Chapter 5 Flashcards
(126 cards)
1
Q
What is the primary role of the underwriting department in an insurance organisation?
A) To handle claims and losses
B) To calculate premiums and control policy coverage
C) To manage customer service inquiries
D) To oversee marketing and sales strategies
A
Answer: B
Explanation: The underwriting department determines the premiums to be charged for risks and controls the extent of coverage under the policy. This function is essential for generating income and managing exposures that lead to claims.
2
Q
Which of the following is NOT typically a specialist area within an underwriting department?
A) Property
B) Liability (casualty)
C) Marine
D) Marketing
A
Answer: D
Explanation: Underwriting departments specialize in areas like property, liability (casualty), marine, and motor. Marketing is not part of underwriting.
3
Q
What is the underwriting manual used for?
A) To record claims history
B) To detail premiums and risk factors
C) To manage customer complaints
D) To track sales performance
A
Answer: B
Explanation: The underwriting manual categorizes premiums based on factors such as construction type, occupation, and risk influences. It helps underwriters set appropriate premiums.
4
Q
What is the pure risk premium?
A) The premium necessary to cover all expenses including profit
B) The premium required to pay for losses and loss-related expenses only
C) The premium charged for high-risk policies
D) The premium calculated by brokers
A
Answer: B
Explanation: Pure risk premium is the portion of the total premium necessary to cover losses and loss-related expenses, excluding costs like marketing and profit.
5
Q
What happens if a call handler encounters a risk outside their underwriting authority?
A) The risk is automatically declined
B) The risk is referred to an underwriter
C) The call handler adjusts the premium
D) The policy is issued without changes
A
Answer: B
Explanation: If a call handler comes across a case beyond their authority, it is sent to an underwriter who assesses the risk and determines whether to issue a quote.
6
Q
What information is typically included in a commercial insurance proposal for a printing company?
A) Details of marketing strategies
B) A survey of the building and description of printing processes
C) Customer feedback reports
D) Sales projections for the next five years
A
Answer: B
Explanation: Insurance proposals for printing businesses include details such as building surveys, materials used, and waste disposal processes to assess risk factors.
7
Q
What role does artificial intelligence (AI) play in underwriting?
A) It replaces underwriters entirely
B) It assists in calculating premiums and assessing risks
C) It manages customer complaints
D) It handles policy issuance
A
Answer: B
Explanation: AI improves underwriting efficiency by helping assess risks and determine premiums based on data analysis.
8
Q
What is the hierarchy within a typical underwriting department?
A) Director of underwriting, head of department, assistant underwriters
B) Director of underwriting, class underwriters, section supervisors
C) Director of underwriting, head of department, class underwriters, section supervisors, underwriters, assistant/trainee underwriters
D) Director of underwriting, section supervisors, assistant underwriters
A
Answer: C
Explanation: Underwriting departments are structured with levels of authority, from director-level oversight down to trainees with limited discretion.
9
Q
What is the role of a broker in the quotation process?
A) To issue policies directly to clients
B) To provide quotations and policy details to clients
C) To calculate premiums for insurers
D) To manage claims for policyholders
A
Answer: B
Explanation: Brokers act as intermediaries between insurers and clients, delivering policy quotes and details before finalizing coverage.
10
Q
What factors can lead to a premium discount for a commercial property? A) Proximity to a river
B) A sprinkler system fitted in the building
C) The building’s age
D) Use of hazardous materials
A
Answer: B
Explanation: Installing a sprinkler system reduces fire risk, which can lower premiums.
11
Q
What is underwriting strategy focused on?
A) Minimizing the number of claims
B) Ensuring sufficient premium is acquired to cover losses
C) Reducing company expenses
D) Increasing the number of policies sold
A
Answer: B
Explanation: The underwriting strategy ensures that across all policies, enough premium is collected so that claims can be paid for policyholders who suffer losses.
12
Q
What is underwriting authority?
A) The ability to handle claims independently
B) The level of discretion an underwriter has in making decisions
C) The legal authority to issue insurance policies
D) The power to modify existing insurance contracts
A
Answer: B
Explanation: Each underwriter has a specific level of underwriting authority that determines how much discretion they have in decision-making, with the director of underwriting holding the most authority.
13
Q
What has driven the growth of the risk management function in insurance firms over the last decade?
A) Increased competition in the market
B) Regulatory expectations and business benefits
C) Advances in technology
D) Rising insurance premiums
A
Answer: B
Explanation: The growth of the risk management function has been driven by regulatory expectations and the benefits it brings to business operations and performance.
14
Q
Who typically leads the risk management activities in an organisation?
A) Chief Financial Officer
B) Chief Risk Officer or Head of Risk Management
C) Senior Risk Analyst
D) IT Risk Specialist
A
Answer: B
Explanation: Many organisations have created the role of Chief Risk Officer or Head of Risk Management to lead risk management activities.
15
Q
What is the typical hierarchy under the Head of Risk Management?
