Please enable JavaScript.
Coggle requires JavaScript to display documents.
Financial product and benefit scheme risks (Key business risks for life…
Financial product and benefit scheme risks
Risks to a beneficiary
the benefits may be less valuable then required (or expected), or
they may not be received at the required time.
Risk to the State in relation to benefit provision
The State is expected to put right any losses that the public incurs, especially if the State provides means-tested benefits such as a minimum income level in retirement
Key benefit risks when benefits are known in advance
Inadequate funds to provide the benefits (e.g. underfunding, insolvency, A/L mismatching
Illiquid assets
Benefit changes
Not meeting beneficiaries' needs.
Key benefit risks when benefits are not known in advance
Lower than expected benefits due to lower than expected investment returns or higher than expected expense charges
Lower than expected benefits due to worse than expected purchase terms for any investment vehicles
Not meeting beneficiaries' needs
Higher than expected claim payments on non-life insurance policies
Mitigating annuity rate risk
Lifestyling
Effects of sponsor/ provider actions on benefit uncertainty
default at a time when funds held are insufficient or when the funds held include loans to the sponsor/ provider
failure to pay contributions in a timely manner
to be taken over by an organisation that is unwilling to continue to meet benefit promises
decide to reduce future benefits
communicate poorly to beneficiaries on issues such as benefit guarantees, leading to complaints/ need for compensation
generally mismanage the scheme/ business, leading to a benefit shortfall.
Key contribution risks in a defined benefit scheme
Unknown future level of contributions as contributions will depend on the amount of the promised benefits, the eligibility of members to accrue and receive benefits, inflation, and investment returns net of tax and expenses
Unknown timing of future contributions if not funded in advance
The requirement to put in extra funds if there is a shortfall in the scheme- the amount and timing of which is unknown
Insufficient liquid assets with which to make the contributions
Insolvency risk due to excessive contributions
Take-over by a third party who is unwilling to make the contributions
Key contribution risks in a DC scheme
Contributions are unaffordable to the sponsor (because in poor financial curcumstances)
Insufficient liquid assets with which to make the contributions
If contributions are linked to inflation or a salary index, that index may increases faster than expected
If contributions are fixed, benefits may be less than expected/ unable to provide for an expected standard of living
Operational and external risks to a benefit scheme
Loss of funds due to fraud or misappropriation of assets
Incorrect benefit payments
Inappropriate advice
Administrative costs, especially compliance with changes in legislation
Wrong decisions by those to whom power has been delegated
Fines or removal of tax status resulting from non-compliance
Inappropriate advice
Complicated products
Rubbish (i.e. incompetent) adviser
Integrity of adviser lacking, e.g. due to sales-related payments
Model or parameters unsuitable
State encouraged but inapproprate actions
Investment risks associated with a financial product
Uncertainty over the level and timing of investment returns (both income and capital)
Mismatching of assets and liabilities
Reinvestment risk
Default risk
Investment returns being lower than expected, increasing provider cost
Lack of appreciation of benefits by recipients due to poor returns
Lack of diversification
Changes in the taxation of investment income and gains
Sponsor covenant
The ability and willingness of the sponsor to pay sufficient contributions to meet benefits as they fall due. Sponsor covenant is a source of credit risk.
Key business risks for life insurance companies
mortality and longevity
morbidity
pandemics
expenses
withdrawals
new business volumes
new business mix
option take-up
reinsurance, e.g. limited availability of desired reinsurance
anti-selection and moral hazard
loose policy wording
lack of data
poor underwriting
Key business risks for general insurance companies
claim amounts, including claim inflation/ court awards
claim frequencies
accumulations and catastrophes
expenses
renewals and lapses
new business volumes
new business mix
anti-selection and moral hazard
loose policy wording
lack of data
poor underwriting
changes in the cover provided or in the characteristics of the policyholders
reinsurance, e.g. inappropriate reinsurance chosen
Expense, persistency and new business volume risks- relationship
A product provider's expenses can be expressed in terms of unit costs, e.g. the cost per new policy written on per in-force policy
Unit costs comprise expenses ad the numerator and a volume measure as the denominator
Lapses and new business volumes directly affect the denominator. However, the numerator will partly be fixed and will not vary exactly in line with the volume measure
Lower than expected new business volume and/ or higher than expected withdrawals will mean a lower than expected overall contribution to overheads.
New business volume risks
greater than expected
Requires capital -> greater NBS -> potential solvency issues
Admin department may struggle -> operational and reputational issues
less than expected
The company may not cover its fixed overhead expenses
New business mix risks
If cross-subsidies -> risk fixed expenses not covered/ profits not as expected
e.g. larger policies may contribute more to fixed expenses and profits than smaller policies
Not all products or policies may have been priced to generate the same level of profit. Risk that the actual mix of business sold is weighted towards those products or rating factors with lower margins than expected.