Chapter 5

Question 1

Role of the Underwriting Department

Answer 1

Responsible for assessing risks and determining premiums for insurance policies

Question 2

Risk Management Role

Answer 2

Chief Risk Officer or Head of Risk leads a team to identify and mitigate business risks​

Question 3

Claims Department Purpose

Answer 3

Ensures fair settlements for policyholders and compliance with contractual obligations

Question 4

Delegated Authority

Answer 4

Insurance companies may grant underwriting or policy administration powers to third parties

Question 5

Managing General Agents (MGAs)

Answer 5

A type of delegated authority arrangement where MGAs handle underwriting, marketing, and administration​

Question 6

Compliance Department

Answer 6

Ensures the firm meets regulatory requirements and prevents legal risks​

Question 7

Actuarial Department

Answer 7

Led by a Chief Actuary, who works with analysts and actuaries to assess financial risks​

Question 8

Sales and Marketing

Answer 8

Drives business growth through strategic sales and customer engagement

Question 9

Customer Service Functions

Answer 9

Involves handling customer queries, claims processing, and policy management

Question 10

Investment Management

Answer 10

Insurers invest assets such as premiums, claims reserves, and shareholder funds​

Question 11

Financial Management

Answer 11

Key focus for senior management and the board, ensuring financial stability

Question 12

Strategic Planning

Answer 12

Guides the business towards long-term success, involving board decisions​

Question 13

Health and Safety Responsibilities

Answer 13

Ensures compliance with regulations and workplace safety standards

Question 14

Mergers and Acquisitions

Answer 14

Companies may merge or acquire others to achieve efficiency and market expansion

Question 15

White Label Insurers

Answer 15

Provide insurance policies under a partner company’s brand while managing underwriting​

Question 16

A policyholder applies for car insurance but has multiple speeding convictions. What should the underwriter do?
a) Approve the policy at a standard rate
b) Decline the application
c) Apply higher premiums and policy conditions
d) Ignore the convictions

Answer 16

c) Apply higher premiums and policy conditions

Question 17

An insurer fails to assess flood risks properly, leading to major financial losses. What should have been done?
a) Ignore past flood records
b) Increase premiums for all policyholders
c) Use risk modelling to predict and mitigate potential losses
d) Refuse to insure properties near water

Answer 17

c) Use risk modelling to predict and mitigate potential losses

Question 18

A customer submits a claim for a stolen car but provides inconsistent details. What should the claims handler do?
a) Approve the claim immediately
b) Reject the claim without investigation
c) Conduct further checks and request additional evidence
d) Pay a partial settlement to compromise

Answer 18

c) Conduct further checks and request additional evidence

Question 19

An insurer grants delegated authority to a broker but notices higher claim payouts. What action should be taken?
a) Immediately terminate the agreement
b) Conduct an audit and review underwriting guidelines
c) Ignore the issue and continue operations
d) Reduce claim limits without notifying the broker

Answer 19

b) Conduct an audit and review underwriting guidelines

Question 20

A company fails to follow GDPR rules, leading to a data breach. What could happen?
a) Regulatory fines and reputational damage
b) Increased customer satisfaction
c) A reward for transparency
d) A reduction in regulatory requirements

Answer 20

a) Regulatory fines and reputational damage

Question 21

An actuary underestimates the cost of claims, leading to financial instability. What should have been done?
a) Use advanced data analytics for accurate projections
b) Reduce premiums to attract more customers
c) Stop selling high-risk policies immediately
d) Ignore the financial losses

Answer 21

a) Use advanced data analytics for accurate projections

Question 22

A sales agent misleads customers about policy coverage. What is the consequence?
a) Customer complaints and potential legal action
b) Increased sales revenue
c) A promotion for the agent
d) No impact on the business

Answer 22

a) Customer complaints and potential legal action

Question 23

A customer has difficulty understanding their policy terms. What should customer service do?
a) Explain the terms clearly and provide written guidance
b) Ignore the customer’s concerns
c) Tell the customer to read the policy themselves
d) Cancel the policy to avoid complaints