A) Risk Analysts, Senior Risk Managers, Specialists
B) Senior Risk Managers, Risk Analysts, Specialists
C) Specialists, Risk Analysts, Senior Risk Managers
D) IT Risk Analysts, Credit Risk Managers, Senior Risk Managers
A
Answer: B
Explanation: The hierarchy typically includes Senior Risk Managers, Risk Analysts, and Specialists such as IT Risk Analysts or Credit Risk Managers.
16
Q
What is the primary aim of risk management activities?
A) To increase company profits
B) To protect the firm from interruptions to its objectives
C) To reduce the number of employees
D) To improve marketing strategies
A
Answer: B
Explanation: Risk management activities aim to protect the firm from interruptions to its objectives, avoid profit loss, and safeguard its reputation.
17
Q
Which of the following is NOT a risk identification technique?
A) Brainstorming and risk workshops B) Site visits
C) Scenario analysis
D) Marketing surveys
A
Answer: D
Explanation: Risk identification techniques include brainstorming, site visits, and scenario analysis, but not marketing surveys.
18
Q
What is the purpose of flow process analysis in risk management?
A) To identify potential bottlenecks in business processing
B) To improve customer satisfaction
C) To reduce employee turnover
D) To increase sales
A
Answer: A
Explanation: Flow process analysis identifies potential bottlenecks or dependencies in various stages of business processing.
19
Q
What does risk analysis involve?
A) Grouping risks into categories and assessing their probability and impact
B) Eliminating all risks from the business
C) Increasing the number of risks identified
D) Outsourcing risk management activities
A
Answer: A
Explanation: Risk analysis involves grouping risks into categories, assessing their probability and impact, and evaluating the effectiveness of controls.
20
Q
How often is the full risk identification and analysis process typically carried out?
A) Monthly
B) Quarterly or annually
C) Every five years
D) Only when a risk event occurs
A
Answer: B
Explanation: The full risk identification and analysis process is carried out quarterly or at least annually to monitor changes in the risk environment.
21
Q
What is a risk register?
A) A list of employees responsible for risk management
B) A centralised data source of all identified risks
C) A document outlining company profits
D) A tool for marketing strategies
A
Answer: B
Explanation: A risk register is a centralised data source that records all identified risks and is maintained by the risk management department.
22
Q
What is the purpose of a risk matrix in risk management?
A) To eliminate all risks
B) To rank risks according to materiality
C) To increase the number of risks identified
D) To reduce company expenses
A
Answer: B
Explanation: A risk matrix is used to rank risks according to their materiality, helping identify the most significant risks.
23
Q
What does RAG stand for in risk management? A) Risk Assessment Grid B) Red Amber Green C) Risk Analysis Guide D) Residual Assessment Grid
A
Answer: B
Explanation: RAG stands for Red Amber Green, a rating system used to categorise risks based on their severity.
24
Q
What is inherent risk?
A) Risk after controls are applied
B) Risk without any special controls applied
C) Risk that has been eliminated
D) Risk that is ignored by the company
A
Answer: B
Explanation: Inherent risk refers to the level of risk without any special controls applied, except for basic common-sense measures.
25
What is residual risk?
A) Risk that has been eliminated
B) Risk after controls are applied
C) Risk that is ignored by the company
D) Risk that cannot be mitigated
Answer: B
Explanation: Residual risk is the level of risk remaining after controls have been applied to mitigate it.
26
What is the purpose of risk reporting?
A) To eliminate all risks
B) To regularly inform senior management about risks and controls
C) To increase the number of risks identified
D) To reduce company expenses
Answer: B
Explanation: Risk reporting ensures that senior management is regularly informed about the status of risks and the effectiveness of controls.
27
What does a risk assessment rating framework involve?
A) Multiplying impact and probability scores to rank risks
B) Eliminating all risks from the business
C) Increasing the number of risks identified
D) Outsourcing risk management activities
Answer: A
Explanation: A risk assessment rating framework involves multiplying impact and probability scores to rank risks according to their materiality.
28
What is the primary role of the claims department in an insurance organisation?
A) To increase company profits
B) To ensure fair and equitable settlement for policyholders
C) To reduce the number of claims filed
D) To manage marketing strategies
Answer: B
Explanation: The claims department ensures that policyholders receive a fair and equitable settlement for their loss, in accordance with the contractual obligations of the insurance policy.
29
What is one of the challenges faced by the claims department?
A) Increasing the number of claims filed
B) Managing expectations and protecting the company's reputation
C) Reducing the number of employees
D) Improving marketing strategies
Answer: B
Explanation: The claims department often manages expectations and protects the company's reputation while delivering good outcomes for customers.
30
What type of background is helpful for claims handlers in marine insurance?
A) Legal degree
B) Marine engineering background
C) Marketing experience
D) Financial management degree
Answer: B
Explanation: A marine engineering background is helpful when damage to vessels needs to be investigated in marine insurance.
31
What document captures claims management processes?
