Insurance risk
Insurance risk may arise from the following sub-categories:
Product pricing: inadequate or inappropriate product pricing;
Product design: product defects due to inadequate product design, variation, delivery or
maintenance;
Reserving: inadequate or inappropriate reserving including unforeseen, unknown or
unintended liabilities that may eventuate;
Claims management: inadequate or inappropriate claims management including overpayment,
failure to collect recoveries, fraudulent misrepresentation or staff operating outside of their
authority;
Underwriting: inadequate or inappropriate underwriting. For example, failure to comply with
the underwriting process, including staff operating outside their authority; and
Insurance concentration risk: adverse concentration exposure. For example, location
catastrophe exposure, underwriting segment factor, industry or distribution channel.
Reinsurance risk
Reinsurance risk may arise from the following sub-categories:
Coverage: insufficient or inappropriate reinsurance coverage arising as a result of:
incorrect use of models used to calculate amount of cover required;
the cover provided by the reinsurance program(s) does not align with original
underwriting exposures; and
latent/emerging exposures.
Underwriting/pricing: inadequate underwriting and/or pricing of reinsurance exposures
retained by IAG's reinsurance captives;
Claims management: inadequate or inappropriate reinsurance recovery management;
Contract terms: reinsurance arrangements not legally binding or poor management of
reinsurance recoveries; and
Reinsurance concentration risk: over-exposure to insurance risks based on factors such as
geographical location, types of cover, industry types or a high reliance on a number of
reinsurers.
The credit counterparty concentration risk to reinsurers is covered under the financial risk – credit
risk category.
Financial risk
Financial risk may arise from the following sub-categories:
Liquidity management: insufficient cash resources to meet financial obligations as and when
they fall due (without affecting either the daily operations or the financial condition of the
Group);
Market risk:
asset concentration: risk of over-exposure to a particular asset class outside the
Strategic Asset Allocation or the limits in the individual Investment Management
Agreements;
foreign exchange: adverse exchange rate movements in unhedged foreign exchange
exposures;
asset prices: the risk an asset’s value will negatively change due to a change in the
absolute level of its market price;
interest rates: the risk an investment's value will negatively change due to a change in the
absolute level of interest rates, in the spread between two rates, in the shape of the yield
curve or in any other interest rate relationship;
derivative exposures: movements in underlying positions not being matched by (opposite)
movements in the value of the derivative positions;
Credit risk: the risk arising from a counterparty’s failure to meet its obligations in accordance
with the agreed terms. These counterparties include reinsurers, premium debtors and those
related to investments; and
Capital management risk: failure to maintain adequate regulatory capital to meet APRA's
capital requirements or the Group's internal capital target.
53
