Part 1 Glossary

Question 1

Anti-selection

Answer 1

People will be more likely to take out contracts when they believe their risk is higher than the insurance company has allowed for in its premiums.

Anti-selection can also occur when existing policyholders have an opportunity to exercise a guarantee or option. Those who have the most to gain will most likely exercise it.

Question 2

Chinese walls

Answer 2

Regulations or practices intended to prevent conflicts of interest in integrated security or consultancy firms.

Question 3

Corporation tax

Answer 3

Tax on company profits.

Question 4

Moral hazard

Answer 4

The action of a party who behaves differently from the way they would behave if they were fully exposed to the consequences of that action. The party behaves inappropriately or less carefully than they would otherwise, leaving the organisation to bear some of the consequences of the action.

Question 5

Mutual insurer

Answer 5

A mutual insurer is owned by policyholders to whom all profits (ultimately) belong.

Question 6

Proprietary insurer

Answer 6

An insurance company owned by shareholders.

Question 7

Underwriting cycle

Answer 7

The process whereby relatively high and thus profitable premium rates that often result in an increase in the supply of insurance are followed
by lower and less profitable premium rates usually associated with increased competition. These in turn may be followed by a decrease in supply as companies leave the less profitable market, reduced competition and a return to higher premium rates. This process is
complex but appears to occur in all types of insurance and reinsurance, though at different speeds and to different degrees.