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LM2 > Chapter 7: Underwriting > Flashcards

Chapter 7: Underwriting Flashcards

1
Q

Capacity

A

Maximum amount of business and insurer can insure in one year

Insurers can have their own internal capacity limits for individual CoBs

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2
Q

Subscription Market

A

More than one insurer can participate in a single risk

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3
Q

Appetite

A

Insurer has to consider if a risk fits the terms of its portfolio

  • Looking to avoid putting a lot of their exposure in one basket
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4
Q

Aggregation

A

Insurers monitor the potential for accepting risks that would be exposed to one event (i.e. Fire/Earthquake)

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5
Q

Insured Influence

A

Insured may have a preference for how the risk is placed, preferring either 1 insurer or splitting amongst more

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6
Q

Why might other markets be used?

A

Lack of capacity in London
Loyalty of brokers/insured (might want to support home market)

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7
Q

PPL

A

Placing Platform Limited

System to handle whole process from quote to bind to post bind endorsements

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8
Q

Broker security committees

A

Responsible for considering the relative security of an insurer

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9
Q

Rating agencies

A

Grade individual insurers

  • A.M Best
  • Fitch
  • Standard & Poors
  • Moody’s
  • Kroll Bond
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10
Q

Basis on which ratings are made

A
  • Financial position
  • Management and operation of the business as a whole
  • Compare insurer to peer group (similar sized orgs)
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11
Q

When a drop in rating might not concern an insurer

A

If everyones rating drops no reason to concern

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12
Q

Why brokers are concerned about ratings

A
  • Broker is agent of the insured and want to make sure an insurer will be able to pay claims
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13
Q

What makes a good leader

A
  • Set good T+Cs for the client
  • Be credible to other insurers so that following market will support

Broker must explain the difference in the various options of leader

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14
Q

IA2015 - Duties of the broker to principals

A

Under 2015 Insurance act, any knowledge held by broker is deemed to be known by client

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15
Q

Insurer duty under July 2023 Consumer Duty FCA requirement

A

Increase requirement that the insurers evidence positive steps to ensure clients have good outcomes

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16
Q

Consumer Duty outcomes that regulators focus on

A
  • Products and services provided
  • is it fit for purpose
  • Price and value
  • is it value for money
  • Consumer understanding
  • are communications provided understandable
  • Consumer support
    *Do customers benefit from product
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17
Q

Exposure modelling

A

Looks at the way different risks written combine to create a concentration in one area

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18
Q

Property Exposure

A
  • Are there a number of separate properties in close proximity?
  • What is the total sum insured of any combo of properties
  • Are the same perils being covered
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19
Q

Stock throughput exposure

A

Are different clients storing goods in the same warehouse

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20
Q

Satellites exposure

A
  • Are several satellites being launched using the same vehicle at the same time
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21
Q

PML

A

Probable Maximum loss

  • not working out the total of all sums insured but the realistic likely maximum
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22
Q

Why might PML be lower than total sum insured

A

property may be over a very wide area, sum insured might be high but the likelihood of everything being destroyed is unlikely

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23
Q

What Lloyds convention is used during Loss Modelling

A

Use RDS (Realistic Disaster Scenarios)

