Chapter 10 - 11: Risks

Question 1

What are the main categories of risks that affect the provision of health, social, and employee benefits?

Answer 1

Market risk
Credit risk
Liquidity risk (including insurance)
Business risk
External risk
Operational risk

Question 2

What are some key considerations when analysing risks in terms of frequency and severity?

Answer 2

Some risks have a very little impact and arise frequently, while others have a big impact but are not experienced very often.

Question 3

What are the three types of risks associated with assumptions made by actuaries?

Answer 3

Model risk
Parameter risk
Random fluctuation risk

Question 4

Explain the concept of “data integrity risk” and its potential consequences.

Answer 4

Data integrity risk refers to the risk that incorrect data is used to perform calculations, which can lead to incorrect benefits, overpayments, or invalid insurance contracts.

Question 5

What are some examples of data that may be useful for actuarial investigations besides data collected by the benefit provider?

Answer 5

Asset holding information and external data like industry data, national statistics or overseas markets

Question 6

How do mortality and longevity risks present differently when considering health and care benefits compared to retirement benefits?

Answer 6

Health and care benefits have a retirement benefit emphasis. Mortality risk arising from a large death benefit on a retirement fund or prefunded LTCI is typically greater than if the death benefit were smaller.

Question 7

What factors can affect claim amounts for indemnity health products?

Answer 7

Innovation on medical cost, innovations in surgical procedures, prevalence of medical conditions, changes in demand, poor claims control/fraud, negotiated pricing agreements and the aging population.

Question 8

How can insurers offering pension products mitigate longevity risk?

Answer 8

Add margins to the pricing
Reinsure the risk
Longevity swaps

Question 9

How do employers mitigate longevity risk with post-retirement benefits?

Answer 9

1. Use buy-out or buy-in strategies
2. Increase subsidies based on medical inflation
3. Ensure care is taken to match the subsidy promise in an outsourcing arrangement with inflation-linked annuity contracts

Question 10

What is a longevity swap?

Answer 10

A longevity swap is a contract between a fund and a swap provider that transfers the risk that pensioners live longer than expected from the fund to the swap provider.

Question 11

How can funds manage longevity risk?

Answer 11

Buy-outs
Buy-ins
Longevity derivatives

Question 12

List entities that can be exposed to longevity risk.

Answer 12

1. Uninsured individuals and their families
2. Retirement funds paying pensions other than income drawdown products
3. Employers paying post-retirement benefits
4. Insurers offering pension products
5. State or other national funds paying income benefits
6. Insurers / providers / state paying health benefits

Question 13

All risks that could potentially be faced (21)

Answer 13

1. Model, parameter and random fluctuations risk
2. Data and data integrity risk
3. Mortality and longevity risk
4. Morbidity risk
5. Aggregation, concentration and catastrophes
6. investment risk
7. Funding risk
8. Excess asset risk
9. Contribution or premium risk
10. Inflation risk
11. Expense and expense inflation risk
12. Risk relating to member or policyholder choices
13. Non-disclosure, adverse selection and demographic risk
14. Persistency risk
15. Volume risk
16. Risks related to distribution
17. Counterparty risk
18. Operational risk
19. Guarantee risk
20. Reputational risk