What are the risks specific to PMI business?
- Indemnity: claim amount different to expected
- Capital strain due to ST nature of contract
- Third party claims assessors.
- Providers could provide poor quality care, to increase utilisation rates fraudulently (reimbursement methods)
- Risk management focus on overall volume and mix of in-force business rather than specifically on new business
What are the risks specific to CI business?
- Risk of mis-estimated critical illness incidence rates, due to lack of data
- High risk of anti-selection especially if standalone product
- Investment risk is small due to small reserves
What are the risks specific to pre-funded LTC business?
*Pre-funded policies carry a surrender value, risk of large number of surrenders.
* Risk of selective surrenders, thus worsening risk pool.
* High investment risk due to large reserves: investment returns are lower than expected
*Could misestimate transition probabilities
What are the risks specific to launching a new product?
- Being in new terrirory
- Risk of language problems
- Unknown regulations in terms of all product aspects
- Scepticism about foreign reinsurers
- Currency risks
- New product
- Lack of data
- Product design risks if a new product
- Policy wording risks
- Claims risk (exacerbated for indemnity)
- Lack of expertise/experience
- Investment risk (if large reserves)
- Marketability risk - adding guarantees / lower premiums
- Costs of research, product development, setting up infrastructure
- New customers
- Persistency risk
- Poor sales volumes - not recouping costs
- Selective withdrawals
- Demographic risk
- Risk of fraud (distributors, policyholders, providers, staff)
- External factors
- Competition risk
- Market research may have over-estimated demand
- Reputational risk if venture fails - could spill over to other operations
- Overall risk depends on the size of free assets / size of the overall venture1
What are some risk management techniques?
Processes(CREP worn during tennis give a DUCE and just answer MCQ)
- Claims risk management
- Reinsurance
- Experience monitoring and control
- Product design
- Data analytics and predictive modelling
- Underwriting (MHD, Full Medical Underwriting, Moratorium)
- Checks on policy data and claims data
- ERM
People
* Managing the distribution process and customer relationship
* Quality of staff
* Outsources and service level agreements.
* managed care protocols (case management, pre Auth, hospital networks)
How do you deal with high risk lives (post-underwriting)?
- Offered higher premiums / lower benefit
- Postponed (if the period of higher risk is deemed temporary)
- Declined (if the additional risk is thought to be too high)
- Offered a different type of policy (less risk intensive)
- Offered to a reinsurer facultatively with zero retention
- Can have certain specific causes and/or conditions excluded
How does community rating manage risks?
- ensures risk of insuring those with higher healthcare needs shared amoungst risk pool
- Important to review mix of lives insured annually
- any changes may not reflect the expected pooled experience of PHs which ain’t good.
- A risk equalization fund may be introduced to keep premiums attractive to “better risk” customers across insurers
What is a risk equalisation fund?
- Insurers can set premiums to reflect the expected claims experience of all insured lived in the territory (not just the particular insurer)
- Premiums received by each insurer in territory, are pooled to form the risk equalisation fund.
- Claims incurred by each insurer are paid out of this risk equalisation fund.
- This fund ensures that “better risk” policyholders are not penalised by paying higher premiums due to insurer having overall risky pool of policyholders.
- Reserves from excess premiums for insurers with a better quality of lives insured are used to subsidise the shortfall in premiums for insurers with riskier lives insured
What are the different types of risks?
CHER DRC BEV PR
Cher is a big risk to the DRC, so her PR team had to pring her a BEV.
Customers - risk of anti-selection, non-disclosure
Healthcare providers - increasing cost, poor outcomes, poor quality service (reimbursement method)
Employees - fraud, leaking confidential information, embezzlement
Regulator and tax - risk that regulation changes, and tax changes which changes profitability.
