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LM2 > Chapter 7 - Underwriting > Flashcards

Chapter 7 - Underwriting Flashcards

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1
Q

What is the subscription market?

A

More than 1 insurer can participate in any single risk

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2
Q

Why might an insurer take less than 100% of any risk?

A
  1. Capacity - each insurer has set capacity from the regulators for amount of business it can insure & insurers set their own capacity for certain classes
  2. Appetite - spreading exposures over different risks enables an insurer to protect its investors better against loss
  3. Aggregation - too many risks located in 1 place could lead to far higher loss to an insurer, so should accept smaller shares in each risk in different locations
  4. Broker influence - broker wants risk spread amongst many insurers
  5. Insured influence
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3
Q

Why might a broker or insured choose an insurer outside LM to participate on a risk?

A
  1. Lack of capacity in London - risk may be too large to be placed in 1 market alone
  2. Loyalty of broker or insured - they may want to support their home market as well as the LM
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4
Q

What is the London Market Group (LMG) & Blueprint 2 aiming to do as they develop electronic processes to support the placement of business in LM?

A

•They’re aiming to make it easier to do business in the LM

•To make it more accessible, cost-effective, & having more efficient services that better meet their needs

•Leaner operating models can lead to cheaper premiums - as, the current operating costs for insurers in LM is 30-40% of every premium, which makes the market uncompetitive

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5
Q

What is the benefit of electronic placing?

A

Submitting documents electronically allows brokers & UWs to maximise the use of their working days by smoothing out peaks & troughs

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6
Q

The LM has its own electronic placing system, Placing Platform Limited (PPL), what does this system do?

A
  1. It can handle the whole process from quote to bind
  2. It provides a full audit trail
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7
Q

Who do rating agencies give grades to?

A
  1. Individual insurers
  2. Lloyd’s as a marketplace
  3. London company market insurers
  4. Overseas insurers
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8
Q

What 3 things do rating agencies base their ratings of insurers on?

A
  1. The financial position of an insurer
  2. The management & operation of the business
  3. The comparison to their peers
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9
Q

What is a key factor for a broker selecting an insurer?

A

It’s security & ability to pay future claims

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10
Q

When would a drop in rating from a rating agency not concern an insurer?

A

When all insurers have their ratings reduced, as everyone still remains at the same level prior to reduction

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11
Q

Why are brokers so concerned about ratings of insurers from rating agencies?

A

•The insured relies on brokers to exercise due care to place their business w/ robust insurers that will be able to pay future claims

•If an insurer was unable to pay future claims, then the broker may face a claim of negligence from ther client

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12
Q

What are the characteristics of a leader in a subscription market?

A
  1. They should set good terms & conditions for the client
  2. Be credible to other insurers, so the following market will support the leader
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13
Q

In the Lloyd’s market, what do leaders in a subscription market need to do?

A

Principle 3 in Lloyd’s principals is on UW profitability - so, there’s an expectation that the leader will conduct pre-bind analysis on all risks

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14
Q

How is a risk presented to a leader in a subscription market?

A

The MRC & relevant supporting document is presented to potential leaders to allow them to consider the risk

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15
Q

What are the 4 outcomes that the FCA focuses on around insurers & consumer duty to retail/consumer business?

A
  1. The products/services being provided - is the product fit for purpose?
  2. Price & value - is the customer getting value for money?
  3. Consumer understanding - can the customer understand the info the insurer is providing them?
  4. Consumer support - ensuring that customers can benefit from the product
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16
Q

What is equilibrium?

A

Supply = demand

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17
Q

What can shorten the insurance cycle?

A

Catastrophe events

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18
Q

What is a soft market?

A

•There’s an excess of supply over demand

•Harder for insurers to push premium prices up

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19
Q

What is a hard market?

A

•More demand than supply

•Insurers control the market more

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20
Q

What do insurers use historical info & technical tools for?

A

•To form a prediction of what might happen in the future

•Insurers try to work out what losses they might suffer - this can assist them to calculate the amount of reinsurance they need

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21
Q

Why is loss & exposure modelling important for insurers?

A
  1. To monitor their business
  2. To assist w/ the consideration around reinsurance purchasing
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22
Q

What is exposure modelling?

A

•The insurer works out exposures on various combinations of risks

•It looks at the way in which different risks that an insurer writes combine to create a concentration of risk in 1 area

•E.g. are several satellites being launched using the same vehicle at the same time

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23
Q

How does data capture help insurers with exposure modelling?

A

•Helps insurers know the full extent of its exposures

•By capturing & mapping this data, you can calculate the exact exposures in a region & see if there’s any more capacity to accept more risks in that area

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24
Q

How do insurers use Probable Maximum Loss (PML) to help with exposure modelling?

