Chapter 1 Flashcards by Charlotte Cummins

A UK-based engineering firm wants specialist insurance for a large infrastructure project. They engage a professional with technical knowledge of complex risks to recommend a policy that best suits their needs.

Question:
Which intermediary is the engineering firm most likely working with?
A. Price comparison site
B. Appointed representative
C. Insurance broker
D. Tied agent

Answer: C. Insurance broker

Explanation: Insurance brokers offer professional advice and can access a wide range of insurance providers for complex or large risks.

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A new financial services startup uses a firm that is not directly authorised by the FCA to arrange its insurance, but this firm operates under the responsibility of a larger, authorised company.

Question:
What type of intermediary is being used?
A. Insurance broker
B. Price comparison site
C. Appointed representative
D. Tied agent

Answer: C. Appointed representative

Explanation: Appointed representatives operate under a Principal firm and are exempt from direct FCA authorisation.

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A firm in the UK wants to assess how much economic impact the insurance industry has.

Question:
Which of the following statistics would best help demonstrate the economic significance of the UK insurance industry?
A. Number of tied agents in the UK
B. Size of an average home insurance premium
C. Total tax contribution and number of employees
D. Number of complaints to the Financial Ombudsman

Answer: C. Total tax contribution and number of employees

Explanation: Tax contributions (£18.5bn) and employment (320,000+ people) illustrate the industry’s economic scale.

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A buyer wants to ensure they get unbiased advice and a wide range of insurance options.

Question:
Which of the following is best suited to meet this need?
A. A tied agent
B. An insurance broker
C. A bank selling insurance
D. A price comparison site

Answer: B. An insurance broker

Explanation: Brokers can offer independent advice and access many providers, unlike tied agents or banks.

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Raj is a tied agent for a large UK insurer. A long-standing customer asks Raj to find the most competitive policy from the whole market.

Question:
What limitation does Raj face in fulfilling this request?
A. Raj is not regulated by the FCA.
B. Raj can only offer insurance from one insurer.
C. Raj cannot offer any advice to customers.
D. Raj is required to operate through a price comparison site.

Answer: B. Raj can only offer insurance from one insurer.

Explanation: Tied agents typically represent and sell the products of a single insurer only.

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A firm is unsure whether to work with an appointed representative or a broker. They prefer not to deal with a firm regulated by another firm.

Question:
Which intermediary type should they avoid?
A. Insurance broker
B. Price comparison site
C. Appointed representative
D. Other intermediary

Answer: C. Appointed representative

Explanation: Appointed representatives are not directly regulated; their Principal firm is responsible for them.

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SecureLife Mutual is an insurer owned entirely by its policyholders. Instead of paying dividends to shareholders, it reinvests profits to offer lower premiums.

Question:
Which of the following best describes SecureLife Mutual?
A. Proprietary company
B. Reinsurance company
C. Mutual insurer
D. Managing general agent

Answer: C. Mutual insurer

Explanation: Mutuals are owned by policyholders and may return profits through better rates or bonuses.

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Horizon Insurance Ltd is a UK-based company that offers both life and general insurance products. It operates directly with the public and is owned by shareholders.

Question:
What type of insurance company is Horizon Insurance Ltd most likely to be?
A. Mutual insurer
B. Composite company
C. Reinsurance company
D. Managing general agent

Answer: B. Composite company

Explanation: Composite companies transact both life (long-term) and general insurance. Horizon fits this description.

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An insurance firm uses another organisation to assess risks, issue policies, and pay claims on its behalf. This organisation does not carry any of the risk.

Question:
What type of organisation is this likely to be?
A. Insurance broker
B. Reinsurance company
C. Managing general agent (MGA)
D. Tied agent

Answer: C. Managing general agent (MGA)

Explanation: MGAs are brokers with delegated authority to act like insurers but do not carry the insurance risk.

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An insurer pays a regular premium to another company to protect itself from significant losses due to catastrophic events.

Question:
What is this arrangement called?
A. Underwriting
B. Delegated authority
C. Reinsurance
D. Co-insurance

Answer: C. Reinsurance

Explanation: Reinsurance involves insurers protecting themselves against large or unexpected losses.

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An insurer’s underwriting results vary significantly year-to-year. It wants to reduce this volatility to produce a more consistent financial performance.

Question:
What can the insurer use to help smooth its underwriting results?
A. MGAs
B. Tied agents
C. Reinsurance
D. Dual regulation

Answer: C. Reinsurance

Explanation: One key use of reinsurance is to limit underwriting result fluctuations.