Distribution channel - broker delay premium, broker make false promises, different channels sell different amount which affects demographic and expenses
Risk pricing - data risk, parameter risk, random fluctuations risk, model risk
Competition - risk competitors have better products, risk that management takes on risk to remain competitive
Business mix - different to expected (big policy = high capital requirements)
Expenses - higher than expected, modelled incorrectly, inflation higher than expected
Volume of business - lower than expected (high expense per policy), higher than expected (high capital strain)
Persistency - lapse and re-entry, lapse when assets share is negative
Reinsurance - catastrophe risk, concentration risk, physical risk.
Why will management ignores actuaries recommendations and takes on unacceptable risks?
- Remain competitive
- Due to strategic company goals e.g. Increase size of business
- Maximise SH earning
- Achieve personal goals of executive
What are investment risks?
- Risk that 3rd party makes the wrong investments (if use 3rd party asset manager)
- Risk that bond issuer defaults on bond
- Risk that value of investment may go up or down (known as capital values risk)
- Risk that return may be modelled incorrectly
- Return needs to be modelled → model, parameter and random fluctuation risk.
- If stochastic model used, random fluctuations risk is accounted for explicitly
- Risk of exchange rates movements (if insurer pays claims in foreign currencies, might be exposed to exchange rate movements). To mitigate this risk, invest in overseas assets.
How can counter-party risk be managed?
1) Through due diligence on the counterparty before selection
2) Diversification across different counterparties
3) Single counterparty exposure limits
4) Restriction on the use of counterparties below a specified credit rating
5) Credit insurance or derivatives
Why are counterparties used?
- Can outsource specialist activities: underwriting, claims management, actuarial functions, administration, investment, marketing, systems and training.
- Provides a level of expertise and efficiency at a price that may be cheaper than in-house costs & leaves the insurer’s management to perform the other tasks where they feel the most competent (incl. strategic decisions).
- Once the third party has been chosen, a service level agreement (SLA) will be put in place.
- Should be certain that passing processes to experts is reducing risks -> need to have regular reports, checks and inspections to ensure that the insurer is not to suffer from reputational risks, business risks and security issues.
Quality of staff
- Quality of staff and exercise of judgement -> successful performance of the business
- NB - adequate systems of identification of competence levels at the various stages of business administration, of recruitment, of staff training, allocation and review and of recognition of the need for outside expertise
- Motivation and reward are key features
- Systems need to monitor fraudulent + incompetent behaviour
- Health and care insurance - more opportunity for fraud and judgement (claims can be falsified / exaggerated more easily)
- May perform an occasional audit of staff competence
- Time and motions analysis by independent experts may indicate a need for staff reallocation and training
Data analytics and predictive modelling
- H&C insurers can take advantage of tech developments and the analysis of large volumes of data (big data)
o E.g. bancassurers hold a large quality of info about a consumer who also has a bank account with them (spending habits etc)
o The ability to use such info to better understand the underlying risks will become increasingly important in insurance - Risk classifications are likely to develop as a result - allowing more accurate rating for each individual customer -> greater ability to select the preferred risks
- Monitoring the data -> drive better experience through early identification of changes in individual insured risks or potentially through being able to intervene and influence customer behaviours
- Multi-factor predictive modelling techniques (GLM) are also increasingly being adopted
o Can combine internally held customer data with external drivers, allowing for correlations and interactions between them - Risks for using big data:
o Reputational damage - privacy and data protection failures
o Regulations governing data may change
o Data may be inaccurate, incomplete or irrelevant
o Complex models used - risk of choosing the wrong model
o Expenses of collecting + analysing data > benefits of extra info
Experience monitoring and control
Periodic review of an insurer’s experience can help the insurer to identify appropriate risk management actions, e.g.:
- Expense controls
- Policy retention activity
- Review new business strategy
- Asset-liability management
- Capital management
Managing the distribution process and customer relationship
When it comes to sales people like grant you need to monitor what he says, or else he might use too many swear words. He likes to churn butter on the weekends but the quality is not as good as Woolies butter. Sometimes he can be a bit over generous with the amount of homemade butter he puts in his pancakes but his wife mops up the excess with old receipts and then tries to train harder to melt off the fat.
