Chapter 34

Question 1

Define ERM and discuss the reasons it may be beneficial to adopt

Answer 1

Enterprise risk management involves considering the risks of the enterprise as a whole,
rather than considering individual risks in isolation.
* This allows the concentration of risk arising from a variety of sources within an
enterprise to be appreciated,
* … and for the diversifying effects of risks to be allowed for.
* This will also give the insurer’s management insight into the areas with resulting
undiversified risk exposures where the risks need to be transferred or capital set against
them.
* This will be an important feed into the business planning and capital allocation cycles.
* Enterprise risk management is not just about reducing risk – it is also about the insurer
putting itself into a better position to be able to take advantage of strategic risk-based
opportunities
* => lower capital requirements bc of diversification benefits

Question 2

How can an insurer control its expenses (9)

Answer 2

THRIFT
T- Tighten budget constraints
H- Hire appropriately (staff not overqualified)
R- Review salary increases
I- Improve efficiency (automation, increased computer tasks, do tasks in house)
F- Focus on simpler products and cheaper distribution channels
T- Trim staffing levels to match amount of work and volume of business

Question 3

How can an insurer manage persistency

Answer 3

• Change distribution channel
• Set up alternative commission structures (like lower initial commission and higher renewal or have a clawback system that reduces with years)
• improve sales method to match customer needs
• restrict premium payment methods

Question 4

How can insurer manage business volumes and mix

Answer 4

Appropriate marketing
Product design

Question 5

How can an insurer manage their options

Answer 5

1. Monitoring & Review
   
   • Continually monitor uptake rates and profit/loss after exercise.
   • Compare charges/loadings vs actual costs.
   • Assess benefits vs costs for both policyholder (value received vs price) and insurer (business gained vs losses).
2. Control for New Business
   
   • Increase pricing (charges/loadings).
   • Alter terms/benefits to reduce cost.
   • Reduce/remove option availability (but check impact on sales/marketability).
   • Remember: cost impact is delayed (only arises when options are exercised).
3. Managing Existing Business
   
   • Set up prudent reserves for future option costs.
   • Interpret terms strictly (while treating customers fairly).
   • Hedge with derivatives.
   • Buy back options (risky: may alert policyholders to option’s value).