Hi guys I really need your help in this question. PLEASE!!! An insurance company is considering launching a new product for graduates taking actuarial exams that pays out a fixed sum when the student fails an exam. (a) Describe the problems of selection and moral hazard with this product and the measures that the company could take to reduce them. (b) List the main risk factors for this product. (c) Give the rating factors that you would recommend the company uses and justify them by relating them to the risk factors you listed.
You can't be afraid of these types of question. Just think about the concepts. Antiselection/moral hazard: means deliberately trying to gain advantage over the company. So what can cause a fail hence get a payout/claim rate higher than expected - Quick ideas.... Not preparing for the exam properly or not even studying it at all Not turning up! Risk factors.... poorly prepared material that doesn't match exam syllabus or contains errors leading to even well prepared people failing Costs rise... eg they put the exam fee up and you promise to return this as the benefit yet you didn't price for this. Rating factors, well these are practical proxies to risk factors So that's how to generate ideas. For what the examiners expect, I assume you have the real sol'n to this qn?
To be honest, the difference between risk factors (the true risks)vs rating factors (measurable indicators of the true risks) is explored in ST3 rather than CA1. In CA1 you are more likely to get a question that asks you just to identify the risks. With part (a), or indeed any question with technical terms in it, a good starting point is to define these terms - see the Glossary!
