Insurance

Question 1

What is the purpose of insurance companies

Answer 1

The purpose of general insurers is twofold: to meet a need and to make money.

Question 2

what is General insurance?

Answer 2

General insurance is any type of insurance that is not life insurance. It encompasses a wide range of types of insurance

Question 3

Insurance companies themselves are subject to?

Answer 3

Policyholders reduce their uncertainty by passing risks to insurance companies. Insurance companies themselves are subject to risk and uncertainty.

Question 4

Actuaries have traditionally played which roles in general insurance?

Answer 4

Actuaries have traditionally played roles in reserving and setting premiums but have also moved into much wider areas within general insurance. PB page 46

Question 5

How is Insurers’ profitability is constrained

Answer 5

Insurers’ profitability is constrained by how much the customer is willing to pay, statutory controls on insurers, and competition from other insurance companies.

Question 6

what are the Major uncertainties in insurance

Answer 6

Major uncertainties in insurance center around how many claims will occur and how much the insurer will have to pay to settle them. Other risks to the insurer include failure to recover fixed expenses, failure of other parties, falls in asset values, and the insurance cycle.

Question 7

what will influence the insurer’s ability to cope with risks

Answer 7

The size of free reserves will influence the insurer’s ability to cope with risks. Reinsurance cover and investment policy also play a role in the insurer’s ability to cope with risks.

Question 8

Technical reserves are held to cover the liabilities related to policies that have already been written and may also be called

Answer 8

insurance reserves or insurance provisions.

Question 9

Which two main categories of liabilities do technical reserves cover:

Answer 9

(a) past liabilities in respect of accidents or losses that have occurred prior to the accounting date and (b) future liabilities in respect of future insurance cover from policies for which premiums have already been received.

Question 10

Claim characteristics refer to

Answer 10

Claim characteristics refer to the ways in which and the speed with which claims originate, are reported, are settled, and are sometimes reopened.

Question 11

Reporting delays are the time from

Answer 11

when the event occurs through to the time that the insurance company is notified of the event.

Question 12

Settlement delays are the period between

Answer 12

Settlement delays are the period between notification to the company and the payment of the claim.

Question 13

Difference between Short tail claims and long-tail claims

Answer 13

Short tail claims are generally reported and settled quickly by the insurer, while long tail claims take a long time for the insurer to settle.

Question 14

The outstanding claims reserve is the first of the two main components of technical reserves, and it covers

Answer 14

the estimated reserves needed to settle the claims that the company knows about at the accounting date, incurred but not reported (IBNR) claims, expected increases (or decreases) in estimates for reported claims, additional reserves for claims that might require further payments, and claims handling expenses.

Question 15

Why might the latest balance sheet of an insurance company (as given in the company
accounts) not give a true indication of the financial strength of the company?

Answer 15

Some judgement is required in setting values for assets and liabilities. So, for example,
when assessing the financial strength of the company a prudent (not realistic) basis may
be used.
Also, the balance sheet is a snapshot at a given moment. Circumstances may have
changed since the date of the balance sheet.

Question 16

The outstanding claims reserve is one of the two main components of

Answer 16

technical reserves in insurance companies.

Question 17

The outstanding claims reserve can be split into up to five separate components, which is?

Answer 17

including reserve for outstanding reported claims, reserve for incurred but not reported (IBNR) claims, reserve for incurred but not enough reported (IBNER), reserve for re-opened claims, and reserve for claims handling expenses.

Insurance companies should hold reserves to cover all of these items, even if the reserves are not shown split into these categories.

Question 18

The reserve for outstanding reported claims is the estimated reserve needed to settle the claims that

Answer 18

that the company knows about at the accounting date.

Question 19

The reserve for IBNR claims is needed to cover

Answer 19

The reserve for IBNR claims is needed to cover the claim payments for incidents which have happened but have not been reported to the insurance company.

Question 20

The reserve for IBNER claims is needed to cover

Answer 20

The reserve for IBNER claims is needed to cover expected increases or decreases in estimates for reported claims.