A) Risk register
B) Claims manual
C) Underwriting manual
D) Policy wording
Answer: B
Explanation: Claims management processes are written down and captured in a claims manual.
32
Who has the widest authority in the claims department hierarchy?
A) Claims investigator
B) Claims handler
C) Claims director
D) Loss adjuster
Answer: C
Explanation: The claims director has the widest authority in the hierarchy of claims settlement authorities.
33
What is the first step in developing a claims philosophy?
A) Establishing key performance indicators
B) Analysing each stage of the claims process
C) Defining the characteristics of a valid claim
D) Reviewing policy wordings
Answer: B
Explanation: The first step in developing a claims philosophy is to analyse each stage of the claims process.
34
What is the purpose of claims notification?
A) To eliminate all claims
B) To provide enough detail for the insurer to assess the claim
C) To increase the number of claims filed
D) To reduce company expenses
Answer: B
Explanation: Claims notification ensures the customer provides enough detail for the insurer to assess the cause, nature, and extent of the loss.
35
What does claim review involve?
A) Analysing the claim in light of policy terms, legal requirements, and market practice
B) Eliminating all claims from the business
C) Increasing the number of claims filed
D) Outsourcing claims management activities
Answer: A
Explanation: Claim review involves analysing the claim in light of policy terms, legal requirements, market practice, and other factors.
36
What are the three possible responses an insurer can make to a claimant?
A) Payment, negotiation, or rejection
B) Acceptance, rejection, or litigation
C) Mediation, arbitration, or litigation
D) Payment, rejection, or outsourcing
Answer: A
Explanation: Depending on the claim information, the insurer can choose payment, negotiation, or rejection.
37
What is the purpose of claim investigation?
A) To eliminate all claims
B) To establish the facts surrounding the claim
C) To increase the number of claims filed
D) To reduce company expenses
Answer: B
Explanation: Claim investigation establishes the facts surrounding the claim, often involving internal investigators or external loss adjusters.
38
How are disputes in claims settlement resolved?
A) By rejecting the claim
B) Through negotiation, mediation, arbitration, or litigation
C) By outsourcing claims management
D) By increasing the settlement amount
Answer: B
Explanation: Disputes are resolved through negotiation, mediation, arbitration, or litigation.
39
What is subrogation in claim recoveries?
A) Pursuing third parties considered liable for the incident
B) Sharing claim costs with other insurers
C) Recovering costs through reinsurance protections
D) Eliminating all claim
Answer: A
Explanation: Subrogation involves pursuing third parties considered liable for the incident to recover claim costs.
40
What is dual insurance in claim recoveries?
A) Recovering costs through reinsurance protections
B) Sharing claim costs with other insurers
C) Pursuing third parties considered liable for the incident
D) Eliminating all claims
Answer: B
Explanation: Dual insurance involves sharing claim costs with other insurers through contribution.
41
What is the goal of the claims department when settling claims?
A) To increase company profits
B) To agree settlement as soon as liability is determined
C) To reduce the number of claims filed
D) To improve marketing strategies
Answer: B
Explanation: The claims department aims to agree settlement as soon as liability is determined and information is provided.
42
What does the claims philosophy define?
A) The characteristics of a valid claim
B) The legal requirements for claims
C) The marketing strategies for claims
D) The hierarchy of claims settlement authorities
Answer: A
Explanation: The claims philosophy defines the key characteristics of a valid claim.
43
What is the primary aim of delegated authority in insurance?
A) To increase claims settlements
B) To acquire more business and reduce management expenses
C) To eliminate the need for underwriting
D) To improve marketing strategies
Answer: B
Explanation: Delegated authority aims to acquire more business and reduce management expenses by allowing other parties to perform underwriting or policy administration.
44
What is a coverholder in the context of delegated authority?
A) An insurer that issues policies
B) A party with significant delegated authority
C) A broker that handles claims
D) A client who purchases insurance
Answer: B
Explanation: A coverholder is a party with significant delegated authority, such as underwriting risks or handling claims.
45
What is a binding authority?
A) A document outlining the terms of an insurance policy
B) An agreement that sets the scope of authority delegated to a coverholder
C) A manual for underwriting guidelines
D) A list of claims settled by an insurer
Answer: B
Explanation: A binding authority is an agreement that sets out the scope and extent of the authority delegated to the coverholder.
46
What are schemes in the context of delegated authority?
A) Insurance policies for high-risk clients
B) Tailored policy wordings for specific categories of clients
C) A list of claims handled by brokers D) A type of reinsurance agreement
Answer: B
Explanation: Schemes refer to tailored policy wordings designed for specific categories of clients, such as haulage contractors or hoteliers.
47
What is the role of a managing general agent (MGA)?
A) To provide funding for claims
B) To undertake all activities of an insurer except funding claims
C) To act as a client representative
D) To eliminate underwriting risks
Answer: B
Explanation: An MGA undertakes all activities of an insurer, such as marketing, selling, and administration, but does not provide funding for claims.
48
Why do insurers create MGA facilities?
