option and thus a good approach.
Swaps – are contracts to swap negatively risk, such as the occurrence of financial consequences in
our case.
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Question 5

i)
• The age of the children and adult as this would have an effect on their morbidity.
• The frequency of their past claims
• The size/ amounts of their past claims
• The reasons for the claims be also be analysed to access any homogenous claim groups (or
sudden increase in similar claims)
• The proposal forms that were done during the underwriting process.
• The claim forms from when any policyholder made a claim.
• We could use external data such as , recent identification of new illnesses or diseases
• We could use data provided from reinsurers.
• Since the scheme has 15 other benefit options, we could assess the other products on the
market as well as our products to see how were performing.
• Competitors pricing would help to see how our prices compare to our competitors.

ii)
Analyse the effect of inflation on the expenses to see if the contribution rates need to be increased
or not.
Analyse the cost of medical equipment or medical expenses and analyse any increase in prices to
appropriately increase the contribution rates.

See if the fixed expenses have been appropriately spread out.

Ensuring that the data is complete, accurate, sufficient, consistent and timely may increases the
accuracy of our analyses

We could analyse the expenses to see the amount of provision that need to be set aside and hence
the contribution rates that may be needed to achieve or targeted provisions.

We could see the prices that are being offered by our competitors and appropriately adjust our
prices.

Access the increases or changes in expenses.

iii)

Underwriting considers any insurance risk. This means assessing whether the risk is acceptable and if
the premiums are appropriate. It could be used to protect the integrity of the risk pooling structure
and may also be used to identify any bad risks.