Question 21

The reserve for re-opened claims is an additional reserve that may be explicitly shown to allow for

Answer 21

The reserve for re-opened claims is an additional reserve that may be explicitly shown to allow for claims that the insurance company treats as being fully settled but might one day require further payments.

Question 22

The reserve for claims handling expenses is held separately to cover additional expenses incurred

Answer 22

in settling claims in each of the above classes.

Question 23

The need for outstanding claims reserves arises from

Answer 23

arises from reporting and settlement delays.

Question 24

which two approaches are used by insurers to estimate the liability for outstanding claims.

Answer 24

Case estimates and statistical techniques

Question 25

Individual estimates cannot be used for IBNR claims because

Answer 25

because the insurer does not yet know about the claim.

Question 26

Statistical techniques are more useful for classes of insurance where there are

Answer 26

lots of claims and stability in the numbers and amounts of claims.

Question 27

There is great uncertainty about the payments an insurer will need to make in respect of outstanding claims, which leads to

Answer 27

uncertainty in profitability and other aspects of the insurer that rely upon estimates for outstanding claims.

Question 28

Long-tail classes have larger reserves for outstanding claims in relation to premium income, leading to

Answer 28

greater uncertainty.

Question 29

The technical reserves can be split into two main components. What are they?

Answer 29

Outstanding claims and unexpired risks.

Question 30

The outstanding claims reserves might be split into two, or perhaps even five
components. What are they?

Answer 30

Outstanding reported and IBNR
or
outstanding reported, IBNR, IBNER re-opened claims and claims handling
expenses.

Question 31

ST7 Q1.5

Answer 31

Class 1 must be a short-tail class of business (because total claims reserves are
relatively low), with little in the way of reporting delays, eg household contents.
Class 2 is a long-tail class (because the total claims reserves are a much bigger
proportion of premiums), with extensive reporting delays. A class such as employers’
liability is possible, where some illnesses may not emerge for many years which will
make IBNR significant

Question 32

Technical reserves in insurance include both reserves for claim events that

Answer 32

have already occurred and reserves for policies with unexpired exposure.

Question 33

The reserves for unexpired exposure are determined by holding a portion of premiums in respect of that exposure, which is known

Answer 33

the Unearned Premium Reserve (UPR).

Question 34

The UPR is the premiums that have been received which have not yet been

Answer 34

earned

Question 35

The straight averaging approach to determine the UPR has some weaknesses as it does

Answer 35

not consider that risk and expenses may not be incurred evenly over the period of cover.

Question 36

Acquisition costs incurred by the insurer at the start of a policy, such as commission paid to the sales outlet, should be allowed for

Answer 36

when setting the reserves in respect of unexpired exposure.

Question 37

The UPR can be calculated using a formula that takes into account

Answer 37

UPR= proportion of risk unexpired X ( premium - acquisition costs),

The UPR calculated in this way is the net UPR, which does not allow for the acquisition expenses.

Question 38

The URR would need to cover all the claims and expenses that are expected to be incurred

Answer 38

in the future by the unexpired portion of existing policies.

Question 38

The URR would need to cover all the claims and expenses that are expected to be incurred

Answer 38

in the future by the unexpired portion of existing policies.

Question 39

The UPR is generally expected to be bigger than the URR, as premiums are expected

Answer 39

to be big enough to cover the claims and expenses, which is what a profit-seeking insurer would generally want.

Question 40

In cases where the UPR is greater than the URR, there is no need for the insurer to

Answer 40

keep reserves greater than the UPR for unexpired policies. However, the full UPR is generally held due to the accounting accruals principle.

Question 41

Holding a reserve equal to the UPR for unexpired policies may result in

Answer 41

in some profit emerging over the coming months from these policies.

Question 42

However, for policies where the URR is greater than the UPR, the insurer needs to

Answer 42

hold a reserve greater than the UPR to cover the possible future claim events.