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ProtectSure Ltd has gone into liquidation after failing to meet solvency margin requirements.

Question:
Who is liable for ProtectSure’s debts?
A. Its shareholders
B. The FCA and PRA
C. The customers
D. The company itself

Answer: D. The company itself

Explanation: Limited companies are liable for their own debts; shareholders’ liability is limited to their investment.

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An individual client has a complex marine insurance requirement and is advised to approach a firm that has specialist knowledge of Lloyd’s procedures and can access a range of syndicates.

Question:
Which type of intermediary is most likely assisting this client?
A. Appointed representative
B. Takaful provider
C. Lloyd’s broker
D. Price comparison website

Answer: C. Lloyd’s broker

Explanation: Lloyd’s brokers specialise in placing complex and bespoke risks within the Lloyd’s market and understand how to access syndicates.

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A former mutual insurer, MutualCare Ltd, now operates as a proprietary company but keeps the word “mutual” in its name.

Question:
What is the term for this transformation?
A. Conversion
B. Demutualisation
C. Acquisition
D. Remutualisation

Answer: B. Demutualisation

Explanation: Demutualisation is when a mutual becomes a shareholder-owned proprietary company.

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A Lloyd’s market participant underwrites insurance business and appoints a company to agree cover, set premiums, and handle claims.

Question:
What role has been appointed by this participant?
A. Tied agent
B. Managing agent
C. Coverholder
D. Reinsurer

Answer: B. Managing agent

Explanation: Managing agents are independent companies appointed by Lloyd’s members to carry out underwriting and claims functions on their behalf.

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An insurance broker has authority to bind cover on behalf of a Lloyd’s syndicate and may handle claims under this authority.

Question:
What is this broker’s role within the Lloyd’s market?
A. Syndicate
B. Lloyd’s agent
C. Coverholder
D. Managing agent

Answer: C. Coverholder

Explanation: A coverholder is a broker or intermediary with delegated authority from a syndicate to bind cover and potentially handle claims.

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A parent company wants to create a separate entity to insure its own business risks directly, reducing dependence on the commercial insurance market.

Question:
What type of insurance company is this?
A. Composite insurer
B. Captive insurer
C. Mutual insurer
D. Lloyd’s syndicate

Answer: B. Captive insurer

Explanation: Captive insurers are formed by parent companies to insure their own or group risks, often for tax and cost efficiency.

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GlobalTech Ltd’s risk manager wants to base their captive insurer in Gibraltar due to flexible regulation, access to professional services, and lower tax.

Question:
Why are such locations attractive for captives?
A. They offer larger policy limits
B. They avoid the need for FCA regulation
C. They offer simplified regulation and fiscal advantages
D. They are close to customers

Answer: C. They offer simplified regulation and fiscal advantages

Explanation: Offshore jurisdictions like Gibraltar and Bermuda offer more flexible regulation, less paperwork, and potential tax benefits.

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A major company sets up a captive insurer and is now purchasing reinsurance directly at lower cost than through traditional insurers.

Question:
Which benefit of a captive insurer does this illustrate?
A. Regulatory independence
B. Avoidance of solvency rules
C. Reduced underwriting standards
D. Lower overall risk premium through direct reinsurance

Answer: D. Lower overall risk premium through direct reinsurance

Explanation: Captives can achieve cost savings by negotiating reinsurance directly, bypassing retail insurer costs.

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A customer inquires about an insurance solution that complies with Islamic principles, avoiding interest, gambling, and uncertainty.

Question:
What type of insurance product should be recommended?
A. Captive insurance
B. Takaful insurance
C. Syndicated insurance
D. Mutual insurance

Answer: B. Takaful insurance

Explanation: Takaful is designed to comply with Islamic (Sharia) law, avoiding gharar (uncertainty), maisir (gambling), and riba (interest).

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An insurer wants to offer a Sharia-compliant home insurance product and consults a group of Islamic scholars during product development.

Question:
What is the function of this group of scholars?
A. Risk underwriters
B. Franchise board
C. Sharia advisory committee
D. Financial Conduct Authority panel

Answer: C. Sharia advisory committee

Explanation: Takaful providers use Sharia advisory committees to ensure that their products comply with Islamic law.

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A Lloyd’s member is unable to meet a large claim. Despite this, the policyholder still receives payment from the market.