A) To eliminate the need for brokers
B) To access profitable revenue streams without committing their own resources
C) To reduce the number of claims filed
D) To improve marketing strategies
Answer: B
Explanation: Insurers create MGA facilities to access profitable revenue streams without committing their own staff and resources.
49
What is a line slip?
A) A type of delegated authority agreement for specific risks
B) A document outlining claims settlements
C) A manual for underwriting guidelines
D) A list of brokers working with an insurer
Answer: A
Explanation: A line slip is a delegated authority agreement where multiple insurers agree to accept a pre-agreed proportion of a specific type of insurance.
50
What is the purpose of a bordereaux in a line slip arrangement?
A) To list risks placed on the line slip for administrative convenience
B) To outline claims settlements
C) To provide underwriting guidelines
D) To negotiate premiums with clients
Answer: A
Explanation: A bordereaux is a listing of risks placed on the line slip, used for administrative convenience and processed in bulk to reduce costs.
51
What is the PPL platform used for?
A) To manage claims settlements
B) To enable brokers and insurers to quote, negotiate, and bind business digitally
C) To eliminate underwriting risks
D) To improve marketing strategies
Answer: B
Explanation: The PPL platform allows brokers and insurers to quote, negotiate, bind, and endorse business digitally, creating a digital information flow.
52
Why is auditing important in delegated authority arrangements?
A) To eliminate the need for brokers
B) To ensure adherence to the terms of the binding authority or line slip
C) To reduce the number of claims filed
D) To improve marketing strategies
Answer: B
Explanation: Auditing ensures that the terms and procedures of the binding authority or line slip are being adhered to by the coverholder.
53
Who typically conducts audits in delegated authority arrangements?
A) The insurer's internal staff
B) External specialist auditors
C) The coverholder's employees
D) The policyholders
Answer: B
Explanation: Insurers usually appoint external specialist auditors to review the coverholder's adherence to the binding authority.
54
What is the purpose of monitoring underwriting performance?
A) To eliminate underwriting risks
B) To compare business performance against the business plan
C) To reduce the number of claims filed
D) To improve marketing strategies
Answer: B
Explanation: Monitoring underwriting performance ensures that the business written aligns with the business plan and identifies deviations from objectives.
55
How often are underwriting committee meetings typically held?
A) Daily
B) Weekly
C) Monthly
D) Annually
Answer: B
Explanation: Weekly underwriting committee meetings are held to review income, claims development, and performance against expectations.
56
What is the role of the strategy team in underwriting performance?
A) To eliminate underwriting risks
B) To assess deviations from underwriting objectives and update strategies
C) To reduce the number of claims filed
D) To improve marketing strategies
Answer: B
Explanation: The strategy team assesses deviations from underwriting objectives and determines whether strategies need to be updated.
57
What is a key requirement for successful delegated authority arrangements?
A) A trusted relationship with the intermediary
B) Eliminating the need for audits
C) Reducing the number of claims filed
D) Improving marketing strategies
Answer: A
Explanation: Delegated authority arrangements rely on a trusted relationship with the intermediary and effective auditing and monitoring.
58
What is the primary aim of delegated authority in insurance?
A) To increase claims settlements
B) To acquire more business and reduce management expenses
C) To eliminate the need for underwriting
D) To improve marketing strategies
Answer: B
Explanation: Delegated authority aims to acquire more business and reduce management expenses by allowing other parties to perform underwriting or policy administration.
59
What is a coverholder in the context of delegated authority?
A) An insurer that issues policies
B) A party with significant delegated authority
C) A broker that handles claims
D) A client who purchases insurance
Answer: B
Explanation: A coverholder is a party with significant delegated authority, such as underwriting risks or handling claims.
60
What is the primary role of the compliance department in an insurance firm?
A) To increase company profits
B) To ensure operations comply with regulatory requirements
C) To manage customer complaints
D) To develop marketing strategies
Answer: B
Explanation: The compliance department ensures that the firm's operations comply with regulatory requirements.
61
Who typically heads the compliance department?
A) Chief Financial Officer
B) Compliance Officer or Compliance Director
C) Customer Service Manager
D) Risk Analyst
Answer: B
Explanation: The compliance department is usually headed by a Compliance Officer or Compliance Director.
62
Which of the following is NOT a task of the compliance department?
A) Communicating regulatory requirements to staff
B) Acting as the point of contact for regulators
C) Developing marketing strategies
D) Carrying out anti-money laundering procedures
Answer: C
Explanation: Developing marketing strategies is not a task of the compliance department.
63
What is the purpose of anti-money laundering procedures in the compliance department?
A) To increase company profits
B) To prevent financial crimes
C) To improve customer satisfaction
D) To reduce management expenses
Answer: B
Explanation: Anti-money laundering procedures aim to prevent financial crimes such as money laundering and fraud.
64
What is the compliance manual used for?
