CP1 - Chapter 25

[Darragh Kelly]

Hi,

I have several questions in relation to chapter 25.

Page 15

‘’The reference to ‘insurance fund’ here means that unit trusts and other funds used as the backing investments for unit-linked businesses face liquidity risk…’’

I don’t quite get what a unit trust is and also the term unit-linked businesses…

Page 18

Just in relation to the last bullet point on this page:

…for example through writing whole account protect covers as well as primary insurance of a risk

Is this like when the insurer covers risks he did not intent to, because of possibly the underwriting process not being detailed enough? What would be an example of this?

Page 19

Just in relation to the last bullet point regarding how operational risk can arise, what does below statement mean and what would be an example of such:

The failure of plans to recover from an external event.

Page 21

What exactly are second-order transition impacts in relation to liability in insurance? Like are these not direct claims or obvious claims? Are they only applicable to climate change?

Many thanks,

Darragh

 

[James Nunn]

Hi Darragh

Some answers to your chapter 25 questions are below - hopefully this helps.

Page 15

As may (or may not) have been covered in your Day 1 tutorial, unit-linked fund provides a benefit that is linked to the price of the investments in which the premiums are invested.

As may (or may not) have been covered in your Day 2 tutorial, a unit trust is an actual trust and is open ended, in that the investment manager will buy or sell units in this unit trust as unit holders (the investors) seek to sell or buy units - units are created or sold.

Page 18

Agreed - the reinsurer may not have underwritten, in particular, some or all of the whole account protection covers it has accepted, and so may not be aware of the risks it has exposing itself to as a result.

Page 19

There are some external risk examples in the chapter summary, which are caused by external events of the same name. Operational risk could be increased, for example, by having an inadequate plan for how to deal with flooding of some company's buildings (which may be prone to flooding) - appropriate plans could include having/keeping things that would generate the largest losses if submerged on higher floods of the building, and these plans may have been inadequate or not implemented/followed fully.

Page 21

Physical climate change impact are considered to be first- order or direct impacts of climate warming as they are things that occur directly as a result of this.

Transition impacts (in this context referring to climate change but could be involved in any situation requiring change or transition) are second-order impacts as they are not directly due to climate change, but are due to actions taken to make changes to avoid the physical risks associated with climate change.

These transition impacts do not necessary stem from higher claims. For example, an investment trust may decide to move away from investing in companies that use fossil fuels as a result of climate change (possibly because it wants to follow a 'green' objective or because in the longer term it may see these companies struggling as fossil fuels become more scare). It will then be exposed to the transition risks relating to making investment changes - excessive trading costs, incorrect investment decisions, etc.