A

•To work out the realistic likely maximum of the sums insured will be

•PML calculation is important for calculating how much reinsurance should be purchased for example

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25
How do mobile risks impact exposure modelling?
•It’s more difficult to undertake effective exposure mapping on risks that are constantly moving, such as ships or containers •But, the exposure issues for marine risks can be as significant as non-marine •E.g. a large container vessel can carry 20k containers & 1 insurer may, without knowing, be insuring contents of each of them
26
What is loss modelling?
The insurer works out the financial impact of certain events occurring •E.g. realistic disaster scenarios (RDS) & catastrophe modelling
27
What are Realistic Disaster Scenarios (RDS), that insurers in Lloyd’s market use for loss modelling?
•They are specific scenarios that managing agents must analyse •They analyse which of the written risks may be exposed & the max claim, if they have reinsurance to cover the risks, how much is the reinsurance cost & how much would it cover •The final result is the gross financial exposure to the insurer of the RDS & the net result
28
What is the purpose of Realistic Disaster Scenarios (RDS), that insurers in Lloyd’s market use for loss modelling?
To calculate the financial losses that might be suffered in certain predetermined catastrophe situations
29
What are general Realistic Disaster Scenarios (RDS) that managing agents in Lloyd’s market have to consider for loss modelling?
1. UK flood 2. 4 different cyberattacks 3. Terrorism in 2 places in New York 4. New Madrid (a fault line where sections of earth crust meet, so can impact 7 different states), Japanese, & 2 California earthquakes 5. European, Japanese, Gulf of Mexico, Florida, & 2 consecutive Atlantic seaboard windstorms
30
What does Lloyd’s require syndicates & managing agents to consider in relation to Realistic Disaster Scenarios (RDS) for loss modelling?
1. General RDS 2. Identify & report on 2 other scenarios - these scenarios must have significant financial impact on the syndicate if they were to occur 3. Further scenarios are required if the exposure to the syndicate is above the advised de minimis level - including marine, aviation, space, energy, liability, & political risks
31
What is catastrophe modelling, that insurers use for loss modelling?
Ensures that an insurer is aware of the non-financial impact of catastrophes occurring •E.g. should a catastrophe occur, claims volumes will increase & the insurer should be ready to deal w/ them
32
What are the steps to take in catastrophe modelling, that insurers use for loss modelling?
1. Insurers, who are leaders, have to prepare for claims to arrive & need to have skilled personnel to handle them 2. Modellers consider the frequency & severity of an event, which helps them determine which combination & levels of reinsurance are required 3. Insurer should decide whether it performs a similar exercise using additional scenarios, based on its own UW portfolios
33
How is degree of risk measured?
In terms of frequency & severity of loss
34
What is the law of large numbers?
When insurers have a lot of data on a certain exposure to risks, then they are able to determine more accurate premium
35
How are premiums usually arrived at?
By applying a premium rate to a premium base
36
What is a premium rate?
The hazards that are being faced w/ a particular risk or particular insured
37
What is a premium base?
A measure of the exposure
38
What is a suitable premium base for property insurance?
The sum insured
39
What is a suitable premium base for employers’ liability insurance?
The payroll of the insured is used as a basis of the premium calculation, often broken down into different categories of work undertaken •The insured can estimate the total salary cost for the coming year •The rate is applied to the estimated figure & at the end of the year the insured submits a declaration showing the actual salaries paid •Then, the premium is adjusted up/down, depending on whether the actual salary cost is higher/lower than the estimated figure - this also applies to ‘products/public liability risks’
40
What is a suitable premium base for products/public liability insurance?
This is often rated on turnover
41
What is a suitable premium base for professional indemnity insurance?
This is rated on fees earned
42
What is a suitable premium base for marine cargo insurance?
•Often paid in stages, as & when goods are shipped •This is done by regular declarations to the insurer under an insurance contract called ‘open cover’ - stock throughput insurance covering goods in a warehouse is also done this way, as the value of the goods stored could fluctuate through a policy year, so it prevents the insured paying too much premium & the insurer receiving too little
43
In a subscription market, what should the broker not do if a follower requests a higher rate? (This is part of the BIPAR principles)
The broker can’t return to the UWs from whom they’ve obtained a quote to ask if they want to alter to a higher premium
44
What are the 5 BIPAR (European Federation of Insurance Intermediaries) principles? (BIPAR principles are no longer automatically applicable to UK, but they indicate good practice)
1. Broker shall specific the demands/needs of the client & the underlying reason for advice 2. Before placing a risk, the broker will advise the client on market structures, including the merit of single insurer vs multiple placement 3. If client wants a multiple insurer placement, the broker will advise on the options 4. If leader & follower insurers have same terms & conditions, the previously agreed premiums will not be aligned upwards if an additional follower requires a higher premium 5. During placement of risk, the broker will keep the client informed of progress
45
Apart from premium rate & base, what are the 5 other components of premium calculations?
1. Operational costs 2. Reinsurance costs 3. Profit margin 4. Contribution to claims reserves 5. Taxes
46
What are operational costs as a component of premium calculations?
The costs of doing business, including employing underwriters, claims, staff, etc •Certain types of business may be more cost heavy - e.g. delegated business, as lots of parties in the chain want their share of commissions
