Describe the distinct characteristics of monopolistic competition
6 You are an actuary working for a small, general insurance company that specialises only in long-tailed insurance risks in its local insurance market. The company has a moderate level of free assets. The Board, who require a risk averse investment strategy, has asked for a review of the investment guidelines given to the company's investment managers. It is assumed that there are no regulatory investment restrictions. (i) Outline the instructions that would be given to the investment managers in respect of the assets that they may or may not hold, including any relevant limits. [6] At a recent Board meeting, one of the members suggested that, given the long-tailed nature of the risks insured and the current low historic level of the stock market, the equity proportion of the investment portfolio should be increased to benefit from future stock market increases. (ii) Explain the advantages and disadvantages of his suggestion for the company. [6] Another Board member has suggested increasing the proportion invested in index- linked Government bonds. Explain the advantages and disadvantages of this suggestion compared with that given to the previous Board member. [4]7 A global relief agency provides humanitarian assistance to victims of natural disasters in poor countries around the world. It is looking into its sources of funding for large natural disasters and is thinking of buying a catastrophe insurance policy. The policy pays out a fixed sum of $100m if a large natural catastrophe leads to more than 500 deaths during the term of the policy. The premium for the policy is likely to exceed $10m per annum. Discuss the advantages and disadvantages to the relief agency of purchasing such a policy. [5] (ii) Discuss the advantages and disadvantages to the Insurer of writing such a policy. [4] (ini) Two different insurance providers are competing to write this policy. Company A thinks that the number of such events has a Poisson distribution with Poisson parameter of 10%, while Company B estimates the Poisson parameter to be 8.33%. Company A requires a return on capital of 10% while Company B requires a return on capital of 15%. Both companies allocate capital to this contract using the same methodology. The amount of capital is set to ensure that the probability of ruin for this contract on a standalone basis is less than 10%. Using approximations where appropriate, calculate which of the two companies will have the higher premium. [9]5 You are an actuary working for a general insurance company that writes a wide variety of classes of insurance. You have been asked to attend a cross-functional group looking at how to improve the company's defence against fraudulent claims. As part of your preparation you have been asked to suggest ways in which fraudulent policyholder behaviour may be reduced. Outline the suggestions you would make. [14] 6 The government of a small developing country wants to encourage the development of the agricultural sector in its country. One of the measures it has taken is to establish a specialist insurance company to provide crop insurance to farmers in its country. The insurance company would charge an annual premium and provide compensation to farmers for crop failure resulting from drought, disease or pests during the policy year. The compensation provided will equal the sum insured less the proceeds from the sale of the crop. List the rating factors that the insurance company might use to set premiums. [3] (ii) Describe the characteristics of claims that the insurer can expect to receive. [)] (iii) State the factors that will influence the level of capital that the insurer will need. [S]
