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

Himalaya Health Insurance has identified that a sudden spike in claims from a pandemic could strain its liquidity even though it is solvent on paper. The risk committee asks which type of risk this primarily illustrates and a suitable response. Which option is best?

This is primarily liquidity risk: the insurer may be solvent but unable to meet sudden claim outflows in cash. The suitable response is holding sufficient liquid assets and contingency funding plans sized to stressed claim payments, not repricing models or advertising.

  1. AModel risk, best addressed by replacing the pricing model
  2. BLiquidity risk, best addressed by holding adequate liquid assets and contingency funding plans matched to potential claim outflowsCorrect
  3. CReputational risk only, best addressed by an advertising campaign
  4. DLegal risk, best addressed by amending policy wording after the event
  5. Basis risk, best addressed by hedging with equity index futures

Explanation

Being solvent but unable to pay claims when due is liquidity risk. Holding liquid assets sized against stressed outflows and having contingency funding addresses it. The other risk types do not describe the cash-timing problem.

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