Question:
What enables this protection for the policyholder?
A. FCA guarantee scheme
B. Reinsurance layering
C. Lloyd’s chain of security
D. Franchisee liability agreement

Answer: C. Lloyd’s chain of security

Explanation: Lloyd’s chain of security protects policyholders if a member cannot pay, reinforcing market trust.

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Lloyd’s adopts a structure where it can approve syndicates, oversee business plans, and expel non-compliant market participants.

Question:
What is this structure called?
A. Syndicate council
B. Reinsurance alliance
C. Franchise structure
D. Mutual board

Answer: C. Franchise structure

Explanation: The franchise structure gives Lloyd’s proactive oversight of the market, improving governance and profitability.

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An insurance company has written fire insurance for a £10 million building and has entered into a reinsurance arrangement where a reinsurer takes 50% of the risk, premium, and claims.

Question:
What type of reinsurance arrangement is this?
A. Facultative
B. Non-proportional treaty
C. Quota share treaty
D. Excess of loss cover

Answer: C. Quota share treaty

Explanation: A quota share is a type of proportional treaty reinsurance where risk, premium, and claims are shared in equal proportions.

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A reinsurer has agreed to pay claims only after a direct insurer’s losses exceed £2 million on a large-scale disaster. Question: What type of reinsurance is this? A. Facultative reinsurance B. Proportional treaty C. Surplus treaty D. Non-proportional treaty

Answer: D. Non-proportional treaty Explanation: In non-proportional treaties, the reinsurer only pays once the direct insurer’s retained limit is exceeded, often referred to as excess of loss reinsurance.

A large property risk falls outside of a direct insurer's existing treaty reinsurance. They negotiate a one-off reinsurance contract specific to this risk. Question: What type of reinsurance is being arranged? A. Facultative B. Treaty C. Proportional D. Quota share

Answer: A. Facultative Explanation: Facultative reinsurance is arranged case-by-case and is typically used for large or unusual risks not covered by a treaty.

A reinsurer is assessing whether to provide cover for a new insurer entering the market. Instead of reviewing each risk, it looks at the insurer’s underwriting approach and pricing discipline. Question: What is this assessment strategy most relevant to? A. Facultative reinsurance B. Direct writing C. Treaty reinsurance D. Catastrophe modelling

Answer: C. Treaty reinsurance Explanation: Reinsurers assess the underwriting philosophy of insurers before agreeing to a treaty, as it covers multiple risks without evaluating each one individually.

An insurer takes the first £500,000 of any loss and reinsures the remainder with a global reinsurer. Question: What is this form of risk transfer known as? A. Quota share treaty B. Risk pooling C. Non-proportional reinsurance D. Facultative coverage

Answer: C. Non-proportional reinsurance Explanation: The insurer retains a set limit and the reinsurer covers amounts above that threshold – typical of excess-of-loss reinsurance.

The UK Government provides terrorism reinsurance support for insurers who exceed certain claim thresholds. The system involves a mutual reinsurance pool and government backing. Question: What is the name of this arrangement? A. Flood Re B. ReSecure C. Pool Re D. Lloyd’s Syndicate Re

Answer: C. Pool Re Explanation: Pool Re is a UK mutual reinsurance scheme for terrorism risk, backed by the Government and funded by participating insurers.

A household insurer passes the flood risk portion of a high-risk home insurance policy to a not-for-profit reinsurance scheme. The scheme is funded partly by a £180m levy on insurers. Question: What is the name of this reinsurance scheme? A. WaterSure B. Flood Re C. Pool Re D. HomeSecure

Answer: B. Flood Re Explanation: Flood Re helps ensure affordable flood insurance for eligible homes by reinsuring primary insurers at a subsidised rate, funded by a levy on the market.

A council decides not to buy insurance for its office contents, but also does not create a fund to cover potential losses. Question: What best describes this approach? A. Risk pooling B. Captive insurance C. Self-insurance D. Non-insurance

Answer: D. Non-insurance Explanation: Non-insurance is when there is no deliberate risk transfer or financial provision, unlike self-insurance which involves a conscious funding decision.

An insurance company uses a reinsurance treaty where it shares premiums and claims in proportion to risk assumed by each party. Question: What type of treaty is this? A. Facultative B. Non-proportional C. Proportional D. Excess of loss

Answer: C. Proportional Explanation: In proportional reinsurance, insurers and reinsurers share premiums and claims based on the same percentage of risk.

