Life Insurance Company Risk Management
This domain examines how insurers identify, measure, control and report the risks created by life insurance and by their own decisions.
Risk taxonomy and framework
Key risks include mortality, morbidity, longevity, lapse, expense, investment/market, credit, liquidity, operational, legal, reputational, strategic and group risk. An ERM framework sets risk appetite, risk limits and key risk indicators, with Board oversight and a risk committee. The three lines of defence separate business ownership, risk/compliance oversight and internal audit. Reinsurance, underwriting controls and asset limits transfer or reduce risk. ORSA-style own risk and solvency assessment links risk profile to capital needs, and stress testing covers pandemic, longevity, interest-rate and lapse shocks.
Worked example
A mortality shock raises deaths by 20% in a term portfolio. If expected annual claims are ₹500 crore, the extra claims are ₹100 crore before reinsurance. With a quota-share treaty ceding 40%, the net extra cost is ₹60 crore, but the insurer still bears the retained share and any reinsurance credit risk. The exercise tests capital and risk-appetite limits, not just claims cost.
Traps
Treating risk management as a compliance checklist; ignoring lapse and expense risk; assuming reinsurance removes counterparty risk; missing correlations between market and lapse risk; setting risk appetite without limits.