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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

A health insurer launches a retail indemnity product with no medical underwriting and a generous portability option. Within a year, the actuary observes that the proportion of high-claiming customers is much greater than priced. Which challenge does this primarily illustrate?

This illustrates adverse selection: with weak underwriting, people who expect to claim more are more likely to buy cover, so the insured group is riskier than priced. Moral hazard is different because it concerns behaviour changing after cover starts.

  1. AMoral hazard arising after the policy is issued
  2. BAdverse selection, where those expecting higher claims are more likely to buy coverCorrect
  3. CBasis risk between premium and claims
  4. DReinvestment risk on premium income
  5. Currency risk on reinsurance recoveries

Explanation

With little underwriting, people who expect higher claims are more likely to buy, so the insured pool is worse than the priced population. This is adverse selection. Moral hazard concerns changed behaviour after cover begins, which is not what is described here.

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