Answer 23

a) Explain the terms clearly and provide written guidance

Question 24

An insurer invests heavily in volatile stocks, leading to losses. How can this be prevented?
a) Diversify the investment portfolio
b) Stop investing altogether
c) Invest only in one high-risk sector
d) Ignore market trends

Answer 24

a) Diversify the investment portfolio

Question 25

An insurer fails to maintain sufficient reserves for claims. What are the risks? a) Insolvency and regulatory action b) Higher customer satisfaction c) Increased profits d) No impact on operations

Answer 25

a) Insolvency and regulatory action

Question 26

A company wants to expand into a new market. What should they do first? a) Conduct market research and risk analysis b) Enter the market immediately c) Ignore competitor activity d) Offer random discounts

Answer 26

a) Conduct market research and risk analysis

Question 27

An insurer's office fails to follow safety protocols, leading to employee injuries. What could happen? a) Legal penalties and compensation claims b) Increased staff productivity c) Higher business revenue d) No consequences

Answer 27

a) Legal penalties and compensation claims

Question 28

Two insurers merge but struggle with integrating operations. What can help? a) Strategic planning and employee training b) Ignoring operational issues c) Firing half the workforce d) Canceling all existing policies

Answer 28

a) Strategic planning and employee training

Question 29

A white-label insurer offers policies under a partner’s brand, but customers complain about claim delays. Who is responsible? a) The insurer managing the claims b) The partner company c) The customers d) No one

Answer 29

a) The insurer managing the claims

Question 30

A multinational corporation applies for a large commercial liability policy. The business operates in multiple high-risk industries, including oil drilling and chemical manufacturing. The underwriter notices discrepancies in their past claims history and financial reports. What is the most appropriate action? a) Decline the policy immediately to avoid risk b) Approve the policy with a high deductible without further investigation c) Conduct enhanced due diligence, including third-party risk assessments and financial audits d) Offer the policy at standard terms to maintain the relationship with the client

Answer 30

c) Conduct enhanced due diligence, including third-party risk assessments and financial audits

Question 31

An insurance company detects an unusual spike in high-value personal injury claims from a specific geographic area. The claims appear to be from different policyholders, but all involve the same law firm and medical provider. What should the claims team do first? a) Approve the claims quickly to avoid complaints b) Flag the cases for fraud investigation and liaise with anti-fraud agencies c) Deny all claims from that area without investigation d) Increase premium rates for all policyholders in that region

Answer 31

b) Flag the cases for fraud investigation and liaise with anti-fraud agencies

Question 32

An insurance firm operating in multiple countries is found to be significantly below the required solvency margin due to excessive claims payouts and poor investment decisions. What immediate action must senior management take? a) Continue operations as usual and hope for financial recovery b) Transfer funds from policyholder reserves to cover business expenses c) Inform regulators immediately, implement capital-raising measures, and revise risk management strategies d) Close down the company and liquidate assets without notifying policyholders

Answer 32

c) Inform regulators immediately, implement capital-raising measures, and revise risk management strategies

Question 33

A ransomware attack encrypts sensitive customer data, and hackers demand a large payment to restore access. The insurer has no immediate backup available. What is the best course of action? a) Pay the ransom quickly to regain access to customer data b) Report the incident to regulators, law enforcement, and activate the company’s cybersecurity incident response plan c) Ignore the issue and claim it was a system malfunction d) Announce that the breach was caused by an external IT provider and shift responsibility

Answer 33

b) Report the incident to regulators, law enforcement, and activate the company’s cybersecurity incident response plan

Question 34

An insurance company’s investment team has placed 80% of the firm’s capital into high-yield but highly volatile assets. A sudden market downturn results in heavy losses, reducing the company’s ability to pay claims. What action should the Chief Financial Officer (CFO) take? a) Immediately rebalance the portfolio to include lower-risk investments and secure emergency funding b) Ignore the losses and wait for the market to recover c) Borrow heavily to cover immediate claim payments without changing investment strategy d) Shift all investments into cryptocurrencies for potential high returns