A) To outline marketing strategies
B) To contain requirements for compliant operations and terms of reference
C) To list customer complaints
D) To track company profits
Answer: B
Explanation: The compliance manual contains requirements for compliant operations and terms of reference for the Board, committees, and controlled functions.
65
What is the role of the compliance department in customer complaints?
A) To ignore complaints
B) To deal with complaints fairly
C) To reduce the number of complaints
D) To outsource complaints to third parties
Answer: B
Explanation: The compliance department ensures that customer complaints are dealt with fairly.
66
What is the purpose of training arranged by the compliance department?
A) To improve marketing strategies
B) To ensure staff understand key regulatory and legal issues
C) To increase company profits
D) To reduce the number of employees
Answer: B
Explanation: The compliance department arranges training to ensure staff understand key regulatory and legal issues.
67
Which of the following is a key regulatory issue covered in compliance training?
A) Marketing strategies
B) The Bribery Act 2010
C) Customer satisfaction surveys
D) Risk management techniques
Answer: B
Explanation: Compliance training covers key regulatory issues such as the Bribery Act 2010.
68
What does the compliance department regularly report to the Board?
A) Marketing strategies
B) Compliance performance and breaches
C) Customer satisfaction surveys
D) Risk management techniques
Answer: B
Explanation: The compliance department regularly reports compliance performance and any breaches to the Board.
69
What is the role of the compliance department in corporate governance?
A) To manage the corporate governance manual
B) To develop marketing strategies
C) To increase company profits
D) To reduce the number of employees
Answer: A
Explanation: The compliance department may manage the corporate governance manual, which contains the firm's policies.
70
What is the FCA's expectation regarding the fair treatment of customers?
A) Firms must eliminate all customer complaints
B) Firms must demonstrate they deliver fair outcomes to consumers
C) Firms must increase profits through customer satisfaction
D) Firms must outsource customer service to third parties
Answer: B
Explanation: The FCA expects firms to demonstrate that they consistently deliver fair outcomes to consumers.
71
How does the compliance department ensure fair treatment of customers?
A) By ignoring customer complaints
B) By monitoring the firm's performance and working with customer service teams
C) By outsourcing customer service to third parties
D) By increasing company profits
Answer: B
Explanation: The compliance department monitors the firm's performance and works with customer service teams to ensure fair treatment of customers.
72
What is the role of senior management in ensuring fair treatment of customers?
A) To ignore customer complaints
B) To instill a culture of fairness and take responsibility for outcomes
C) To outsource customer service to third parties
D) To increase company profits
Answer: B
Explanation: Senior management must instill a culture of fairness and take responsibility for delivering fair outcomes to customers.
73
What does the FCA expect firms to do when errors are identified?
A) Ignore the errors
B) Promptly put things right and learn from them
C) Outsource the errors to third parties
D) Increase company profits
Answer: B
Explanation: The FCA expects firms to promptly put things right and learn from identified errors.
74
What is the compliance department's role in measuring customer fairness?
A) To ignore customer complaints
B) To measure performance against fairness issues and act on results
C) To outsource customer service to third parties
D) To increase company profits
Answer: B
Explanation: The compliance department measures performance against customer fairness issues and acts on the results.
75
What is the compliance manual used for?
A) To outline marketing strategies
B) To contain requirements for compliant operations and terms of reference
C) To list customer complaints
D) To track company profits
Answer: B
Explanation: The compliance manual contains requirements for compliant operations and terms of reference for the Board, committees, and controlled functions.
76
What is the role of the compliance department in customer complaints?
A) To ignore complaints
B) To deal with complaints fairly
C) To reduce the number of complaints
D) To outsource complaints to third parties
Answer: B
Explanation: The compliance department ensures that customer complaints are dealt with fairly.
77
What is the purpose of training arranged by the compliance department?
A) To improve marketing strategies
B) To ensure staff understand key regulatory and legal issues
C) To increase company profits
D) To reduce the number of employees
Answer: B
Explanation: The compliance department arranges training to ensure staff understand key regulatory and legal issues.
78
Which of the following is a key regulatory issue covered in compliance training?
A) Marketing strategies
B) The Bribery Act 2010
C) Customer satisfaction surveys
D) Risk management techniques
Answer: B
Explanation: Compliance training covers key regulatory issues such as the Bribery Act 2010.
79
What does the compliance department regularly report to the Board?
A) Marketing strategies
B) Compliance performance and breaches
C) Customer satisfaction surveys
D) Risk management techniques
Answer: B
Explanation: The compliance department regularly reports compliance performance and any breaches to the Board.
80
What is the role of the compliance department in corporate governance?
A) To manage the corporate governance manual
B) To develop marketing strategies
C) To increase company profits
D) To reduce the number of employees
Answer: A
Explanation: The compliance department may manage the corporate governance manual, which contains the firm's policies.
81
What is the FCA's expectation regarding the fair treatment of customers?
A) Firms must eliminate all customer complaints
B) Firms must demonstrate they deliver fair outcomes to consumers
C) Firms must increase profits through customer satisfaction
D) Firms must outsource customer service to third parties
Answer: B
Explanation: The FCA expects firms to demonstrate that they consistently deliver fair outcomes to consumers.
