Insurance risksInsurance risks

Insurance risks

10. An insurer’s capital measurement model must consider the risk that the amount or timing of cash flows connected with the insurer’s obligations will differ from expectations or assumptions as at the valuation date. Factors that must be considered include:

(a) outstanding claims risk - the risk that the actual cost of claims for obligations incurred before the calculation date will differ from expectations or assumptions due to factors such as:

(i) unexpected inflation in claim costs;

(ii) changes in interest rates;

(iii) changes in the legal environment in which claims will be resolved, including the environment in which claims are pursued by policyholders or third parties;

(iv) changes to the basic premises underlying the provisions for a particular coverage (such as has occurred with environmental impairment liability);

(v) patterns of pricing adequacy which affect the payment of claims or the adequacy of case reserves;

(vi) currency fluctuations which affect the costs of losses when expressed in local currency;

(vii) the randomness of the claims process itself; and

(viii) incompleteness of databases;

(b) premiums risk - the risk that premiums relating to post calculation date exposures, including premiums written before but incepting after the calculation date, could be insufficient to fund the liabilities arising from that business due to changes in factors including:

(i) changes in interest rates;

(ii) competitive pressures that do not allow the insurer to achieve assumed levels of exposure or rate adequacy;

(iii) regulatory intervention that restrains premium increases or decreases or requires business to be underwritten that would not be underwritten in the absence of such intervention;

(iv) retrospective premiums or dividends that differ from assumptions; and

(v) amounts collectible from intermediaries that differ from assumptions;

(c) loss projection risk - the uncertainty regarding assumptions about future claims costs. Loss projection risk is a function of the factors that affect reserve risk and also of the uncertainty regarding factors such as:

(i) unanticipated changes in loss costs and exposures from the historical experience period;

(ii) loss costs for the mix of new policies being underwritten, including the effect of adverse selection; and

(iii) loss adjustment practices in the future that may differ from those in the past;

(d) concentration risk - the uncertainty regarding the cost of catastrophic events. Concentration risk can be considered a component of loss projection risk, and is a function of factors such as: