How does an insurance company successfully manage and control mortality risk for individual products ?
- price products
- properly select the cases to issues at the proper rated
- properly diversify its morality risks
- Decides whether it needs to obtain reinsurance
how does underpricing affect expenses for mortality?
- properly price its products
- properly select the cases to issue at the proper rates
- properly diversity its mortality risks
- decide whether it needs to obtain reinsurance.
how does an insurance company counteract for misclassification of mortality risk?
company may fail to diversify the potentially diversifiable risk characteristics within a portfolio of mortality risk.
- diversity risk by location, type, financial/health UW, occupation and economic status
How does a company compensate for failure to obtain reinsurance according to risk management policies?
reinsurance administration programs must make sure that any cases failing within the guidelines for obtaining reinsurance actually obtain the reinsurance and that reinsured claims are settled appropriately.
What are some tools for managing mortality risk
?
control cycles product design controls underwriting activities and controls, pre-screening of applicants reinsurance programs
what is a control cycle?
a repetative process designed to ensure that all areas of the company adhere to the company’s perfromance stadards. - consist of
Control cycle consists of 3 basic types of controls.
- steering controls
- concurrent controls
- feedback controls
Define each
- steering controls: established in advance and describe the company’s expectations of performance, because steering controls focus on future performance, they often referred as feedforward controls.
- concurrent: address current activities and systems by continuously monitoring activites as they performe
- feedback controls: used to company actual performance or output with established standards.
The actuarial control cycle requires companies to track what:?
developing mortality experience using forms of acutal-to-expected (A/E) ratio for motalities.
The percentage gives actuaries a basis for adjusting expeience mortality rates to develop expected mortality rates.
A/E analysis can track cause of death in early policy yrs and thus see if u/w well implicated
- used to evaluate the effects that recent changes in u/w crioteria have on mortality results of NB.
define antiselection:
the tendency of individuals who beleive they are more likely than average to experience loss to seek insurance protection to a greated extent that do other individuals.
What is the underwriting philosophy?
by applying underwriting controls, Mannuals, rating ceriteria, underwriting audit procedures and reinsurane aut productes and by influencing a product’s distirbution system.
Underwriting standards for life insurance specify criteria for what?
- required data about the risk in each new case
- formal system for classify8ing risks in NB caases
- requireing reinsurance on cases that meet predetermined guidelines.
Define risk class:
set of risks group together under a risk classification system. each class is associated with a set of premium rates, known as rate ables.
What is a risk class classification system?
system used to assign NB casses to risk classes and an associated rate table ina manner that reflects the expect cost of benefits for the insurance product.
What are standard risks?
Mortality risk characteristics overall are nominally standard for the coverage they seek.
What is a substandard risk?
cases who risk characteriestics overall are higher than standard, but who are still insuereable.
what is a preferred risks?
generally cases whos risk characteristics represent a lower risk than standard.
- lower premium rates than standard.
What guidelines should be followed for an effectively designed risk classifgicationssytem?
- system should be appropriate for UW indiviudal life insurance policies
- risk classes in a lfie isnurancr risk clasfficiation system should be large enough to support credible statistical inferences regarding expected mortalitiy
- risk classes in a life insuran ce risk classification system should conform to all existing laws, regulations, industry practices, and company business practices.
- mortality risk classes should represent a narrow range of expected mortality expenses, since all risks assigned to a single class pay the same rates.
Define risk characteristics in underwriting.
measureable or observable factors that u/w use for assigning each new business case to one of the risk classes of a risk classficiationssytem.
Risk characteristics for use in underwriting individual life insurance should meet what guidelines?
- should have predictive value for mortality costs so variation in actual or expected mortality correlates to the risk characteristic.
- risk must be objectively measurable.
- material differences in expedcted mortality expenses for a specified risk should be at the basis for difference in premium rates
- the design of u/w standards must avoid double counting of mortality cots due to any interdependence
- if more than one risk has prediuctive value for mortality risk, the acturary should design the u/w process to use the characteriestic most practical to obtain
- should confirm to industry risk classficiation practices
- cost and effort, legal and regulatory and social aspects needs to be considered in evaluating tris.
insurance risk characteristics are usually subdivided into what 4 chategories?
1) medical risk characteristics.
2) personal risk characteristics
3) financial risk characteristic
4) moral hazard characteristic.
What is this characteristic associated with in terms of specified tendency of mortality:
Age
older show higher mortality than young ages
What is this characteristic associated with in terms of specified tendency of mortality:
gender
males > mortality than females
What is this characteristic associated with in terms of specified tendency of mortality: health characteristics
mortality increases with number of heath characteristics.
most associated: build, HTN, Fx.
What is this characteristic associated with in terms of specified tendency of mortality:
smoker
smokers>2x mortality than non-smokers