82
How does the compliance department ensure fair treatment of customers?
A) By ignoring customer complaints
B) By monitoring the firm's performance and working with customer service teams
C) By outsourcing customer service to third parties
D) By increasing company profits
Answer: B
Explanation: The compliance department monitors the firm's performance and works with customer service teams to ensure fair treatment of customers.
83
What is the role of senior management in ensuring fair treatment of customers?
A) To ignore customer complaints
B) To instill a culture of fairness and take responsibility for outcomes
C) To outsource customer service to third parties
D) To increase company profits
Answer: B
Explanation: Senior management must instill a culture of fairness and take responsibility for delivering fair outcomes to customers
84
What does the FCA expect firms to do when errors are identified?
A) Ignore the errors
B) Promptly put things right and learn from them
C) Outsource the errors to third parties
D) Increase company profits
Answer: B
Explanation: The FCA expects firms to promptly put things right and learn from identified errors.
85
What is the compliance department's role in measuring customer fairness?
A) To ignore customer complaints
B) To measure performance against fairness issues and act on results
C) To outsource customer service to third parties
D) To increase company profits
Answer: B
Explanation: The compliance department measures performance against customer fairness issues and acts on the results.
86
Who typically heads the actuarial department in an insurance firm?
A) Chief Financial Officer
B) Chief Actuary
C) Compliance Officer
D) Risk Analyst
Answer: B
Explanation: The actuarial department is usually headed by a Chief Actuary, who may be a member of the Board or report to the Chief Executive.
87
Which of the following is NOT a type of actuary mentioned in the text?
A) Pricing actuaries
B) Reserving actuaries
C) Modelling specialists
D) Marketing actuaries
Answer: D
Explanation: The text mentions pricing actuaries, reserving actuaries, and modelling specialists, but not marketing actuaries.
88
What is the primary role of actuaries in life insurance?
A) To manage customer complaints
B) To calculate the average life span of policyholders
C) To develop marketing strategies
D) To reduce management expenses
Answer: B
Explanation: Actuaries in life insurance calculate the average life span of policyholders, separately for men and women, to assess risk and set premiums.
89
What is the purpose of anti-money laundering procedures in the compliance department?
A) To increase company profits
B) To prevent financial crimes
C) To improve customer satisfaction D) To reduce management expenses
Answer: B
Explanation: Anti-money laundering procedures aim to prevent financial crimes such as money laundering and fraud.
90
What is the role of general insurance pricing actuaries?
A) To eliminate underwriting risks
B) To predict loss ratios for a book of business
C) To manage customer complaints
D) To develop marketing strategies
Answer: B
Explanation: General insurance pricing actuaries predict loss ratios for a book of business based on historical performance and industry loss data.
91
What does reserving analysis involve?
A) Eliminating all claims
B) Reviewing initial reserves against final actual costs to assess trends
C) Increasing the number of claims filed
D) Outsourcing claims management activities
Answer: B
Explanation: Reserving analysis involves reviewing initial reserves against final actual costs to assess trends in reserving movements.
92
What influences the ability to predict the final outcome of long-term claims?
A) Marketing strategies
B) Changes in the risk environment, such as legal decisions and construction costs
C) Customer satisfaction surveys
D) Risk management techniques
Answer: B
Explanation: Changes in the risk environment, such as legal decisions and construction costs, influence the ability to predict the final outcome of long-term claims.
93
What is the purpose of loss modelling in complex risk scenarios?
A) To eliminate underwriting risks
B) To predict aggregate exposure to an insurer’s portfolio of business
C) To manage customer complaints
D) To develop marketing strategies
Answer: B
Explanation: Loss modelling predicts aggregate exposure to an insurer’s portfolio of business in complex risk scenarios, such as hurricanes and earthquakes.
94
What is a CAT model used for?
A) To eliminate underwriting risks
B) To simulate potential catastrophic events and estimate losses
C) To manage customer complaints
D) To develop marketing strategies
Answer: B
Explanation: A CAT model simulates potential catastrophic events and estimates the amount of loss due to these events.
95
What does solvency capital assessment involve?
A) Eliminating underwriting risks
B) Estimating risks to the business and modelling near worst-case scenarios
C) Managing customer complaints
D) Developing marketing strategies
Answer: B
Explanation: Solvency capital assessment involves estimating risks to the business and modelling near worst-case scenarios.
96
What is the calculation kernel in Solvency II internal model capital assessment?
A) A document outlining claims settlements
B) The programme that provides the capital estimate
C) A manual for underwriting guidelines
D) A list of customer complaints
Answer: B
Explanation: The calculation kernel is the programme that provides the capital estimate in Solvency II internal model capital assessment.
97
Why do insurers engage external actuaries?