Question 43

These additional reserves are known (again, quite logically) as the additional unexpired
risk reserves (AURR), or the additional reserves (or provision) for unexpired risks.
It should not surprise you that

Answer 43

AURR =URR - UPR (minimum of zero)

Question 44

State in layman’s terms the key difference between the UPR and the URR. Which of
the two calculations, UPR or URR, is open to most uncertainty?

Answer 44

Whereas UPR is the portion of premium set aside for unexpired risks, the URR is our
estimate of how much we need to cover the claims and expenses from unexpired risks.
The URR is probably open to more uncertainty. (We know what premiums we charged,
but we don’t know what the claims experience will be next year.)

Question 45

In addition to reserves for outstanding claims and unexpired policies, which other two types of technical reserves can insurance companies may hold

Answer 45

claims equalisation reserves and catastrophe reserves.

Question 46

Claims equalisation reserves (CER) are used to smooth the profits of an insurance company from year to year. In a good year, profits are transferred to _______, and in a bad year, funds are transferred from the ____ to ________the assessment of profit.

Answer 46

Claims equalisation reserves (CER) are used to smooth the profits of an insurance company from year to year. In a good year, profits are transferred to the CER, and in a bad year, funds are transferred from the CER to increase the assessment of profit.

Question 47

Insurance companies hold ____ to reduce the volatility of profits over time, as insurance business can be highly volatile due to large fluctuations in _________.

Answer 47

Insurance companies hold CERs to reduce the volatility of profits over time, as insurance business can be highly volatile due to large fluctuations in claims.

Question 48

______________ are used to cover the losses that might arise from a catastrophic event. These events can be natural or man-made, such as floods, earthquakes, explosions, or oil spillages.

Answer 48

Catastrophe reserves

Question 49

Catastrophe reserves are contingency reserves held in case of an exceptional event, and insurers do not expect to use them for paying ?

Answer 49

claims.

Question 50

Holding a large explicit catastrophe reserve can reduce the need for an insurer to hold __________________, which are the excess of assets over liabilities

Answer 50

extensive free reserves

Question 51

Conversely, insurers that do not hold a catastrophe reserve need to have sufficiently large_________ to cover the possibility of a catastrophic event.

Answer 51

free reserves

Question 52

What are the two main approaches to estimating outstanding claims? Which of the two
should be used for estimating IBNR? Which of the two is more likely to benefit from
actuarial input?

Answer 52

Solution 1.9
(a) Estimates of individual outstanding reported claims.
(b) Statistical estimation of totals.
Use statistical methods for IBNR.
Actuarial input is more likely to be used in the statistical estimation of totals.

Question 53

An insurance company that recognises that it has been writing business unprofitably for
the last six months shows just three different types of technical reserve in its accounts.
What do you think they might be? How would your answer change if the question had
said very profitably instead?

Answer 53

Solution 1.10
● Outstanding claims reserves (includes IBNR etc)
● UPR
● AURR (needed because URR expected to exceed UPR as unprofitable)
If the question had said that the company was writing business very profitably, then we
would not have needed an AURR. So the answer would have been:
● Outstanding reported claims reserves
● IBNR
● UPR.

Question 54

Free reserves are the excess of assets over

Answer 54

technical reserves and are essential for the functioning of an insurance company.

Question 55

Different expressions are used to refer to the excess of assets over liabilities, such as

Answer 55

free assets, solvency margin, shareholders’ funds, and capital employed.

Question 56

Solvency margin is a common interpretation of the excess of assets over liabilities and may also be referred to as

Answer 56

the minimum capital requirement or required minimum margin.

Question 57

The free reserves are important for managing an insurance company, as they determine

Answer 57

the maximum amount of business the company can write and the classes of business it can support.

Question 58

Free reserves provide a cushion against unexpected adverse results, and policyholders rely on them to ensure that

Answer 58

the insurer can meet claims in the event of a disaster.

Question 59

Legal requirements may also mandate a minimum level of

Answer 59

free reserves.

