Chapter 15 - Risk (3)

Question 1

What are the main aims of the insurance company

Answer 1

• Maximise profits of the company, whether these go to shareholders or with-profits policyholders
• maximise the return that the company achieves on its available capital

Question 2

Why is the downgrading of a company’s credit rating a risk

Answer 2

Because it would lead to:
- Adverse publicity
- greater difficulty and cost in raising additional capital in the market
and as a consequence:
- the range of profitable activities may be constrained
- Policyholders may be less likely to maintain or purchase policies with the insurer

Question 3

The overall insurer risk can be measured against its primary aims, but also allowing for:

Answer 3

• The capital and other resources available to the insurer
• The cost of failing to meet the public interest need ( to avoid insolvency)
• The cost of failing to meet the requirements of any other applicable legislation

Question 4

Revised premium rates are not competitive. What could cause this, and how can a company correct this?

Answer 4

MORTALITY
Experience might be heavier than that of competitors, due to:
- Weaker underwriting
- Different target market
- Different distribution channel
- No smoker split
So, the insurer could:
- Strengthen underwriting
- Change target market
- Change distribution channel
- Introduce differential rates for smoker splits
- Could take a less conservative view in setting the mortality assumption, if this can be justified by evidence, eg from own data, industry or reinsurers, or by offering cover on a reviewable basis

EXPENSES
May be higher than those of competitors
- Could look to reduce commission
- Reduce sales costs by more efficient marketing and increasing salesforce productivity
- Try to improve admin efficiency and reduce overheads
- May be able to achieve lower price if total profits improved by increasing volumes

WITHDRAWALS
Experience may be worse than competitors
- Try to improve persistency through improving sales methods and training of sales staff
- Withdrawal rates may differ due to different target markets and/or distribution channels, so we could try to change these

PROFIT TARGET
- May be too high relative to the market, so reprice at a reduced level of profitability
- Consider how much contribution is required from this business to overheads, reducing the required contribution will reduce the price
- Perhaps reduce prices and accept lower profitability ( or even losses), if the company feels that other reasons for offering competitive term assurance rates justify this, eg the need to attract sales to other types of (profitable) business, and/or provide a complete (competitive) product range

OTHER
- Reinsure the business more efficiently. It can be used to reduce capital requirements, and a sufficient reduction in the overall cost of capital could allow the company to reduce its premium rates