A UK-based insurance firm operates in 12 countries. Each subsidiary develops its own pricing and products to suit its domestic market while operating under a shared brand identity. Question: Which type of company structure best describes this firm? A. Global company B. Multinational company C. Regional conglomerate D. Domestic group

Answer: B. Multinational company Explanation: A multinational company adapts its business and operations to local market needs, with semi-independent subsidiaries.

Lloyd’s operates internationally under a unified brand and centralised structure, while offering specialised insurance tailored slightly for local markets. Question: What type of company structure does this represent? A. Regional brand B. Multinational company C. Global company D. State-run insurer

Answer: C. Global company Explanation: Global companies like Lloyd’s see the world as a single market and maintain a centralised strategy with minimal localisation.

A global insurer has identified a major opportunity for expansion in India due to its growing economy and low insurance penetration. Question: What is most likely driving this opportunity? A. High GDP per capita B. A saturated insurance market C. A large population and developing insurance sector D. Strict government control over private insurance

Answer: C. A large population and developing insurance sector Explanation: BRICS countries like India have large populations, low insurance penetration, and growing economies, making them attractive markets.

An insurer is expanding into the BRICS countries and learns that insurance penetration among individuals is low. Question: What does this mean for the insurer? A. There is limited growth potential B. Most people have already bought insurance C. Few people currently hold insurance policies D. It’s illegal to sell insurance in those countries

Answer: C. Few people currently hold insurance policies Explanation: Low insurance penetration means a small percentage of the population currently has insurance, suggesting strong growth potential.

A global insurer is restructuring its strategy so that most product decisions and marketing campaigns are driven centrally from its London headquarters. Question: Which type of business model is this insurer most likely shifting toward? A. Multinational B. Global C. Localised D. Domestic-only

Answer: B. Global Explanation: A global company makes decisions centrally and treats the world as one unified market.

An insurer is researching why the London Market has remained internationally competitive despite post-Brexit challenges. Question: Which factor contributes most to this ongoing competitiveness? A. Brexit eliminated all global connections B. LMG (London Market Group) coordinates strategy and representation C. It only writes life insurance now D. The UK government now underwrites all risks directly

Answer: B. LMG (London Market Group) coordinates strategy and representation Explanation: The London Market Group (LMG) represents the London insurance community and helps maintain competitiveness and collaboration.

What is an appointed representative (AR) in insurance distribution? A. An FCA-authorised independent intermediary B. An agent working under a regulated principal firm C. A type of reinsurer D. A retail chain offering extended warranties

Answer: B Explanation: ARs work under the umbrella of a regulated principal who is responsible for their compliance.

Which of the following is a key characteristic of independent intermediaries? A. They only sell one insurer’s products B. They underwrite their own policies C. They offer products from multiple insurers and give advice D. They operate exclusively online

Answer: C Explanation: Independent intermediaries provide a choice of insurer products and usually advise clients.

What is a ‘connected contract’ in the context of insurance agents? A. A multi-insurer commercial policy B. A contract arranged incidentally by a non-insurance business C. A policy that requires two insurers to underwrite D. A direct insurer’s online policy agreement

Answer: B Explanation: Connected contracts are sold by non-insurance professionals (like vets or travel agents) under oversight.

How do banks typically offer personal insurance to customers? A. Through white-labelled products and direct underwriting B. Via in-branch brokers exclusively C. By selling only life insurance D. Through insurance comparison websites

Answer: A Explanation: Banks often white-label insurance products and sell them through their customer network.

What is an affinity group in insurance distribution? A. A group of underwriters sharing risk B. A reinsurer consortium C. A group with shared characteristics or membership D. An FCA-authorised intermediary

Answer: C Explanation: Affinity groups are member-based (e.g. clubs, unions) and may offer tailored insurance schemes.

What does 'white labelling' mean in insurance? A. Underwriting only pure risk products B. Using a third-party insurer's product sold under the retailer's brand C. Selling only high-net-worth policies D. Offering no branding on insurance documents

Answer: B Explanation: White labelling involves selling insurance under a known retailer or bank's brand, even though it's provided by a third party.

Why is it more profitable for a business to retain customers than to win new ones? A. Customers rarely switch providers B. Existing customers buy more expensive products C. It costs five times more to win a new customer D. The FCA rewards firms for retaining customers

Answer: C Explanation: Retaining customers is significantly cheaper than acquiring new ones—on average, five times less expensive.

What is the first step in meeting customer expectations? A. Analysing complaints B. Measuring satisfaction C. Conducting market research D. Creating loyalty schemes

Answer: C Explanation: Businesses must first identify customer expectations through market research before they can meet or exceed them.

