Life Insurance and Retirement Valuation

Tutorial 7: Risk Management Frameworks

LIFE INSURANCE AND

RETIREMENT VALUATIONS

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

TUTORIAL 8

MODULE 12:
RISK MANAGEMENT
FRAMEWORKS

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

Housekeeping

• Assignment marking – results on 31 March

• Exam is on 22 April
o Do the question, do the question, do the questions ….
o Areas to focus on / more past questions

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

Enterprise risk management

“ERM is the process by which organizations in all industries

assess, control, exploit, finance, and monitor risks from all
sources for the purpose of increasing the organization’s short and
long term value to its stakeholders.”

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

Relationship between objectives, risk and capital

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

Risk management framework

• a risk appetite statement;
• a risk management policy;
• a designated risk management function;
• defined roles, responsibilities and formal reporting structures for the management of
material risks throughout the entity (with risks being reported to and managed at appropriate
levels within the organisation, depending on the nature of the risk);
• policies and procedures supporting the management of all material risks;
• a risk management process that informs decision makers of the entity’s risks, how the entity
intends to mitigate those risks, and how much current and future capital is necessary;
• a management information system (MIS) that is adequate, both under normal circumstances
and in periods of stress, for measuring, assessing and reporting on all material risks across
the entity; and
• a review process to ensure that the risk management framework is effective in identifying,
measuring, evaluating, monitoring, reporting and controlling or mitigating material risks.

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

Question 1
Life 2A semester 2 2017 exam Q1c

The MadeUpLand Government is currently working on legislation to develop a framework which would
require trustees of superannuation funds to offer members at retirement a product that protects against
outliving one’s savings. In selecting an appropriate product trustees would need to meet their obligations to
act in the best interests of their members.

TrustMe for Life (TML) sells both life insurance and superannuation business.
In preparation for this legislative change TML Life Company is considering developing a lifetime annuity
that it could offer to its superannuation members as they approach retirement. This product is expected to be
sold to healthy rather than substandard lives.

TML has been selling yearly renewable term (YRT) business for 15 years but has no experience with
writing lifetime annuity business.

You are a product development actuary at TML.

TML’s CEO has asked for your help to understand the key features of annuities. The CEO understands you
do not have a lot of experience in this area but is confident you will be able to apply actuarial principles and
your knowledge of pricing to answer his questions.

The CEO has asked you to prepare a memo which discusses:

o The risks to TML of introducing a new lifetime annuity product. (4 Marks)
o How these risks could be managed. (4 Marks)
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Tutorial 7: Risk Management Frameworks

Question 2
Life 2A semester 1 2016 exam Q1b

MakeGood Life is a life insurer that has been selling investment linked business for 30 years. In the last few years it has
experienced the following problems:-

• Loss of knowledge and expertise resulting from staff turnover

• A history of unit pricing errors requiring compensation to be paid

Your role as Head of Operations involves overseeing the calculation of unit prices as well as administration and customer service.

It has just been brought to your attention that a dividend payment included in net asset value (NAV) on 01/04/2019 for $21m was
manually entered incorrectly as $12m meaning unit prices from this date are incorrect.

MakeGood Life’s newly appointed Managing Director, who is also new to life insurance, says

“a history of unit pricing errors suggests an issue with people, processes or systems. I would like to explore the option of
outsourcing policy administration and unit pricing to an external third-party provider.”

Explain what risks relating to people, processes and systems MakeGood would be exposed to if it outsources its administration
and unit pricing functions and describe what mitigating action could be taken to manage these risks?

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 Life Insurance and Retirement Valuation
Tutorial 7: Risk Management Frameworks

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The Actuaries Institute is the sole professional body for actuaries in Australia. ABN 69 000 423 656
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Published January 2020
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