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

After a severe flood in one Indian state, a general insurer finds that thousands of property policies in the same region claim simultaneously. Which risk-management step best addresses the accumulation challenge exposed by this event?

The best step is to monitor geographic exposure and buy catastrophe excess-of-loss reinsurance. Accumulation risk arises when one event hits many policies at once, and these measures cap the insurer's net loss. The alternatives increase concentration or ignore catastrophe cost.

  1. AMonitor geographic exposure and buy catastrophe excess-of-loss reinsuranceCorrect
  2. BIncrease the proportion of the portfolio written in that same region
  3. CPrice all policies on the basis of average annual claims with no catastrophe loading
  4. DHold reserves only for claims already reported
  5. Move assets entirely to long-dated bonds

Explanation

Accumulation risk arises when many policies are hit by one event. Controlling aggregate exposure by region and using catastrophe reinsurance limits the loss from such events. The other options increase concentration, ignore catastrophe cost or address unrelated matters.

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