Chapter 7 - Underwriting

Question 1

Name 5 reasons why an underwriter would not take 100% risk

Answer 1

Capacity limits
Appetite for Risk
Aggregation
Broker influence
Insured influence

Question 2

Why might other markets be used to place risk?

Answer 2

Location loyalty
Lack of capacity in London

Question 3

What are the operating costs in the london market?

Answer 3

30-40%

Question 4

What is the capability of the PPL

Answer 4

Handles all risks from quote, through to binding and post bind placements - End to end integration

Question 5

When would a drop in ratings not concern an insurer?

Answer 5

When the ratings across the board drop

Question 6

Why does rating matter for insurers?

Answer 6

Insurers who cannot pay out in claims can result in professional negligence claims to the broker

Question 7

Who are the bureau leads on a slip?

Answer 7

Lloyds lead and companies market lead

Question 8

In what scenario would the slip lead not be a bureau lead?

Answer 8

Lead by lead who doesn’t operate through Xchanging

Question 9

Who is the slip lead?

Answer 9

The lead insurer setting terms and conditions

Question 10

Who does the broker ultimately owe duty to?

Answer 10

Their principal

Question 11

Who does the insurer owe duty to?

Answer 11

The investors

Question 12

What are the 4 key requirements for the consumer act 2023?

Answer 12

Products fit for purpose
Value for money
Consumer understanding
Consumer support and benefitting from product

Question 13

What is exposure modelling? What is it primarily used for?

Answer 13

Does the risk written combine to create a concentration of risks? e.g. geographically or else where
Reinsurance purchasing

Question 14

What is the probable maximum loss? What is it used for?

Answer 14

The realistic total loss, typically less than total insured
Reinsurance purchasing

Question 15

What is loss modelling?

Answer 15

Financial impact of worst case scenarios occuring

Question 16

How does RDS work - Realistic Disaster Scenarios - List out the 4 steps

Answer 16

Which risks might be exposed, maximium claim per risk
Reinsurance coverage and cost
Calculate gross financial exposure and net loss after reinsurance caps

Question 17

What are the 4 key risks that are used in RDS, How many other sceanrios do they need to consider?

Answer 17

Windstorms
Earthquakes
Terrorism
Cyber attacks
+2 more

Question 18

What are some of the advised scenarios of risk to cover?

Answer 18

Marine, aviation, space, energy, liability and political

Question 19

What is the purpose of catastrophe modelling?
What are the key factors they will consider?

Answer 19

Impact assessment of the non financial risk factors. Such as claims volume handling
Frequency and severity of claim

Question 20

What are the two factors used to calculate premium?

Answer 20

Base (Depends on risk type) + Rate (exposure)

Question 21

What is the total premium for a 10M property charged at 2% per £100?

Answer 21

200k

Question 22

For liability insurance, what is the premium base calculated on for EL, PL and PI insurance?

Answer 22

Employer’s liability - payroll of insured
Public liability - turn over
Prof. Indem - Fees earned

Question 23

Name two types of insurance which is paid in stages

Answer 23

Marine and stock throughput

Question 24

What is implied through an open cover type insurance?

Answer 24

Regular declarations are made to the insurer and premium is paid periodically

Question 25

How does BIPAR impact premiums?

Answer 25

Following insurers cannot align their insurance premiums if one party decides to ask for more

Question 26

What 5 other factors contribute to premium calculations?

Answer 26

Operational costs Reinsurance costs Claim reserve contribution Profit margin Taxes

Question 27

How is reserving done for small value, large volume policies?

Answer 27

Blanket reserving

Question 28

What additional factors should be considered when calculating reserves?

Answer 28

Cost of indemnity Operational + Expert costs

Question 29

How does the interest rate affect reserving?

Answer 29

If interest rate = negative, over-reserving is required and vice versa Claimant can claim interest E.g. +0.25% on 1M means 997500 can be reserved.

Question 30

Why don't insurers reserve the full payout?

Answer 30

Higher liability, more captial required to maintain solvency, less liquid

Question 31

Why shouldn't insurers under-reserve?

Answer 31

Mislead investors, cannot payout in full

Question 32

How does inflation affect long tail claims?

Answer 32

Increase the total pay out then when the claim was first advised

Question 33

What is IBNR / IBNER

Answer 33

The amount that they need to reserve for the claims not yet advised. Calculated using historic data

Question 34

What is the difference between IBNR and IBNER

Answer 34

IBNR = Claims not yet advised IBNER (Incurred by not enough reported) - claims advised but not enough reserved to pay

Question 35

What are trust funds? How is it calculated?

Answer 35

Reserves that must be held in that country for the risks which they have underwritten in that country Reserves that are held on the open claims within the market systems

Question 36

How long do Lloyds give syndicates to close their books?

Answer 36

3 years. e.g. for UWY 2021, review will open at 2024

Question 37

What is the purpose of reinsurance to close (RITC)

Answer 37

Used to close an accounting year. Reinsurance is purchased for next year's account to cover these unclosed claims

Question 38

How is RITC calculated?

Answer 38

Future liabilities - this is the basis for the syndicate to work out premium charged for those liabilities

Question 39

What happens if RITC is not possible due to complex / large claims not yet settled? Who might have to pay this>

Answer 39

Open years agreement Lloyds' member or central funds

Question 40

Why do insurers not have to transfer liabilities formally from one year to the next? where as syndicates do

Answer 40

Syndicates exist for 1 year, insurers don'tW

Question 41

What is commercial RITC market?

Answer 41

Transfer of liabilities where the next year's account is not linked to the previous owner

Question 42

What is reinsurance pricing primarily based on?

Answer 42

Unsettled claim liablities

Question 43

On what factors do ratings companies use to rate insurance firms?

Answer 43

Financial position Management Operation Comparison to others

Question 44

What is RITC used to protect against?

Answer 44

Cost of unreported / outstanding claims

Question 45

What is the role of the leader?

Answer 45

Set good terms and conditions for insured