What is the main purpose of Customer Relationship Management (CRM)? A. To increase regulation of insurers B. To automate underwriting C. To build strong, personalised relationships with customers D. To reduce the cost of claims

Answer: C Explanation: CRM helps businesses build deeper relationships by using customer data to anticipate and meet future needs.

Which of the following is NOT typically associated with CRM? A. Transactional selling B. Relationship-focused marketing C. Multichannel communication D. Proactive engagement

Answer: A Explanation: CRM is about building long-term relationships, not just completing transactions.

Which cross-cutting rule under Consumer Duty focuses on helping customers reach their goals? A. Avoid foreseeable harm B. Act in good faith C. Enable and support financial objectives D. Ensure regulatory compliance

Answer: C Explanation: One of the cross-cutting rules is to enable and support retail customers to pursue their financial goals.

Which of the following is not one of the three cross-cutting rules under the FCA Consumer Duty? A. A firm must act in good faith towards retail customers B. A firm must maximise returns to shareholders C. A firm must avoid foreseeable harm to retail customers D. A firm must enable and support retail customers to pursue their financial objectives

Answer: B Explanation: The three cross-cutting rules focus on customer welfare, not shareholder returns.

A large insurer is reviewing its new strategy focused on cost-cutting and increased automation. As a result, many roles may be made redundant. Which stakeholder group is most likely to be negatively affected by this strategy? A. Shareholders B. Employees C. Regulators D. Intermediaries

Answer: B Explanation: Employees are directly affected by redundancies, though shareholders may benefit financially and regulators may only monitor compliance.

A broker contacts an insurer to complain about slow response times when processing policies. The broker threatens to stop placing business with them. Which stakeholder interest is at risk here? A. The public’s concern about social responsibility B. Intermediaries’ expectations around service standards C. Shareholders’ expectations of return D. Government’s demand for legal compliance

Answer: B Explanation: Intermediaries expect good service and may take their business elsewhere if these standards are not met.

A publicly listed insurance company announces a record profit and proposes a significant dividend to shareholders, but freezes employee bonuses. Which stakeholder conflict is most evident here? A. Customers vs. public B. Shareholders vs. employees C. Intermediaries vs. regulators D. Government vs. customers

Answer: B Explanation: Maximising shareholder returns while holding back employee rewards creates a clear tension between these two stakeholder groups.

A regulator issues a warning to an insurer that its latest advertising may mislead consumers. Which stakeholder is the regulator primarily acting on behalf of in this instance? A. Intermediaries B. Shareholders C. Customers D. Employees

Answer: C Explanation: Regulators protect customers by ensuring fairness and transparency in advertising and communication.

An insurance company is looking to build new environmentally friendly headquarters and promote its green credentials. This action is most aligned with the interests of which stakeholder? A. The public B. Shareholders C. Employees D. Government

Answer: A Explanation: Social responsibility and environmental concerns are key interests of the general public.

An insurance company decides to sponsor a local environmental cleanup project beyond its legal requirements. This reflects which ethical business perspective? A. Shareholder focus – prioritising profits for investors B. Stakeholder perspective – considering wider societal impact C. Regulatory compliance – meeting legal minimums only D. Consumer protection – improving client outcomes

Answer: B Explanation: The stakeholder perspective involves going beyond legal requirements to benefit society and multiple stakeholders, not just shareholders.

A senior manager in an insurance firm faces a dilemma about choosing a cheaper supplier who does not meet the firm’s ethical environmental standards. What is the key ethical principle at risk here? A. Acting in the best interest of the client B. Acting with the highest ethical standards and integrity C. Providing a high standard of service D. Complying with relevant laws and regulations

Answer: B Explanation: Choosing a supplier ignoring environmental ethics risks breaching integrity and ethical standards, even if legal compliance might be met.

The FCA introduces stricter ESG reporting rules requiring detailed disclosures of carbon emissions and sustainability efforts. Which of the following is true? A. The rules only apply to companies with fewer than 100 employees B. These rules are voluntary guidelines for UK insurance firms C. These rules apply to large UK companies, including insurers, above certain size thresholds D. The rules replace all other company reporting obligations

Answer: C Explanation: ESG disclosures are mandatory for large companies (500+ employees or £5m+ turnover), including insurance firms.

A company issues a marketing campaign claiming its insurance policies are “carbon neutral” without evidence. This is an example of: A. Ethical compliance B. Stakeholder engagement C. Greenwashing D. Sustainability leadership

Answer: C Explanation: Making false or misleading environmental claims is known as greenwashing and is prohibited under new regulations.

