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IF 3 > CH 10 > Flashcards

CH 10 Flashcards

1
Q

What is Risk Premium

A

The expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty attaching to the claim cost

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2
Q

What does risk premium represent

A

The amount of money required today to fund claims, time value of money is also taken into account

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3
Q

What are the key features of risk premium

A
  • Severity
  • Frequency
  • Large claims
  • Reinsurance cost
  • Claims run off
  • IBNR
  • Catastrophe claims
  • Latent Claims
  • Claims inflation
  • Exposure
  • Fraud
  • LASPO
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4
Q

Which feature ensures the expected number of claims to be foretasted accurately

A

Frequency, and takes into account for anticipated changes in the environment,the portfolio of risks and individual risks

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5
Q

Under frequency how is each type of claim projected

A

Each distinctive type of claim, should be projected separately

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6
Q

Severity under risk premium deals with

A

It deals with assessing the average cost of different types of claims

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7
Q

In severity allowance is made for

A

Allowance is always made for catastrophes

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8
Q

What is an underwriter required to consider when calculating Risk Premium

A

They need to consider how many large claims they can expect and how much they need to allow of these claims

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9
Q

What role to large claims play

A

They play a disproportionate role in pricing and profitability. Small insurers being particularly disadvantaged, their portfolios can’t handle such losses

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10
Q

Which claims have an increasing impact in future ratings

A

Large claims involving liability to third parties

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11
Q

What are Periodic Payment orders (PPO)

A

They are designed to make structured payment to claimants for life.

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12
Q

When are Periodic payments orders mostly used

A

in Serious personal injury claims

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13
Q

Following changes in the personal injury discount rate what impact have insurers observed on both existing and new clients

A

Increase in reserve of some large personal injury claims increasing by more than 100%, so as to allow the lack of any future investment income

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14
Q

Why do insurers buy reinsurance protection

A

So as to protect the company from catastrophic single or combined losses

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15
Q

Where are reinsurance costs factored in

A

The reinsurance costs must be factored into the pricing of the product costs/premium

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16
Q

Why should claims data be adjusted

A

They should be adjusted to allow for the provisional nature of case estimates

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17
Q

In respect of liability claims insurers use which reserves

A

They use precautionary reserves even if the insurer has declined being liable for the accident

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18
Q

Why do insurers use precautionary reserves for liability claims, even when insurers have declined liability

A

Insurers have regulatory obligation to identify its potential liabilities and need to ensure that adequate reserve are in place, as they can decline liability and still lose the legal agreement and have to pay the loss

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19
Q

What are claim run off

A

When a claim is reopened, and insurer has a possibility of either having to pay the claim, or not needing to pay any claim

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20
Q

Claim run offs have the possibility of

A

They could produce surplus or claims deficit

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21
Q

Which factor must underwriters consider carefully in establishing pricing

A

Incurred But Not Reported Claims (IBNR)

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22
Q

Incurred But Not Reported claims

A

These are claims that usually occur at the end of the year when people are busy with holidays thus have no time to report, thus fail to be recorded in the insurers books

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23
Q

Why are Incurred but not reported claims required to be accounted for when assessing total claims for the underwriting year

A

If not done then the number on which pricing is based is inadequate

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24
Q

What type of reserves are created for IBNR eventualities

A

Precautionary reserves

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25
Q

How are Catastrophe claims different from Large claims

A

They reflect the accumulation of a large number of claims all arising from a single common event

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26
Q

What is the underwriter required to do for Catastrophe claims

A

They need to estimate the frequency and severity and manage their exposure and buy optimal levels of reinsurance cover

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27
Q

What are Latent Claims

A

these are extreme IBNR as in some cases they can exceed to 50 years between the cause and the claim

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28
Q

What are some of the examples of latent claims event

A

Asbestos -related diseases like mesothelioma,stress,toxic mould and EMF

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29
Q

Latent claims have led to insurers

A

It has led to insurers creating reserves now for incidents that occurred over 40 years

