October 2015 question 2 v

[nyaman]

I was looking at the solution in aset and my solution that I produced, some answers were the same but some were not. I made points about how both underwriting and reinsurance are risk management tools but the risks mitigated may vary. The use of both may be appropriate. However, on cost I had mentioned that both will bear a cost to the company and increase the premium rates hence reduce marketability, which in turn will result in low sales and therefore increase fixed overhead costs per policy. Other points on risks I mentioned were, lapse and re-entery risk ( particularly from substandard risks that may now be offered low premiums as they may be now eligible for standard premium rates) and how high volumes of sales could cause problems for the insurer.

My question is are these answers relevant to the solution and wiĺl they earn marks?

 

[Mark Willder]

I was looking at the solution in aset and my solution that I produced, some answers were the same but some were not. I made points about how both underwriting and reinsurance are risk management tools but the risks mitigated may vary. The use of both may be appropriate. However, on cost I had mentioned that both will bear a cost to the company and increase the premium rates hence reduce marketability, which in turn will result in low sales and therefore increase fixed overhead costs per policy. Other points on risks I mentioned were, lapse and re-entery risk ( particularly from substandard risks that may now be offered low premiums as they may be now eligible for standard premium rates) and how high volumes of sales could cause problems for the insurer.

My question is are these answers relevant to the solution and wiĺl they earn marks?

The ASET solutions are very full and generally cover all the points in the Examiners' Report. So it is unlikely that points that are not in ASET would score.

I'd agree that they mitigate different risks, but you would need to be more precise to get the marks. Underwriting mitigates anti-selection while reinsurance mitigates against randomness and uncertainty. Anti-selection is an important part of the solution.

Note that the question asks for a discussion of the suggestion to remove underwriting. So comments on the reinsurance itself won't score.

The solution did mention the impact on costs and new business volumes. You could argue this either way - less underwriting meaning lower cost, or more anti-selection meaning higher cost - you would score for both. The impact of high volumes is a secondary point, and we're not convinced that premiums will actually fall, which is probably why it didn't appear in the exam solution.

Lapse and re-entry is maybe worth a mention, but you would hope that insurer's would be aware of the problem. It can easily be controlled by the usual application question "have you ever been quoted special terms for insurance".

I hope this gives a little more logic behind which points would appear in the solution.

Best wishes

Mark