1) Monitor the sales message
- Promises made consistent with conditions in contract
- Product- and sales literature should be customer friendly, clear and appropriate (does not over-sell)
2) Beware business churning
- Salespeople should not be encouraging PHs to lapse policies with a view of taking out others (2x initial expenses)
- Products should offer value when measured against new business terms
- Should be an adequate process of commission clawback
- Should be an appropriate balance between initial and ongoing commission
3) Analyse the quality of sales staff
- Record of sales agents should be analysed for volumes written and for persistency
- Complaints (compliments) against each agent should be reviewed
4) Beware overgenerous commission
- Commission should be commensurate with the sales effort
- Commission should be commensurate with the policy loadings
- Commission levels should not introduce product bias
- Commission should not encourage over-selling
- Commission should be matched with clawback controls on early lapse
5) Monitor premium receipts
- Premiums should be received from agents / brokers in a timely manner
- Policies should not be issued without evidence of premium receipt
6) Invest in sales training
- Salespeople / sales support staff should be adequately trained on sales processes
o Incl. the need to obtain robust info on customers’ health and care insurance needs and their ability to pay
- Should be adequately trained on products and acceptance procedures
Checks on policy data or claims data
In a village, librarian Mr. Thistlebottom kept impeccably accurate records. He would clean the library cabinets until they were spotless, so much so that old library users wouldn’t even recognize them. He made sure that each library book was a consistent distance apart from the next, and made it compulsory for students to only choose books at the end of the row. If they did not, they would not be accepted into the library for 10 years and staff would be trained to enforce this rule.
- Recording accuracy
NB for admin & benefit payout + basis for policy experience used for pricing and reserving.
Should ensure that the proposal form & admin system input screens have the same format to reduce risk of error. - Regular vetting and spot checks
Regular inspection of the processes by which data are accepted by the system + considering whether the data captured are comprehensive (compare paper records).
The systems should have modules that query possible inconsistencies / unusual features in the data.
Policy records should be checked “end to end” - particularly is passed between different systems. - Controls on data acceptance
The software for accepting data input should have inbuilt checks that prevent erroneous items from being accepted. There should be an audit trail of special exceptions overwritten by persons of pre-specified status. - Compulsory fields
Certain fields should be mandatory (all used to price the policy). - Staff training
NB - training staff responsible for input to establish a culture of the value of accuracy of data, to develop the ability to spot errors and to ensure data are input speedily and efficiently. Feedback from the staff should be encouraged. - Reconciliation checks
That the data at the previous investigation + the business coming onto the books - the business going off of the books = the current data. - Consistency checks
Premiums are consistent with sums insured
ERM
ERN is a character which thinks he’s super holy right. He hates standing out and being isolated but enjoys being part of a whole group of people. Sometimes he likes to find concentrations of people e.g broke car sale, just to appreciate it all. It’s important that the groups of people are diverse, filled with Asians, blacks, coloured and whites, which reduces the amount of caps he feel like he needs to wear on his teeth. ERN is an educator who likes to take risk to balance longevity and mortality risks.
- this is holistic risk management framework
- considers the risks of the business as a whole rather than considering individual risks in isolation
- Allows for concentration of risk arising from a variety of sources within organisation to be appreciated
- Also allows for diversifying affects of risks to be allowed for
- This is a holistic, integrated approach to risk management
- Management is able to see overall level of risk they are exposed to - will be lower if insurer is well diversified (e.g. write business in lots of countries)
- Greater diversification will be mean less capital needs to be held against risks
- ERM allows recognition that value can be added to business through educated risk-taking with a strong risk management framework → allows companies to identify and assess strategic opportunities
- e.g. longevity risk offsets mortality risk so for insurer selling lots of annuities, offset longevity risk by selling more term assurance business
How can anti-selection be minimized
- through underwriting
- through waiting periods
- through exclusions
- through “staged” benefits, not lump sum
- target healthy lives only
- targeted marketing