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30
Q

Latent claims are also referred to as

A

They are referred to as Long tail claims

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31
Q

Which claims are presenting serious issues

A

Latent Claims

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32
Q

Which lines of b’ness are more likely to be affected by latent claims

A

Liability Insurance

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33
Q

Why does Claim inflation always exceed Generic Inflation

A

Due to changes in Legislation

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34
Q

How is premium adjusted to take into account inflation

A

It needs to be adjusted to reflect any devaluation of the funds available to pay claims

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35
Q

A key issue facing insurers on fraud is

A

the increasing prevalence of fraud in both claim fraud and application fraud

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36
Q

The implementation of LASPO led to

A

It led to reduction in rates particularly casualty and Motor b’ness i.e some reduced up to 15%. And also led to improvement in loss ratios especially in motor insurance. But didn’t last for long

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37
Q

What are some of the expenses included in the pricing of an insurance product, thus cost of running an insurance b’ness

A
  • staff cost
  • premises
  • electricity and other utilities
  • computer and machinery
  • marketing and advertising
  • commission paid to agents and brokers
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38
Q

What are fixed expenses

A

Cost associated with processing a particular product, that don’t increase with the size of the risk

39
Q

What are variable Expenses

A

These are expenses that vary with the size,complexity and nature of each risk

40
Q

Which risks tend to have higher variable expenses

A

Larger risks tend to be more complex and thus have higher variable expenses

41
Q

Variable costs could be grouped into which headings

A
  • Underwriting
  • Commission
  • Claims handling
42
Q

What are the variable costs under underwriting

A

Services like policy alterations/risk management/disaster recovery planning,helplines provided to policyholders are independent of the existence/volume of claims

43
Q

What are the variable costs under Commission

A

This is an amount normally percentage paid to agent/intermediary/broker who introduces business to the insurer

44
Q

What is the commission rate for motor fleet

A

7.5%

45
Q

What are other forms of commission

A

Work Transfer

46
Q

What is work Transfer arrangement

A

Insurer pays the intermediary a percentage of the premium charged in exchange for taking on more work like issuing documentation/acting as an underwriter under delegated authority

47
Q

Work Transfer arrangement is common under which class of insurance

A

Real estate Market

48
Q

The Variable cost under claims handling

A

The cost will vary according to the number and complexity of the claims

49
Q

So what are the variable cost under claims handling

A
  • a charge per claim

- a charge reflecting the differences in the volume of work required for more involved cases

50
Q

In general an underwriter should ensure that the model by which expenses are allocated does what

A

It bears a close resemblance to the actual day-day realities of what takes up everyone’s time

51
Q

What is common in the real estate market in relation to other expenses

A

Risk Management funds (RMF) to be offered to customers so as to put towards the agreed costs in maintaining or protecting the assets

52
Q

How are Risk Management Fund paid

A

It can be paid by insurer entirely or matched pound for pound(50/50) between the insurer and insured

53
Q

What other expenses to insurers incur

A

Sometimes insurers offer Low Claim Rebates (LCR ) or profit shares where they payback a proportion of the premium

54
Q

Why would an insure offer Low claims rebate or profit shares to an insured

A

So as to incentivise the more positive risk management by the insured, leading to fewer and potentially smaller claims

55
Q

How is profit of an insurance company measured

A

it’s measured as a proportion of the Capital Employed (ROCE)

56
Q

What is ROCE

A

Return on Capital Employed is an important financial concept

57
Q

How would shareholders be able to justify risk if the class of insurance had a high degree of volatility

A

The class of insurance must be able to generate higher profits. As higher risk investments carry greater return

58
Q

How are insurers able to earn Investment Income

A

This is by virtue of the substantial amount of capital and reserve they control

59
Q

Why are insurers required by law to maintain a certain level of reserves

A

This is required so they are able to pay future claims

60
Q

What do insurers do with the income they recieve

A

They are allowed to invest it, this the income received from this investment process is another earning stream for the b’ness

