Page 156 - Risk Management in current scenario

Risks of higher than planned number of claims
In the life insurance, insurance risks contains three risks; mortality risk,
risk of higher than anticipated claims, Lapse risk, risk of policyholders not
paying the premium higher than anticipated and Expense risk, risk of
actual expenses higher than planned. Here we are discussing mortality
risk and its management.

In the mortality risk, the risk to the insurance company is that the actual
Claims higher than expected claims. The expected claims are based on
mortality assumptions taken at the time of pricing. There could be several
reasons why the actual claims could be higher than planned. The most
important role comes from front lines sales force where they are first
point of contact with the customer. The sales forces are the first
underwriter who plays a very pivotal role in determining what could be
the actual claims of the Company, because, if they bring sick lives, the
claim experience will be bad.

The other reasons could be that the substandard lives taking advantage
of their ill-health taking insurance on standard rates due to non-medical
limits prevailing within the product where the customers do not have to
give the evidence of their good health.

There is also a risk of Pandemics; historical data shows that there have
been incidences of pandemic in the past. The key point to note here is
that in both 20th and 21st century, three lethal pandemic attacks have
happened resulting into the large number of deaths. Under the Solvency-
II regime in the EU, there is a need to keeping the capital separately for
the Catastrophe risk at a rate of 1.5 per 1000 sum assured equivalent to
99.5% probability confidence level, that is, keeping capital for 1 in 200
year event and there is an evidence of such events.

The other reasons of higher than planned claims are Catastrophe Events.
These events could be flood, excessive rain, natural disaster such as
earthquake, resulting into mass claims. The history shows that there have

154 | Risk Management in Current Scenario