Risk Mitigation
-Further research (reducing uncertainty) -Avoid -Transfer -Share -Insure -Reduce
Risk management process
- Identification
- Measurement
- Control
- Financing
- Monitoring
Outcomes of risk control
-avoid Surprises
-exploit risk Opportunities
(= growth and returns)
-better management and allocation of Capital
(=growth and returns)
-improve Stability (and quality) of business
-Earlier risk detection
(=cheaper and easier to deal with)
-identify natural Synergy opportunities
-Price products to reflect inherent level of risk
-reduce variability in Employee costs + improve job security
-determine cost effective means of risk Transfer
-Confidence to stakeholders that business is well managed
Type of risk
- Business
- Liquidity
- Operational
- Credit
- Market
- External
Bonus:
- Political
- Environmental
- Crime
- Project
- Financing
Product offering effect from underwriting
-Premium rate
-Accepted at standard rates
-cover is Deferred until more info is known
-cover is Declined
-policy is Loaded
(premiums increased/benefit decreased)
-Exclusions
Benefits of underwriting
-protects provider from Anti-selection
(integrity of pools)
-Fair rating and pricing of risks
-greater Access to insurance for poorer risks
(+info about risk factors)
-reduces Moral hazards from overinsurance
-helps align claims Experience with assumptions
Diversification
-line of Business
-Reciprocal reinsurance
-geographical Areas of business
-Investments
(classes and assets within)
Defined benefit scheme benefit risks
-benefit Changes
(e.g. by state/sponsor)
-Underfunding
(wrong contributions/poor investment performance)
-Illiquid assets
-Sponsor insolvency/defaulting
(=under funding)
-Inflation erosion of benefit value
-members’ Needs not met
-members’ Expectations not being met
Defined contribution scheme benefit risks
- lower investment Returns than expected
- poorer Annuity terms than expected
- Inflation eroding the value of the benefits
- members’ Needs not being met by accumulated contributions (over-funding/under-funding)
- higher Expense charges than expected
General scheme benefit risks
- Money (sponsor default)
- Will (takeover)
- Skill (mismanagement)
Defined benefit scheme contribution risk
-future contribution Uncertainty (... From: **different members' Benefit amounts + eligibility **Inflation **unexpected changes in Tax **unanticipated changes in Expenses ) Shortfall not being able to be met (... due to: **sponsor Insolvency **Liquidity problems. )
Defined contribution scheme contribution risks
- Unaffordable contributions
- insufficient Liquidity to make payments on time
(driving factors: **Time (age/service) link **Inflationary risk (if linked to inflation) **Pay-roll link **Employee contribution link )
General scheme contribution risk
- Fraud
- bad Advice
- Costs (fines/legislation/admin/tax)
Benefits of Reinsurance
--Limited large losses
(…
**reduced risk of Insolvency
**increased capacity to write Large risks
)
--reduced claims Volatility
(…
**Increased capacity to write more business
=> diversification
**Smoother profits
**reduced capital Requirements
)
--access to reinsurer Expertise
(…
**reduced Business risk
{from inappropriate assumptions}
**reduced Operational risk
{from transferring some activities to the reinsurer}
)Cons of reinsurance
--reduced Flexibility (only take on risks allowed by reinsurance contract) --Legal risks (in case of contract dispute) --increased Admin --Costs (conflicts with pursuit of profitability) --Counter-party risks introduced (failure of the reinsurer) --less Control
Forms of Alternative Risk Transfer (ART)
- -Post-loss funding
- -Integrated risk covers
- -Securitisation
- -Swaps
- -insurance Derivatives
Benefits of ART contracts
- -provision of potentially Unavailable cover
- -potentially Cheaper
- -Tax advantages
…
- -Security of payment
- -potentially more Effective
- -source of Capital