61
Q

What is the underwriter result

A

This is the business result without income investment

62
Q

The underwriting result consist of

A

Its a combination of the loss ratio,commission ratio and the expense ratio

63
Q

What is the Combined Operating ratio(OCR)

A

This is the loss ratio, commission ratio and expense ratio together form the Combined Operating Ratio

64
Q

The combined Operating Ratio (OCR) is a common measure for

A

Its a common measure for financial health of general insurers

65
Q

The underwriting result of the Combined Operating ratio is

A

This is an actual profit/lass value

66
Q

What produces the cyclical nature of insurance

A

The relationship between the profit and the yield of the underwriting result plus investment income

67
Q

What is the hard market

A

This is when rates and premiums are high

68
Q

What is soft Market

A

This is when rates and premiums are low to attract more b’ness on which secure investment return is made

69
Q

When will the market turn soft to hard

A

When the returns for insurers are inadequate and capital is withdrawn

70
Q

Insurers tend to balance their portfolios with two broad classes of investment which are

A
  • Interest bearing Investment

- Investment where the value is expected to grow at least in line with the economy (equities)

71
Q

What would happen if the contributions of gains would be ignored

A

The insurer’s products may become overpriced and uncompetetive

72
Q

If the contribution of gains are relied upon then

A

Products become very competitive which is good but this will cause difficulties if the investment returns diminish

73
Q

What does the ABI statement of Recommended Practice require from the insurer

A

It requires full amount of capital movement to be shown in the profit and loss account

74
Q

What type of Premium taxes exist in the UK

A

In the UK there is a variety ranging from pure taxation expressed as a fixed percentage of premium and to other quasi- taxation

75
Q

Policyholder Protection Board was replaced by

A

Financial Services Compensation Scheme (FSCS)

76
Q

The Financial Services Compensation Scheme levies a surcharge based on

A

It bases it on percentage of gross direct premium

77
Q

The Financial Service Compensation Scheme uses the levies to fund

A

It funds claims by policyholders whose insurer has become insolvent

78
Q

Why is The amount of levy surcharge by the Financial Services Compensation Scheme not easily assessed

A

This is because it is difficult to forecast the demand

79
Q

What is the Motor Insurer’s Bureau (MIB)

A

In the UK its the last resort for property damage or injury by uninsured or untraced driver

80
Q

The Motor Insurers Bureau is levied depending

A

it’s levied depending on the claims experience

81
Q

Mesothelioma Act 2014 levy is charged on

A

It’s charged on all premium for employers liability cover

82
Q

The levy of Mesothelioma Act 2014 is used ti fund

A

It funds the Diffuse Mesothelioma Payment Scheme, which allows those suffering from mesothelioma -related diseases but are unable to trace their employers to obtain financial support

83
Q

How much is the annual amount raised by the Mesothelioma Act 2014 levy

A

Expected to be Circa 35 Million Pounds

84
Q

What’s the levy rate charged in insurers for Mesothelioma Act 2014

A

2%-3%

85
Q

Initially how did the Mesothelioma Payment Scheme provide its compensation

A

It compensated individual claims based on 80% of the average civil claims

86
Q

How has the Mesothelioma Payment Scheme compensation changed from 2015

A

It now compensates individual claims based on 100% of the average civil claims under the diffuse mesothelioma payment scheme amendment Regulation

87
Q

What is Mesothelioma

A

This is a cancer of the lining of lungs and other organs following exposure to asbestos or materials containing it

88
Q

Following implementation of LAPSO what did insurer anticipate

A

They anticipated improvements in claim costs

89
Q

Why did insurers anticipate improvement in claims cost

A

This is due to changes in the way claims are settled and notified

90
Q

What more needs to be done by LAPSO

A

more needs to be done to protect against undue costs as a result of spurious/exaggerated claims and claims farming

91
Q

Example of fixed expenses are

A

Accounting entries,record keeping, policy issue and certificate production for a given product

92
Q

Fixed expenses are allocated per

A

policy

93
Q

What is the commission rate for commercial credit insurance

A

25% or more on some on some of these cases

IF 3 (7 decks)

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