A) To eliminate underwriting risks
B) To gain an independent view of reserving and capital management
C) To manage customer complaints
D) To develop marketing strategies
Answer: B
Explanation: Insurers engage external actuaries to gain an independent view of reserving and capital management.
98
What is the relationship between actuaries and underwriters in setting premiums?
A) Actuaries have ultimate responsibility for underwriting performance
B) Actuaries and underwriters work closely together, but underwriters have ultimate responsibility
C) Underwriters eliminate underwriting risks
D) Actuaries manage customer complaints
Answer: B
Explanation: Actuaries and underwriters work closely together in setting premiums, but underwriters have ultimate responsibility for underwriting performance.
99
What has increased investment in catastrophe modelling?
A) Customer satisfaction surveys
B) The rise in natural catastrophe events linked to climate change
C) Marketing strategies
D) Risk management techniques
Answer: B
Explanation: The rise in natural catastrophe events linked to climate change has led to increased investment in catastrophe modelling.
100
What is the purpose of specialist software in loss modelling?
A) To eliminate underwriting risks
B) To calculate costs to the company in the event of natural catastrophes
C) To manage customer complaints
D) To develop marketing strategies
Answer: B
Explanation: Specialist software calculates costs to the company in the event of natural catastrophes, such as hurricanes, floods, or earthquakes.
101
What is often the primary factor influencing the purchase of insurance products?
A) Reputation of the insurer
B) Price of the product
C) Policy coverage
D) Customer service quality
Answer: B
Explanation: Insurance products are often purchased based on price, with the reputation of the insurer and policy coverage being secondary considerations.
102
What does the marketing plan of an insurance company consider?
A) Claims handling processes
B) Distribution channels and internet usage
C) Customer complaints
D) Risk management techniques
Answer: B
Explanation: The marketing plan considers distribution channels (direct or through brokers) and the extent of internet usage.
103
Which of the following is a key role of the marketing team?
A) Competitor research
B) Claims handling
C) Underwriting risk assessment
D) Setting premiums
Answer: A
Explanation: Competitor research is a key role of the marketing team, helping insurers compare their products and services with competitors.
104
What must all financial promotions comply with?
A) The Consumer Rights Act 2015
B) The FCA's Financial Promotions regime
C) The Insurance Conduct of Business Sourcebook (ICOBS)
D) The Proceeds of Crime Act 2002
Answer: C
Explanation: All financial promotions must comply with the FCA's Financial Promotions regime, ensuring they are clear, fair, and not misleading.
105
What is the purpose of relationship marketing?
A) To build strong relationships with customers based on past purchases
B) To manage customer complaints
C) To reduce management expenses
D) To develop underwriting guidelines
Answer: A
Explanation: Relationship marketing uses customer information to build strong relationships and pre-empt their buying needs.
106
Why is retaining customers important in relationship marketing?
A) It eliminates underwriting risks
B) It reduces management expenses
C) It improves competitor research
D) It is less expensive than acquiring new customer
Answer: D
Explanation: Retaining customers is less expensive than acquiring new ones and helps businesses recoup the cost of acquiring customers.
107
What are the three main types of assets held by insurance companies?
A) Premiums, claims reserves, and underwriting profits
B) Claims reserves, shareholders’ funds, retained profit, and loans
C) Equities, bonds, and commercial property
D) Premiums, dividends, and capital growth
Answer: B
Explanation: Insurance companies hold claims reserves, shareholders’ funds, retained profit, and loans to fund their business.
108
What is the primary role of the investment department in an insurance company?
A) To manage underwriting processes
B) To achieve the best investment returns while ensuring liquidity for expenses and claims
C) To regulate government bonds
D) To sell insurance policies
Answer: B
Explanation: The investment department seeks to maximize returns while keeping assets available to pay claims and business expenses.
109
How should investments be managed for short-tail insurance policies?
A) Invest in commercial property
B) Invest for short durations to ensure liquidity for quick claim settlements
C) Invest entirely in equities
D) Hold reserves in long-term corporate bonds
Answer: B
Explanation: Short-tail insurance policies require short-duration investments to ensure liquidity for quick claim settlements.
110
What type of investments are typically held for long-tail insurance policies?
A) Short-term cash investments
B) Long-term investments such as equities and commercial property
C) Government bonds with short durations
D) Premium reserves
Answer: B
Explanation: Long-tail policies involve long-term investments (e.g. equities and commercial property) to match the duration of liabilities.
111
Why is planned liquidation of investments important?
A) To avoid losses in asset value
B) To increase market book value
C) To reduce the need for external investment managers
D) To regulate underwriting guidelines
Answer: A
Explanation: Planned liquidation prevents unexpected losses, as unplanned selling may require discounts to market value.
112
What is the primary role of the finance director (FD) in an insurance company?
A) To oversee underwriting processes
B) To influence decisions on costs, investment strategy, and solvency ratios
C) To manage claims settlements
D) To regulate credit control activities
Answer: B
Explanation: The finance director plays a key role in strategy development, influencing decisions on costs, investment strategy, capital raising, and solvency ratios.
