Final answer:
In managing portfolio risk, insurers must account for economic risks, adverse selection, and actuarial fairness across different risk groups. High-risk levels can negatively impact investment portfolios, and insurers face challenges due to imperfect information and the need to balance payments with claims and costs.
Step-by-step explanation:
Special issues that insurers need to account for in managing portfolio risk include economic risks, adverse selection, and the management of different risk groups.
Throughout history, high-risk levels have been shown to be detrimental to an investment portfolio during times of economic turmoil, such as natural disasters, wars, or widespread unemployment.
Insurers must ensure that the average person's payments cover the claims, and operating costs, and allow for profits.
Adverse selection is a significant issue wherein riskier individuals are more likely to purchase insurance, driving up costs due to a less healthy risk pool.
This can make insurance unaffordable for those who are at greater risk of filing claims. Imperfect information also poses a challenge, as insurers often have difficulty identifying and pricing the risks of insurance seekers accurately.
To achieve actuarial fairness, insurers must balance the risks within different groups, understanding that not everyone faces the same likelihood of an adverse event.
They must effectively manage investment income earned on reserves, and administrative costs, and ensure the stability of the insurance markets despite challenges.
Financial markets similarly grapple with imperfect information, emphasizing the need for effective management strategies to support both insurers and insured individuals.
The complete question is: Special issues insurers need to account for in managing portfolio risk. Justify!