A CEO is asked to justify pursuing organic growth despite investor pressure for quicker returns. Which of the following is the most appropriate justification? A. “Organic growth avoids the need for external financing altogether.” B. “Organic growth provides a distorted but attractive growth rate to investors.” C. “Organic growth enables stronger customer relationships and long-term profitability.” D. “Organic growth guarantees lower costs in the short term.”

Answer: C Explanation: Organic growth supports long-term relationships and builds reputational and operational strength, though short-term returns may be slower.

An insurance firm has decided to expand its personal lines portfolio by launching a new direct-to-consumer motor product. It funds the development internally and trains current staff to manage it. This is an example of: A. Non-organic growth B. Acquisition-led growth C. Organic growth D. Vertical integration

Answer: C Explanation: Organic growth involves expansion using internal resources, such as launching new products or entering markets without acquisitions.

Which of the following scenarios represents a disadvantage of organic growth for an insurance firm? A. The firm can build on its existing brand equity and customer base. B. The time required for expansion may leave the firm unable to cover fixed costs. C. The firm avoids cultural disruption from mergers. D. The firm retains full control of its strategic direction.

Answer: B Explanation: Organic growth takes time, and during early stages, income may not be sufficient to spread fixed costs, increasing financial strain.

A large broker acquires a smaller firm to gain access to its client book and geographical presence. What type of growth is this? A. Lateral integration B. Organic growth C. Non-organic growth D. Internal restructuring

Answer: C Explanation: Acquiring another business is a form of non-organic growth, as it involves expansion through external means (mergers or takeovers).

An insurance company wants to maintain control and stability during a growth phase, avoid cultural disruption, and utilise its own retained profits. Based on these goals, which strategy is best suited? A. Rapid acquisition of multiple brokers B. Organic growth through internal expansion C. Selling off legacy books of business D. Outsourcing key functions overseas

Answer: B Explanation: Organic growth allows a business to retain control, avoid integration risks, and use internal resources, making it ideal for stable, internally driven expansion.

An insurance executive says: “We chose organic growth because it offers a clearer view of our underlying performance, free from the impact of structural changes.” This comment most closely relates to which advantage? A. Improved cash flow from acquisitions B. Rapid entry into new markets C. Measurable progress based on actual internal performance D. Easier to access external capital

Answer: C Explanation: Organic growth provides clearer insight into real progress since growth metrics aren't skewed by mergers or one-off events.

A company plans to grow organically, but analysts are concerned about delayed investor returns. Which risk is most relevant here? A. Growth may occur too rapidly and outpace regulation B. The firm might breach competition law by expanding market share C. The company’s slow revenue growth may disappoint short-term investors D. Staff may become redundant due to structural consolidation

Answer: C Explanation: Organic growth typically takes time, and the delay in revenue expansion may not meet the expectations of short-term-focused investors.

An insurance company purchases 75% of another insurer’s shares to rapidly expand its client base and gain access to its digital platform. This action is best described as: A. Organic growth B. Merger C. Vertical integration D. Acquisition

Answer: D Explanation: An acquisition involves gaining control of another company, usually by purchasing a majority shareholding. This is not necessarily a mutual agreement like a merger.

Two regional insurers agree to combine operations on equal terms to create a more competitive national firm. This is an example of: A. Hostile acquisition B. Merger C. Horizontal acquisition D. Vertical integration

Answer: B Explanation: A merger involves two companies voluntarily joining forces on a strategic basis, unlike acquisitions, which are often one-sided.

A large insurance group acquires a back-office services company to improve policy administration efficiency. This is an example of: A. Horizontal integration B. Conglomerate diversification C. Vertical integration D. Lateral acquisition

Answer: C Explanation: Vertical integration involves acquiring operations at a different stage in the supply chain. In this case, the insurer is acquiring a service provider closer to operations, not the customer.

One reason a UK-based insurer merged with a US-based insurer was to reduce the combined firm’s solvency capital requirement. This was possible because: A. US regulations are more relaxed than UK regulations B. The merged books of business are geographically uncorrelated C. Solvency II does not apply to US firms D. The combined company would automatically be reinsured

Answer: B Explanation: Diversification benefits occur when risks are uncorrelated, such as across geographies, which can reduce solvency capital requirements under Solvency II.