Answer 34

a) Immediately rebalance the portfolio to include lower-risk investments and secure emergency funding

Question 35

A major retailer submits a business interruption claim after a government-mandated lockdown due to a pandemic. The policyholder argues the policy covers all forms of disruption, but the insurer’s terms state that only physical damage triggers coverage. What should the claims department do? a) Pay the claim in full to avoid reputational damage b) Deny the claim and ignore customer complaints c) Conduct a detailed policy wording review and seek legal interpretation before making a decision d) Offer a partial payout without explanation

Answer 35

c) Conduct a detailed policy wording review and seek legal interpretation before making a decision

Question 36

A senior executive at an insurance company learns about a pending acquisition of a smaller competitor before it is publicly announced. They secretly buy shares in the competitor’s company before the acquisition is made public. What legal and regulatory consequences could they face? a) None, since they work in the insurance industry, not finance b) Fines, criminal prosecution, and a permanent industry ban c) A small warning from the regulator but no real consequences d) A promotion for making a smart financial decision

Answer 36

b) Fines, criminal prosecution, and a permanent industry ban

Question 37

A long-standing corporate client files a large property damage claim after a fire. The company’s CEO is a personal friend of the insurer’s director and pressures the claims team to fast-track approval, despite concerns over inconsistencies in the claim. What is the correct response? a) Approve the claim immediately to maintain the business relationship b) Conduct a full investigation and apply standard due diligence, regardless of the personal relationship c) Offer a small payout to avoid conflict and delay the full investigation d) Ignore the inconsistencies and approve the claim as a goodwill gesture

Answer 37

b) Conduct a full investigation and apply standard due diligence, regardless of the personal relationship

Question 38

A finance team is working on securing additional capital for expansion. Which team is primarily responsible for maintaining investor relations and raising new funds? A) Underwriting B) Compliance C) Finance D) Claims

Answer 38

Answer: C) Finance Explanation: The finance department is responsible for capital raising and investor relations​.

Question 39

A broker delays premium payments by 75 days. What is the insurer’s main financial risk in this scenario? A) Regulatory fine B) Credit risk C) Inflation risk D) Asset impairment

Answer 39

Answer: B) Credit risk Explanation: The delay exposes the insurer to non-payment risk from the intermediary​

Question 40

An insurer's finance department is forecasting income from reinsurance recoveries and investment returns. Which function is being carried out? A) Management accounting B) Premium underwriting C) Financial planning D) Credit control

Answer 40

Answer: C) Financial planning Explanation: Finance must account for all income sources in the capital assessment process​

Question 41

Why might an insurer use subordinated debt to meet capital requirements? A) It counts as Tier 1 capital B) It is cheaper than issuing equity C) It avoids capital adequacy rules D) It increases broker commissions

Answer 41

Answer: B) It is cheaper than issuing equity Explanation: Regulatory debt capital usually carries a lower cost than equity, improving EPS​

Question 42

A company adds reinsurance as part of its capital planning. What function does this fulfil? A) Asset diversification B) Operational risk transfer C) Capital substitution D) Product expansion

Answer 42

Answer: C) Capital substitution Explanation: Reinsurance reduces capital strain by transferring high-risk exposures​

Question 43

A CFO reviews the company’s solvency capital requirement (SCR). Which regulation mandates this? A) IFRS 17 B) Companies Act C) Solvency II D) GDPR

Answer 43

Answer: C) Solvency II Explanation: Solvency II requires calculation and monitoring of capital needs​

Question 44

What is the primary role of the financial controller under the CFO? A) Strategic planning B) Claims assessment C) Daily financial operations and reconciliation D) Broker training

Answer 44

Answer: C) Daily financial operations and reconciliation Explanation: The controller manages day-to-day accounting and reconciliations​ .