47
What are reinsurance costs as a component of premium calculations?
Including facultative reinsurance (to cover a risk) + the share of the insurer’s general reinsurance costs
48
How are profit margins a component of premium calculations?
•To make a profit on the risk, the insurer should consider the additional expenses to writing the risk •This includes reinsurance costs, operating costs, & taxes
49
How are contributions to claims reserves a component of premium calculations?
Insurers should concentrate on building up reserves in case of the catastrophe losses that may occur
50
How are taxes a component of premium calculations?
•Certain taxes are payable by the insurer, so the insurer should take its tax expenses into account •So, it should consider its ‘bottom line net income position’ •Taxes depend on the area of the world from which the risk comes from - e.g. fire brigade charges in Germany are a type of tax & are charged to insurers as a deduction from their premium
51
What info do insurers use to reserve?
1. Claims data 2. Expert input 3. Claims adjuster knowledge 4. Experience 5. The country legal proceedings may be held
52
How does reserving differ for smaller vs larger claims?
•For smaller value & higher volume claims (e.g. household & motor): useful for insurer to use statistical data to create a ‘blanket reserve’ across an entire book of business • For larger claims: claims are reviewed & reserved individually, so each claim is reviewed on a case by case basis
53
What 2 things do insurers need to consider when reserving?
1. Cost of claim indemnity - e.g. cost of repairs of a building, the liability payment to an injured person 2. Cost of experts that the insurer is using on the claim
54
Why is it not safer to reserve the full policy limits?
•Because all reserves held by an insurer form part of the solvency calculation •So, the higher the reserves, the more capital the insurer must have available to balance the solvency equation
55
What is short-tail business?
Claims are reported & settle within the policy year or very shortly after
56
What is long-tail business?
Claims take a long time to settle •This mainly relates to liability insurance •If a claim is expected to take a long time to settle, then inflation & charges in the law might make the final settlement far higher than anticipated when the claim was 1st advised
57
What are Incurred But Not Reported (IBNR)?
They’re estimates that relate to claims which haven’t been reported at all to the insurer
58
What are Incurred But Not Enough Reported (IBNER)?
Relates to claims which are known about, but the currently posted reserve may not be adequate
59
Why is Incurred But Not Reported (IBNR) important for all insurers?
To be sure that their reserve figures are as accurate as possible
60
What is the process by the insurer for Incurred But Not Reported (IBNR) / Incurred But Not Enough Reported (IBNER)?
Insurer applies some uplift to the known reserves to provide for those losses which have happened but haven’t been advised to •The uplift is a figure based on previous experience of how claims have developed •Actuaries can review previous years, see how claims developed, & consider whether the year under consideration will perform the same
61
What are Situs Funds / Trust Funds?
Some overseas regulators require insurers to maintain funds/reserves within the particular country’s borders in relation to risks written that are located inside that country •The amount that has to be held in these funds is calculated using the reserves that are held on open claims within the market systems
62
What is the Lloyd’s process to try & close the year of an account for a syndicate?
At end of each year of account, not all premiums & claims may have been received, so Lloyd’s gives the business 3 years to develop & at the end of that period, the premiums & claims are reviewed •The purpose of the review is to try & close the year, which means declaring a profit or loss for the year •If it declares a profit, then the insurer releases some funds to the Names, once this is done that year is now ‘closed’ & the investors (Names) aren’t liable for any more claims
63
What is Reinsurance To Close (RITC) in Lloyd’s?
After a year of account closes, there may still be outstanding claims, so the syndicate will purchase reinsurance from the next year of account to cover these potential claims after it’s ‘closed’ that year •For syndicates to buy RITC, they’ll need to calculate the remaining future liabilities - this calculation should contain an element of IBNR, like other reserve calculations •Once a suitable premium has been agreed, then the reinsurance can be put into place - this is the final step of ‘closing a year’ & investors now have no further liabilities
64
Why would Reinsurance To Close (RITC) not be finalised & a year would remaine open for a syndicate?
1. If the syndicate trying to purchase reinsurance was not able to calculate the liabilities to a level where the other syndicate is happy 2. The premium being quoted for reinsurance may be unacceptable
65
In Reinsurance To Close (RITC), why would actuaries be unable to calculate future liabilities or size of reinsurance premium?
Outstanding claims are large of difficult •So, will need to proactively manage these claims to ensure they’re resolved as efficiently as possible, while not making the financial position any worse
66
In Reinsurance To Close (RITC), what would a syndicate have to do if they can’t close a year due to large claims outstanding?
They may have to use up the premium funds & members funds, hence exposing the Central Fund to pay claims •Lloyd’s will work w/ managing agents that have open years of accounts for syndicates to make sure they’re under control
67
Does Reinsurance To Close (RITC) always have to be with the next syndicate year of account?
No, there’s a market for commercial RITC, where organisations that don’t have any historic link w/ the syndicate take over its future liabilities for a suitable price
68
What does it mean when insurance companies go into a state of ‘run off’?
They don’t write any new risks, but remain prepared to deal w/ outstanding claims that arise on the business already on books

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