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Accepting risk (Features influencing risk appetite (Existing exposure to a…
Accepting risk
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Risk and product design
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The price of a product needs to cover the cost of the risk being transferred and allow the party taking on the risk to make a profit
The cost of risk relates not just to the features of that particular product but also on the other business of the provider (diversification, hedging)
Good product design techniques will identify all the risks involved in a product and consider how each is managed
In order to determine an appropriate cost for a particular policy, it is necessary to perform risk classification
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Additional options (and other design complexities) introduce new risks, which need to be allowed for in the costing.
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Insurable risk
The policyholder mus have an interest in the risk being insured, to distinguish between insurance and a wager
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The amount payable in the event of a claim must bear some relationship to the financial loss incurred.
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Market for risk
Different entities have different risk appetites which enables there to be a market in risk, and for risk to be transferred from entities with a smaller risk appetite to those with a larger risk appetite.
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Why pool risk?
Pooling risk means that there is greater certainty in the future payments to be made on the occurrence of an insured event. This is due to the law of large numbers.