Following a merger, the newly combined insurance business experiences falling staff morale and reduced productivity. Which disadvantage of M&As is this most likely to represent? A. Synergies not realised B. Economies of scale C. Clash of corporate cultures D. Vertical inefficiency

Answer: C Explanation: Culture clashes are a common issue post-merger. Differing management styles, values, and work practices can demoralise staff and lower efficiency.

An insurer acquires another to quickly gain a banking licence and existing local market infrastructure in Europe. This strategy best illustrates: A. Market saturation B. Horizontal integration C. Entry via acquisition D. Organic diversification

Answer: C Explanation: Acquiring a firm to enter a new market or obtain a licence is a classic example of market entry via acquisition.

Which of the following is a valid criticism of insurance mergers from a customer perspective? A. Customers benefit from more personalised service post-merger B. Premiums are guaranteed to fall due to economies of scale C. The number of competing insurers may be reduced D. Policies are automatically upgraded after integration

Answer: C Explanation: Mergers can reduce competition, leading to less choice for customers and potentially higher premiums over time.

A major insurer announces an M&A deal and claims it will reduce overheads by £20 million and increase shareholder returns. A year later, these benefits haven’t materialised. This situation reflects: A. Culture clash B. Poor customer service C. Failed synergy realisation D. Geographic concentration

Answer: C Explanation: A key risk of M&As is that expected synergies (cost savings, efficiencies) are not fully realised, undermining promised returns.

During a large merger, management attention shifts heavily toward integrating systems and policies. Complaints rise, and new business volumes drop. This reflects which risk of M&As? A. Strategic drift B. Eye off the ball C. Brand cannibalisation D. Horizontal fatigue

Answer: B Explanation: "Eye off the ball" is a known risk where the focus on change management distracts leadership from running day-to-day operations effectively.

An insurer contracts an external actuarial firm to build a pricing model. The contract is for 6 months, and the actuarial firm works on-site. This is an example of: A. Material outsourcing B. Regulatory delegation C. Temporary secondment D. Project-based outsourcing

Answer: D Explanation: This is outsourcing for a specific task/project with a defined duration. It's project-based, not necessarily “material” unless the function is critical to regulatory compliance.

Which of the following would be most likely classified as material outsourcing under PRA and FCA definitions? A. Hiring a contractor to redesign the company logo B. Outsourcing customer complaints handling to an external call centre C. Using an agency for temporary underwriting assistants D. Contracting a catering service for the office

Answer: B Explanation: Material outsourcing refers to functions that, if they fail, could threaten compliance with regulatory conditions. Complaints handling is critical to customer outcomes and regulatory standards.

Which of the following is NOT typically an advantage of outsourcing for an insurance company? A. Greater speed to market for new products B. Immediate access to specialist skills C. Reduced fixed costs via contractual pricing D. Guaranteed customer satisfaction

Answer: D Explanation: While outsourcing can bring many operational benefits, customer satisfaction is not guaranteed—especially if service quality suffers due to poor oversight.

A UK-based insurer outsources data processing to a firm in India. Which key risk must it especially manage under UK regulation? A. Brand inconsistency B. Legal jurisdiction for insurance claims C. Compliance with data protection laws on cross-border transfers D. Breach of underwriting standards

Answer: C Explanation: Data protection laws, including the UK GDPR, restrict transfer of personal data to countries without equivalent legal safeguards. This must be managed carefully in offshore outsourcing.

What is a common governance-related disadvantage of outsourcing for insurers under Solvency II? A. The insurer may avoid responsibility for performance B. Service providers are not legally accountable to regulators C. The insurer must maintain oversight despite delegation D. Contracts are not permitted to include termination clauses

Answer: C Explanation: Under Solvency II, outsourcing does not remove regulatory responsibility. Firms must govern and oversee all outsourced services as if they were in-house.

During a merger, the combined firm outsources its accounting functions. The service contract includes open regulator access to books and systems. This satisfies: A. The PRA's Fundamental Rule 2 only B. SYSC 8 regulatory expectations C. Solvency II capital requirements D. Only EIOPA guidance, not UK rules

Answer: B Explanation: SYSC 8 (part of the PRA Rulebook and FCA Handbook) outlines the minimum expectations for outsourcing, including regulator access to information and business premises.

A company outsources customer service to a partner, but complaints spike, and reputational damage occurs. What went wrong in terms of outsourcing risk? A. Misclassification of a material function B. Poor operational resilience planning C. Inadequate oversight and control D. Over-dependence on too many suppliers

Answer: C Explanation: One of the key risks in outsourcing is failing to maintain oversight. Regulatory and operational risks increase when the firm doesn’t actively monitor the service quality.