Question 60

Other aspects of the management of a general insurer are also influenced by the size of
the free reserves. What do you think the effect of higher free reserves will be on an
insurer’s:
● reinsurance programme?
● investment strategy?
● pricing policy?

Answer 60

Higher free reserves result in:
● less need for reinsurance
● greater investment freedom, ie scope to mismatch
● greater scope for competitive pricing

Question 61

Setting appropriate premium rates is crucial for the success of an

Answer 61

an insurance company

Question 62

which is the major area of actuarial involvement in insurance

Answer 62

Premium rating

Question 63

Actuaries are interested in the frequency and severity distributions of claims for reserving, ______, and __________

Answer 63

Actuaries are interested in the frequency and severity distributions of claims for reserving, pricing, and capital modeling.

Question 64

Estimation of claim distributions helps pricing actuaries calculate?

Answer 64

the pure risk premium.

Question 65

Actuaries model ______claim distributions or find reasonable approximations.

Answer 65

Actuaries model aggregate claim distributions or find reasonable approximations.

Question 66

Actuaries identify characteristics of policyholders with the greatest impact on risk taken using _________and _________

Answer 66

GLMs and multivariate analyses.

Question 67

____________ approach calculates the risk premium as the actual cost of claims during a past period, expressed as an annual rate, per unit of exposure.

Answer 67

The burning cost

Question 68

____________________________approach calculates the risk premium as the expected average claim cost multiplied by the expected average number of claims in the period.

Answer 68

The frequency-severity

Question 69

Original loss curves are used to derive premium rates when

Answer 69

past claims data is too sparse to derive a credible price using traditional techniques.

Question 70

A pricing actuary estimates the expected cost of claims based on ?

Answer 70

past data.

Question 71

Adjustments may be needed to allow for unusually heavy/light experience in the past data, large or exceptional claims and ?

Answer 71

trends in claim experience, inflation, changes in risk and/or cover, environmental factors, and incomplete past data.

Question 72

Further adjustments are made to arrive at the office premium, including expected reinsurance costs and _____, expense loadings, loadings for profit, and ________

Answer 72

Further adjustments are made to arrive at the office premium, including expected reinsurance costs and recoveries, expense loadings, loadings for profit, and allowance for investment income.

Question 73

Further adjustments are made for practical considerations such as business objectives, competitive pressures,_______, the insurance cycle, _________, and the use of no-claims discounts.

Answer 73

Further adjustments are made for practical considerations such as business objectives, competitive pressures, brand or customer loyalty, the insurance cycle, market acceptability, and the use of no-claims discounts.

Question 74

Capital represents

Answer 74

any resources held by the company in excess of its liabilities,

Question 75

capital modelling helps ensure that

Answer 75

he company has enough capital to meet its obligations with confidence.

Question 76

Capital modelling also helps allocate capital between

Answer 76

different classes, products, and individual policies.

Question 77

A capital model typically takes the form of a cashflow model that projects all aspects of a general insurer’s business into the future to assess the company’s ability to meet its financial obligations.

Answer 77

that projects all aspects of a general insurer’s business into the future to assess the company’s ability to meet its financial obligations.

Question 78

Assumptions that will be required for the model capital modeling include

Answer 78

future premium income, future claims, reserving basis, expenses, investment return, reinsurance arrangements, economic variables, likelihood/cost of catastrophes, insurance cycle, operational losses, tax, and dividends.

Question 79

A capital model will usually analyze the insurer’s business in detail,

Answer 79

with projections for different classes of business, sources of business, locations, claim types, asset types, asset categories, etc.

Question 80

Different methods, such as _________and _______, will be used to account for the volatility in the general insurance business, and ___________ will be used to determine confidence levels.

Answer 80

Different methods, such as stress testing and scenario testing, will be used to account for the volatility in the general insurance business, and stochastic models will be used to determine confidence levels.

Question 81

The modern approach to assessing the level of capital that general insurers are required to hold is to allow for the

Answer 81

inherent riskiness of the insurer’s activities.