113
What are the main sources of income for an insurance company?
A) Premiums, investment income, and fees
B) Underwriting profits and claims reserves
C) Equities and commercial property
D) Government bonds and dividends
Answer: A
Explanation: The main sources of income include premiums, investment income, fees, commission for services, recoveries under reinsurance claims, property rental income, and sales of salvaged property.
114
What is the purpose of Solvency II for UK insurers?
A) To simplify capital requirements
B) To implement solvency requirements that reflect risks and ensure consistent supervision
C) To eliminate the need for risk assessments
D) To regulate international insurance transactions
Answer: B
Explanation: Solvency II aims to implement solvency requirements that better reflect the risks companies face and ensure a consistent supervisory system.
115
How does the finance team handle solvency capital requirements?
A) By eliminating risk assessments
B) By structuring solvency capital from available resources and raising additional capital if needed
C) By focusing solely on underwriting profits
D) By consolidating accounts for subsidiaries
Answer: B
Explanation: The finance team structures solvency capital from available resources and raises additional capital if required, ensuring compliance with solvency requirements.
116
What is the role of the finance department in group consolidation and reporting?
A) To manage underwriting processes
B) To consolidate accounts for subsidiaries and prepare annual reports
C) To regulate credit control activities
D) To oversee claims settlements
Answer: B
Explanation: The finance department consolidates accounts for subsidiaries, including international entities, and prepares annual reports for shareholders and regulators.
117
Why might an insurer consider entering a new class of business?
A) To reduce solvency capital requirements
B) To analyze competition and cross-selling opportunities
C) To eliminate loss ratios
D) To simplify underwriting processes
Answer: B
Explanation: An insurer may consider expanding into a new class of business to analyze competition, market barriers, and cross-selling potential.
118
What is the strategic benefit of geographical diversification for an insurer?
A) To increase penetration rates in saturated markets
B) To reduce exposure to correlated risks
C) To simplify regulatory approvals
D) To eliminate underwriting losses
Answer: B
Explanation: Expanding geographically helps reduce correlated risks, such as weather-related events, by spreading premium income across different regions.
119
What is the primary goal of outsourcing in insurance companies?
A) To eliminate administrative tasks
B) To improve efficiency and/or effectiveness
C) To reduce regulatory requirements
D) To increase client contact
Answer: B
Explanation: Outsourcing aims to improve efficiency and effectiveness by subcontracting certain business activities while maintaining company responsibility.
120
What is a Service Level Agreement (SLA) in the context of outsourcing?
A) A contract that transfers all responsibilities to the subcontractor
B) An agreement that defines the standards and expectations for outsourced services
C) A document that eliminates the need for monitoring outsourced activities
D) A strategy to increase client contact
Answer: B
Explanation: A Service Level Agreement (SLA) ensures the company remains responsible for outsourced business by defining standards and expectations.
121
What is the role of a third-party administrator (TPA) in claims management?
A) To manage only the appointment of adjusters
B) To handle all aspects of claims, including reserves, settlements, and recovery
C) To eliminate the need for loss adjusters
D) To increase client contact during claims processing
Answer: B
Explanation: A TPA manages claims processing, including appointing adjusters, managing records, setting reserves, settling claims, and handling recovery.
122
What is a potential risk of outsourcing claims management to a TPA?
A) Increased regulatory requirements
B) Reduced client contact and potential damage to the brand
C) Higher administrative costs
D) Elimination of claims reserves
Answer: B
Explanation: Outsourcing claims management to a TPA may reduce client contact, increasing the risk of brand damage if service standards decline.
123
What is a key advantage of selling insurance through brokers?
A) It eliminates the need for marketing
B) It reduces the administrative burden on insurers
C) It increases direct customer loyalty
D) It avoids paying commissions
Answer: B
Explanation: Selling through brokers reduces the administrative burden on insurers, as brokers handle client management and premium collection, though it requires paying commissions.
124
What is the purpose of a business planning document in the strategy process?
A) To eliminate the need for operational management
B) To outline key elements such as classes of business, premiums, and expense profiles
C) To replace the need for solvency and risk assessments
D) To focus solely on advertising budgets
Answer: B
Explanation: A business planning document outlines key elements such as classes of business, premiums, expense profiles, investment strategies, and reinsurance policies, guiding operational management.
125
What is the role of the dialogue process in business planning?
A) To finalize the business plan without revisions
B) To discuss and refine business plans between unit and senior management
C) To eliminate the need for head office involvement
D) To focus solely on regulatory compliance
Answer: B
Explanation: The dialogue process involves discussions between business unit management and senior management to refine and finalize business plans.
126
What is the final step in the business planning process?
A) Drafting the initial plan
B) Reviewing plans for solvency, risk, and governance requirements
C) Eliminating unnecessary business units
D) Focusing solely on advertising strategies
Answer: B
Explanation: The final step in the business planning process is reviewing solvency, risk, and governance requirements to ensure alignment with strategic objectives.