-

24
Q

RDS

A

Realistic Disaster Scenarios

Specific scenarios set out by Lloyd’s that managing agents must analyze

25
How insurers evaluate RDS
1. Work out which risks they might be exposed by and the maximum claim 2. Work out if they have any RI to cover it 3. How much RI cost and how much original claim would cover Final result = Gross financial exposure and then the net after RI
26
Gross financial exposure of RDS
Impact without reinsurance
27
Net Financial Exposure of RDS
Impact after taking into account applicable RI into consideration as well as RI and reinstatement costs
28
General scenarios of RDS
- 2 consecutive Atlantic seaboard windstorms - Florida windstorms in different areas - Gulf of Mexico windstorm - European windstorm - Japanese windstorm - California earthquakes in two areas - New Madrid earthquake - Japanese earthquake - UK flood - Terrorism in two places in new york - 4 different cyber attacks Must also identify 2 scenarios of its own choice Equally important for company market
29
New Madrid
Fault line in Missouri where earthquakes have potential to impact 7 different states Illinois Indiana Missouri Arkansas Kentucky Tennessee Mississippi
30
Catastrophe Modelling
- Helps ensure the insurer is aware of the non-financial impact of catastrophes occuring - Modellers consider frequency and severity of any event to help determine reinsurance i.e. Claims volume will increase significantly
31
Premium calculation
- task of the leader - insured contribution to the common pool *must be fair and reflect the degree of risk
32
Law of large numbers
- larger data pool increases the chance of setting an accurate premium
33
How premiums are determined
Premium rate - hazards faced with a particular risk/insured Premium base - measure of the exposure When calculating both the insured and the insurer contribute to the calculation * insured provides the value they want to have insured *insurer provides the rate they are prepared to charge Insured value divided by per amount of cover (i.e. £2 per £100)
34
Premium example
Vessel value = 10,000,000 Insurer rate = 2.00 per 100 (2%) 10,000,000 / 100 = 100,000 * 2.00 = 200,000
35
Premium base: sum insured
Sum insured is good for many property lines but is not good for EL, PL or PI EL = Payroll PL = Rated on turnover PI = Fees earned
36
EL premium base
- not a factual figure Insured estimates total salary cost rate is applied to estimated figure and end of year declaration is submitted by insured showing actual salary. Premium is then adjusted up or down depending on actual alary figure
37
Marine Cargo insurance premium
Often paid in stages as and when goods are actually shipped Done via regular declarations under Open cover insurance contract
38
BIPAR
European Federation of Insurance Intermediaries No longer automatically applicable now that the UK left the EU
39
Premium for following market
No obligation to accept the premium rate the lead set and can choose a different one In this instant broker cant return to the UWs who they got the original commitments
40
Additional components of premium calculations
- Operational Costs * some business may cost more to manage - Reinsurance costs *RI to cover may be expensive - Profit Margin *might not be profitable - Contribution to claims reserves - Taxes
41
Reserving
Making sure there are sufficient funds to pay claims
42
How insurers reserve
- Ascertain how much a claim will be ASAP *review claim data *consult experts - For higher volume, lower value claims (household/motor) insurers use statistical datas to create blanket resetves - have to also estimate the cost of experts as well as the liability/building price
43
Claims Adjuster considerations
- Location / Jurisdiction of risk where legal proceedings may take place - UK vs US personal injury claims are much lower UK gov have now changed discount rate to -0.25% so any reserve should now be 100.25% of the actual value of policy
44
Why its not worth reserving the full policy limit
- More capital they must have in reserve, the more additional capital they have to tie up which could be used for other business - still dangerous to under-reserve
45
Under-reserving
Hold insufficient reserves
46
Short tail
Claims are reported and settled within the policy year
47
Long tail
(mainly liability) Claims can take a long time to report
48
IBNR
Incurred but not reported Making provisions/estimates relating to claims which have not been reported at all to the insurer
49
IBNER
Incurred but not enough reported Making provisions/estimates relating claims which are known about but reserve is not adequate
50
Developed claims
- claims will come in in stages - some paid during the year - some will be advised but not paid - Some will not even be advised during the year By seeing how previous year developed, actuaries can estimate how current years will develop
51
Trust funds
Insurer required to maintain physical funds/reserves within countries Situs funds Calculated using reserves that are held on open claims within market
52
UK GAAP
- Financial statements using annual accounting rules for individual UW year - purpose of review is to close year
53
Closed year
Names (investors) are not liable for claims 2021 would be reviewed start of 2024
54
RITC
Reinsurance to close - calculate remaining liabilities - Should contain an element of IBNR
55
Incalculable circumstances for liabilities
- RITC cannot be finalised and year remains open - Outstanding claims are large or difficult * could use up premium funds and members' funds
56
Does RITC have to be the next YOA
no - commerical RITC where orgs take over the future liabilities without a link to the syndicate - Names may have invested for a single year, so liabilities arent transferred
57
Run off
no longer write new risks but will remain on books for outstanding claims from existing business - commercial companies exist to deal with this too

LM2 (10 decks)

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