Chapter 15

Question 1

How is the aggregation and concentration of risk typically assessed by an insurer?

Answer 1

• carrying out financial projections
• This often involves stochastic methods, *incorporating probability distributions of key risks
  *….to account for CORRELATIONS between parameters
• Running the projection model many times to test sensitivities and different scenarios helps assess the inherent risk in the business.

Question 2

Why is a credit rate downgrading a risk to the company? (6)

Answer 2

• Adverse publicity
• Difficulty to raise additional capital
• Increased cost of capital
• Reduction in possible activities
• Policyholder lapses
• Fewer purchases of policies

Question 3

Beyond profit and capital aims, what other factors are considered when assessing overall insurer risk due to aggregation?

Answer 3

◦ The capital and other resources available to the insurer.
◦ The cost of failing to meet the public interest need to avoid insolvency, as usually expressed in insurance supervisory legislation.
◦ The cost of failing to meet the requirements of any other applicable legislation. Supervisory insolvency is a critical business risk