Question 82

The types of risks that may be taken into account in the capital modelling process include

Answer 82

insurance risks, reserving risk, market risk, credit risk, operational risk, liquidity risk, and group risk.

Question 83

Companies can be rewarded for maintaining a sound risk management policy,

Answer 83

and less risky insurers may require lower capital levels in the model.

Question 84

Insurance companies need to consider the __________of their liabilities when choosing investments.

Answer 84

nature

Question 85

Fixed monetary returns are appropriate for liabilities that are in fixed monetary amounts. However, for liabilities that need to be settled in prices applicable at the time of settlement, investments that tend to____________ are desirable.

Answer 85

Fixed monetary returns are appropriate for liabilities that are in fixed monetary amounts. However, for liabilities that need to be settled in prices applicable at the time of settlement, investments that tend to maintain their real value are desirable. (Nature of Liabilities:)

Question 86

Investments for Insurance Companies: Factors to Consider

Answer 86

Nature of Liabilities:Term of Liabilities:Currency of Liabilities:Uncertainty of Liabilities:Size of Free Reserves:Legislative Influences:Taxation:

Question 87

Term of Liabilities:
Investments should have similar terms to those of the ________. The appropriate term of investments depends on the classes of business written.

Answer 87

Term of Liabilities:
Investments should have similar terms to those of the liabilities. The appropriate term of investments depends on the classes of business written.

Question 88

Short-term investments tend to be ________for many liabilities, while long-tail classes of business may _________medium-term and long-term investments.

Answer 88

Short-term investments tend to be appropriate for many liabilities, while long-tail classes of business may require medium-term and long-term investments.

Question 89

Currency of Liabilities:
In some classes of insurance, insurers may have liabilities in several currencies, hence___?

Answer 89

Assets should be held to match.

Question 90

Uncertainty of Liabilities:
There is often uncertainty about the amounts that will be necessary to settle claims and the timing of claim payments. Insurance companies must hold a proportion of assets in a liquid form sufficient to__________.

Answer 90

cover this uncertainty.

Question 91

Size of Free Reserves:
The greater the free reserves (relative to the size of the company), the greater the_____________.

Answer 91

extent to which the investment strategy can be aimed at maximizing returns.

Question 92

Legislative Influences:
Insurers may be wary of holding too many investments that have___________ values due to the need to maintain ___________ above a particular minimum solvency margin.

Answer 92

Legislative Influences:
Insurers may be wary of holding too many investments that have volatile market values due to the need to maintain free reserves above a particular minimum solvency margin.

Question 93

Taxation:
why the taxation basis for insurers is relevant to the choice of investment strategy.

Answer 93

Taxation:
Insurers want to maximize their post-tax investment returns, so the taxation basis for insurers is relevant to the choice of investment strategy.

Question 94

Insurance companies are described as “capital intensive”. Explain why they need so
much capital in relation to payroll, size of premises etc

Answer 94

This is the same as asking why they need large free reserves:
● it may be a legal requirement
● to meet normal fluctuations in claims experience
● to protect against unexpected adverse experience (catastrophes, large claims etc)
● to support and attract new business
● to protect against failure of a third party, eg a reinsurer.
We discuss these ideas in more detail later in the course.

Question 95

Question 1.14
Which two aspects of an insurance company’s operations will have the most impact on
the company’s investment strategy?

Answer 95

Solution 1.14
● classes of business written, hence nature / term / currency and uncertainty of
liabilities
● size of free reserves.

Question 96

Profits can be calculated using the following formula: ?

Answer 96

post-tax profits = premiums - claims - expenses + investment return - tax. (Profitability and cashflow
8.1 Basic measure of profits)

Question 97

When calculating profits, it is important to ensure that figures used for premiums, claims, and expenses are ?

Answer 97

sensible and consistent.

Question 98

The accruals principle states that?

Answer 98

income and expenditure should accrue over the period to which they relate.