Question 45

A broker’s firm goes into liquidation while holding client premiums. How is the insurer protected? A) Broker insurance B) Trust account holding C) FCA intervention D) Cash collateral

Answer 45

Answer: B) Trust account holding Explanation: Premiums in trust accounts are ring-fenced from broker insolvency​

Question 46

A finance team is consolidating the financial reports of overseas subsidiaries. What challenge are they likely addressing? A) Underwriting fraud B) Cultural alignment C) Currency differences and local regulations D) Product misalignment

Answer 46

Answer: C) Currency differences and local regulations Explanation: Consolidation involves handling multiple standards and currencies​

Question 47

In strategic planning, which function sets the long-term capital deployment strategy? A) Claims team B) Reinsurance committee C) Executive board and finance team D) Underwriting panel

Answer 47

Answer: C) Executive board and finance team Explanation: Strategy requires coordinated financial planning and capital forecasting​

Question 48

What does a solvency margin indicate? A) Claims performance B) Capital buffer against liabilities C) Revenue growth D) Commission levels

Answer 48

Answer: B) Capital buffer against liabilities Explanation: It’s the excess capital available over the minimum required​

Question 49

Which activity involves reconciling premium income against bank deposits? A) Credit analysis B) Investment management C) Accounting control D) Marketing audit

Answer 49

Answer: C) Accounting control Explanation: Accurate matching ensures proper income recognition and fraud prevention

Question 50

The finance director influences investment and underwriting strategy. Why is this important? A) To comply with SM&CR B) To maximise shareholder value and manage risk C) To determine reinsurance pricing D) To improve actuarial techniques

Answer 50

Answer: B) To maximise shareholder value and manage risk Explanation: Finance is central to aligning strategy with capital and risk appetites

Question 51

Why must solvency capital requirements be reviewed regularly? A) To reprice all products B) Because regulations change monthly C) Risk profile may evolve D) Tax rules demand it

Answer 51

Answer: C) Risk profile may evolve Explanation: Changes in underwriting or investment activity may increase risk exposure​

Question 52

What happens if an insurer cannot meet its solvency capital requirement? A) Its rating improves B) It’s taken over by a broker C) It must raise capital or adjust risks D) It is fined by the FOS

Answer 52

Answer: C) It must raise capital or adjust risks Explanation: Firms must restore their capital position or reduce risk exposure promptly

Question 53

What is the role of the finance department during a merger or acquisition? A) Premium setting B) Sales negotiations C) Capital evaluation and financial due diligence D) Customer acquisition

Answer 53

Answer: C) Capital evaluation and financial due diligence Explanation: Finance assesses financial viability and prepares capital models for the deal

Question 54

A property underwriter needs loss history and occupancy info. Which function supports with this data? A) Claims B) Legal C) Risk engineering D) Finance

Answer 54

Answer: C) Risk engineering Explanation: They assess physical risks and help underwriters set terms.

Question 55

The CFO is analysing bank loan options versus issuing shares. What consideration is likely key? A) Liquidity cost B) Regulatory debt vs equity treatment C) Reinsurance treaties D) Claims settlement history

Answer 55

Answer: B) Regulatory debt vs equity treatment Explanation: Debt may be classed as regulatory capital, affecting solvency ratios

Question 56

Why might the finance team maintain active relationships with banks? A) To get foreign exchange updates B) To seek investment tips C) For raising emergency capital when SCR changes D) To offset marketing spend

Answer 56

Answer: C) For raising emergency capital when SCR changes Explanation: Changing capital needs require quick access to external funding sources

Question 57

What is one key output of financial consolidation across subsidiaries? A) Reinsurance rates B) Unified pricing strategy C) Annual report and accounts D) Product catalogue

Answer 57

Answer: C) Annual report and accounts Explanation: Consolidated financials are essential for reporting to shareholders and regulators​