Risks in life and general insurance

R einsurance
I nvestment
S hort Termism of Senior Management
K ompetition

L egal and regulatory risks

I nflation
F raud
E xpenses

D ata
R ates (mortality, claims)
O ptions
W ithdrawals
N ew Business (Vol,Mix)

C ontrols (failure)
A ggregation (Group - non-independent risk)
T ax
S election

Contract design factors

Profitability
Risk characteristics
Extent of cross subsidies
Marketability

Wording in policy documents

Competition
Customer needs

Financing (capital req)

Admin and accounting
Consistency with other products
Types of benefits (level, form, early, discontinuance, gtd, discretionary)
Onerousness of options and gtees
Regulation
Sensitivity of profit

Characteristics of a professional

Awareness
Competence
Integrity
Diplomacy

Good communication
Relevance
Objectivity
Confidences ability to maintain
Environment sensitivity to changes in
Reliability
Sensitivity
Insurability

Independent risks

Data sufficient
Ultimate limit on claims
Moral hazard minimised
Pooling of risk
Small probability of occurrence

External environment chapter

Competition and the underwriting cycle

Regulation
Environmental and ethical considerations
Accounting stds
Tax
Economics (i, infl, growth, exch rate)

Benefits provided by state

Institutional structure (mutual or proprietary?)
Governance (corporate)

Lifestyle
Internationalism
Social trends
Technological advances

Reinsurance - reasons for reinsurance

Diversification - spreads risk and reciprocal deals

Expertise
Financial assistance
Limits exposure to risk
Avoids single large losses and concentration of risk
Tax advantages (possible)
Opportunity to write larger risks/write more NB/fine tune experience/build up experience
Rates seem attractive
Smooths profits

Capital - reasons for needing

Regulatory requirement to demonstrate solvency

Expenses of developing new business
Guarantees (enables products with them to be written)

Credit rating
Uncertain/adverse events eg fines, catastrophes
Smooth dividends or bonuses
Helps show financial strength and attract new business
Investment freedom
Opportunities eg Merger/growth
New business strain and cashflow mismatching
Uses of data

Statutory returns
Investment monitoring
Risk management

Management information
Accounts
Pricing
Experience investigations
Marketing
Administration
Provisioning

Sources of data

Tables (eg mortality)

Reinsurers
Accounts
Internal and industrial
National statistics
Existing products
Regulatory returns
Similar products

Problems with industry data

Detail insufficient
Recording differences

Differences in target market, underwriting, product terms, geographical area, sales channel
Out of date
Not everyone contributes
Errors
Quality depends on that of contributors

Disclosure of information in a pension scheme - what is disclosed?

Directors' pension costs

Investment strategy and performance
Surplus/deficit arising in last year and surplus/deficit accrued
Calculation methods and assumptions
Liabilities arising in last year and liabilities accrued
Options and guarantees
Sponsor's contributions
Uncertainties = risks
Rights on wind up
Expenses

Disclosure of information in a pension scheme - when is information disclosed?

Payment commencement
Request
Intervals
Combination
Entry
Why is disclosure important?

Sponsor becomes aware of financial significance of benefits

Informed decisions can be made
Mis-selling avoided
Manages the expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor/trustees made more accountable

Reasons for underwriting

Substandard lives (identify and set special terms)

Avoid anti-selection
Financial underwriting against fraud
Experience in line with expected
Risk classification to set fair premium

Also consider reinsurers, regulators

Also there is claims underwriting at the claim stage to assess eligibility of claim

Overseas investment problems (practical type problems)

Custodian needed
Additional Admin required
Time delays
Expenses incurred
Repatriation of funds
Political problems and poor regulation
Information poorer
Language difficulties
Liquidity poorer
Accounting differences
Restrictions on ownership of assets

The more fundamental problems are mismatching domestic liabilities, tax, volatility of
exchange rate (MTV)

Money market instruments - reasons for holding

Protect MV
Opportunities
Uncertain cashflow
Recent inflow awaiting investment
Short-term liability match

General economic uncertainty

Recession start
Interest rate rises
Depreciation of domestic currency

SYSTEM T - asset characteristics

This is in the notes but doing a full blown SYSTEM T will get you more ideas

Security - think of risks in general

Yield (running, total return, real vs nominal, compare other investments)
Spread (diversification and volatility)
Term
Expenses and exch rate
Marketability

Tax

NTCC - liability characteristics

Nature
Term
Currency
Certainty

TRAITOR - investor characteristics

Tax status
Regulation/solvency requirements
Assets already held (diversification)
Income vs capital gains (consider cashflow situation)
Tastes = preferences = liabilities, education, expertise, tax, fashion
Other investors (competitors) and Other investments (alternatives) and Objective
Risk appetite

Ways of valuing assets

Book value
Expected utility
Discounted cashflow

Fair value
Ritten up/down book value
Arbitrage
Market value and smoothed market value
Economic value
Stochastic modelling

Prime property

Comparables
Age/condition/use/flexibility
Location
Lease structure

Size
Tenant quality