Question 99

Written premiums refer to _____________, while earned premiums refer to________________________________.

Answer 99

Written premiums refer to the total amount of premium income written in the year, while earned premiums refer to the amount of premium income relating to insurance cover provided during the year.

Question 100

Written premiums refer to _____________, while earned premiums refer to________________________________.

Answer 100

Written premiums refer to the total amount of premium income written in the year, while earned premiums refer to the amount of premium income relating to insurance cover provided during the year.

Question 101

Earned premiums are consistent with the accruals concept as they tell us _______________________

Answer 101

how much premium has accrued during the year.

Question 102

Paid claims refer ____________ while incurred claims refer to _________.

Answer 102

Paid claims refer to the total amount of claim payments made by the insurer during the year, while incurred claims refer to the amount of claims paid plus the increase in the total reserve for outstanding claims.

Question 103

Claims incurred is consistent with the_______

Answer 103

accruals principle.

Question 104

When policies are written, the insurer pays commission and other initial expenses, which are referred to as___________

Answer 104

Acquisition Costs.

Question 105

Acquisition costs for unexpired policies at the accounting date are known as ______________________________

Answer 105

Deferred Acquisition Costs (DAC).

Question 106

The expenses item needs to be based on an incurred basis, just like ___________

Answer 106

just like premiums and claims

Question 107

The ________item should be shown as Expenses Incurred, rather than just showing expenses paid.

Answer 107

The expenses item should be shown as Expenses Incurred, rather than just showing expenses paid.

Question 108

The Underwriting Result, also known as Underwriting Profit, is the ____________

Answer 108

The Underwriting Result, also known as Underwriting Profit, is the excess of earned premiums over claims and expenses.

Question 109

The formula for calculating the Underwriting Result is: ?

Answer 109

The formula for calculating the Underwriting Result is: Earned premiums - Claims incurred - Expenses incurred = Underwriting result.

Question 110

The Underwriting Result is based on________

Answer 110

The Underwriting Result is based on the accruals concept.

Question 111

The Underwriting Result shown in the revenue account of a general insurance company is analogous to

Answer 111

the operating profit of non-insurance companies.

Question 112

Question 1.16
The following data is available for a general insurance company for an accounting year
(in £ million):
premiums receivable: 165
unearned premium brought forward at 1 January: 75
unearned premium carried forward at 31 December: 83
claims paid: 103
outstanding claims reserve at 1 January: 124
outstanding claims reserve at 31 December: 133
expenses incurred: 31
Produce the revenue account showing the underwriting profit (or loss) for the year

Answer 112

Solution 1.16
Earned premiums 157 ( = + − 165 75 83 or 165 75 − − (83 ) )
Claims incurred 112 ( = + − 103 133 124 or 103 133 124 + − ( ) )
Expenses incurred 31
Underwriting profit 14

Question 113

Cashflow diagram page 72 A cashflow diagram is a useful tool for understanding the mechanics of________

Answer 113

an insurance operation.

Question 114

The diagram summarizes the various cashflows that may take place, including _____

Answer 114

premiums, taxes, expenses, commissions, reinsurances, shareholders, technical reserves, free reserves, investments, and claims.

Question 115

________is the insurance company’s own insurance, where the reinsurer covers part of the risk the insurer has taken on. The insurance company sometimes makes __________ from the _________.

Answer 115

Reinsurance is the insurance company’s own insurance, where the reinsurer covers part of the risk the insurer has taken on. The insurance company sometimes makes reinsurance recoveries from the reinsurer.

Question 116

The double arrow for investments highlights that

Answer 116

money may be lost on investments as well as being gained.

Question 117

Shareholders hope to receive dividends, and they may be asked to put more money into the company through

Answer 117

rights issues.

Question 118

List seven different types of reserve which, when added together, make up the total
technical reserves. Which of these is most likely to be zero, and why?