Which of the following would be the most effective mitigation against over-dependence on a single outsourcing provider? A. Sign a 10-year exclusive contract B. Set fixed pricing for all services C. Use multiple service providers or have a clear exit strategy D. Fully delegate customer data management

Answer: C Explanation: Over-dependence can be mitigated by working with multiple providers or by maintaining contingency plans (exit strategies) in case the relationship needs to end.

A general insurer uses a third-party administrator (TPA) to manage its claims. The FCA finds the firm did not classify this as outsourcing. What regulatory risk does this present? A. Excess solvency capital allocation B. Breach of the Principles for Businesses C. Improper use of reinsurance D. Understatement of technical provisions

Answer: B Explanation: The FCA found in its thematic review that firms often failed to treat delegated arrangements (e.g. TPAs) as outsourcing, meaning they overlooked key oversight duties, violating FCA principles.

Why might an insurer decide to bring previously outsourced services back in-house? A. To benefit from higher fixed costs B. To remove internal accountability C. Due to poor service quality, high costs, or unmet technology expectations D. Because outsourcing is no longer legally permitted under UK law

Answer: C Explanation: Some insurers reverse outsourcing decisions when the expected benefits don’t materialise, especially if service quality or technology deliverables are poor.

What defines market disruption in the insurance industry? A. Gradual change through product evolution B. Small adjustments to existing processes C. A steady reduction in operational costs D. A profound change forcing significant business transformation

Answer: D Explanation: Market disruption is described as a profound change that forces organisations to transform significantly, not just incrementally.

What is the name of the FCA initiative that supports innovation in financial services? A. Innovation Sandbox Scheme B. Regulatory Sandbox C. Compliance Incubator D. Financial Risk Hub

Answer: B Explanation: The FCA promotes innovation through its 'Regulatory Sandbox', allowing firms to test ideas in a controlled environment.

What is 'Insurtech' primarily concerned with? A. Use of apps for car-sharing B. Investment banking tools C. Property technology developments D. Use of Fintech and Big Data in insurance

Answer: D Explanation: 'Insurtech' refers to Fintech developments specifically applied to the insurance sector, including Big Data and analytics.

How does Big Data most benefit insurance companies? A. Automatically approves claims B. Increases customer premiums C. Improves pricing, underwriting and customer service D. Eliminates the need for underwriters

Answer: C Explanation: Big Data allows for better decision-making in areas like pricing, underwriting, and customer services by analysing massive datasets.

What is one major concern about using AI in insurance? A. Improves claim payment times B. Increases face-to-face engagement C. Reduces need for electronic platforms D. Risk of bias and ethical issues in decision-making

Answer: D Explanation: Ethical concerns include potential bias in data, reduction in jobs, and regulatory issues — all key risks associated with AI use.

What does cyber business interruption cover? A. Replacement of hardware B. Overtime payments for IT staff C. Income lost due to IT failure or cyber attack D. Stock loss from a supplier delay

Answer: C Explanation: Cyber business interruption insurance covers income loss and additional costs from an operational shutdown due to cyber incidents.

What does cyber extortion insurance typically reimburse? A. Costs of updating website design B. Fines from data regulators C. The ransom demanded and consultancy fees D. Loss of printed marketing materials

Answer: C Explanation: This type of policy reimburses ransom payments and associated consultant fees in response to ransomware or similar threats.

Why is climate change considered a significant risk for insurers? A. It affects IT systems B. It increases demand for car insurance C. It may cause widespread, severe weather-related claims D. It reduces property values uniformly

Answer: C Explanation: Climate change increases the frequency and severity of catastrophic weather events, directly impacting insurer liabilities and investment risks.

What was the result of the FCA’s test case on COVID-19-related business interruption? A. It ruled all policies excluded pandemics B. It allowed most insurers to avoid liability C. It clarified cover and supported many policyholders' claims D. It increased all premiums by 50%

Answer: C Explanation: The Supreme Court largely upheld the FCA’s position, resulting in many policyholders successfully claiming for COVID-19 business interruption.

What type of risks does Lloyd’s Product Launchpad support? A. Only motor and home insurance B. Claims processing disputes C. Non-standard, emerging or intangible risks D. Pension product development

Answer: C Explanation: Lloyd’s Lab and Product Launchpad are designed to foster innovative products, including those covering intangible or technology-based risks.

Chapter 1 Flashcards

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