Answer 118

Solution 1.17
● Outstanding reported claims
● IBNR
● IBNER
● Re-opened claims
● Claim handling expenses
● Unearned premium reserve
● Additional reserve for unexpired risks.
The AURR is most likely to be zero. If it is not zero, it indicates that we think that we
have recently been writing business on unprofitable terms

Question 119

Question 1.18
What would happen to the post-tax profits of a general insurer if the company decided
to reduce the reserve it had been holding for IBNR by £20 million? Assume tax is
charged at a rate of 30%. Suggest (ie use some imagination and make something up) a
single event which might cause this to happen

Answer 119

Solution 1.18
This year’s pre-tax profits would be increased by £20 million, so assuming that this
goes straight into the assessment of tax, we would pay an extra £6 million tax. Post-tax
profits would be increased by £14 million.
IBNR might be revised downwards if it included a big allowance for claims that might
come through from a particular cause, eg employees claiming against their employers
for back-ache from sitting at desks. If a court case has just gone through in favour of
the employer, then the insurer will give a big sigh of relief and reduce its IBNR

Question 120

Question 1.19
Complete the following statements by filling in the blanks.
AURR is the _______ of _______ over _____, subject to a _______ of ________.
UPR is the portion of __________ that relates to __________ cover.
Claims incurred is defined as the __________ __________ plus the __________ in
outstanding claims reserves.
The main determinants of the investment strategy will be:
● the __________, __________, __________ and __________ of the __________
● the relative size of the __________ __________.
A reserve used to smooth profits from year to year is called a claims _______ _______.
The excess of __________ premiums over __________ claims and __________ is
called the ________ __________

Answer 120

AURR is the excess of URR over UPR, subject to a minimum of zero.
UPR is the portion of premiums which relates to unexpired cover.
Claims incurred is defined as the claims paid plus the increase in outstanding claims
reserves.
The main determinants of the investment strategy will be:
● the nature, term, currency and uncertainty of the liabilities
● the relative size of the free reserves.
A reserve used to smooth profits from year to year is called a claims equalisation
reserve.
The excess of earned premiums over incurred claims and expenses is called the
underwriting result (or underwriting profit)

Question 121

Reinsurance is the insurance of

Answer 121

insurance companies.

Question 122

Insurance companies use __________to reduce risk to themselves.

Answer 122

Insurance companies use reinsurance to reduce risk to themselves.

Question 123

Reinsurance is useful in situations where ________, such as ____________ or commercial properties.

Answer 123

Reinsurance is useful in situations where the risk is too large for one insurer to take on, such as large industrial or commercial properties.

Question 124

_______________ or ______________can help insurers to reinsure a portion of the risk that they cannot cope with.

Answer 124

Proportional reinsurance or coinsurance can help insurers to reinsure a portion of the risk that they cannot cope with.

Question 125

___________occur when insurers have an unbalanced portfolio of risks, such as too much exposure to liability claims or a concentration of policies in a certain geographical area or type of policyholder.

Answer 125

Accumulations of risk

Question 126

Accumulations of risk can exacerbate the ________

Answer 126

problems of non-independent risks.

Question 127

Insurers can mitigate the risk of accumulations by

Answer 127

arranging reinsurance to help them cope with the possibility of a catastrophic event occurring.

Question 128

Question 1.20
Imagine you work for an insurance company specialising in selling travel insurance,
through travel agents, to parties of over 50’s going on skiing holidays in the US.
Give some examples to explain why your company is likely to want to take out some
reinsurance.

Answer 128

Solution 1.20
It depends critically on how wide the cover provided is, but examples of some
potentially scary things, for which reinsurance may help the insurer sleep at night, are:
● One or more whole parties could be affected by the same claim event, eg:
– delayed departure from airport
– no snow on arrival, or other sub-standard holiday features
– plane / coach crash
– avalanche.
● Similarly, if one or more travel agents became bankrupt the insurer might,
conceivably, suffer a large loss from many claims.
● One or more of the skiers may suffer injury, with potentially enormous medical
expense claims, especially with older skiers (complications?) and especially in
the US.