Regulatory 2: Commercial And Legislative Aspects

Question 1

Solvency 1 created minimal capital requirement (90s)

What is MCR? The higher of…

Answer 1

The higher of two amounts:
A base capital requirement and an amount that has to be calculated from the volume and type of business (the general capital insurance requirement)

Question 2

All UK regulated insurers must legally have capital at least as large as their…?

Answer 2

Minimal capital requirement (MCR)

Remember that MCR is the higher of two amounts: the base capital requirement and the general insurance capital requirement

Question 3

The FSA advised that a U.K. Insurer must have capital resources that are adequate having regard to the size and nature of its business

Answer 3

Aka it disagreed with the solvency and MCR ideas

Question 4

What is capital resource requirement (CRR)

Answer 4

Created by the FSA in 2005 is what all Uk insurers must have.

CRR is the greater of MCR and a risked based calculation that results in a higher enhanced capital requirement (ECR)

This must be met if the insurer is to avoid intervention by the regulator

Question 5

Why is does liability have a higher volatility than property?

Answer 5

Due to claims amounts taking longer to settle which can be more substantial

Larger reserves need to be maintained over a longer period just in case of large claim

This means that they can take advantage of the investment opportunities

Question 6

Management of capital:

An insurer must have a clear understanding of what 4 areas when it comes to capital?

Answer 6

1) how much it has
2) how much capital it needs to support targeted business
3) how much capital is required for current and future regulatory requirements
4) what is plans to do if it has too much or too little capital

Question 7

What are the implications of having too much capital?

Answer 7

Could signify that they don’t have a correct plan in place to utilise capital correctly

Although could mean That they have no other areas to grow in and will just return capital to investors

Question 8

What are the implications of too little capital?

Answer 8

• get the attention of the PRA
• reputation with brokers damaged
• unable to take advantage of opportunities
• ability to raise further amounts of capital at a reasonable cost may be compromised
• may have to buy reinsurance
• can’t take advantage of other opportunities
• may not be able to pay own risks

Question 9

What a the implications of not having contact certainty?

Answer 9

• if the underwriter is not aware of exactly what they’re exposure is it could lead to inaccurate claims reserving
  Inaccurate pricing
  Incorrect allocation of capital

FCA would be interested the most in this area

Question 10

Contract certainty is achieved when:

Answer 10

Complete and final agreement of the contract has been achieved on both sides of the party by the time the contract incepts
Contract documentation must be provided promptly after

Question 11

When does documentation need to be handed out to retail and all other customers

Answer 11

Retail= 7 working days 
Other= 30 calendar days

From the latest of either:
Inception date of contact
Date that the parties entered into contract
The date where the final insurer enters into the contract (if more than one insurer)

Question 12

Legislative influences: consumer rights act 2015 aims to make it easier for consumers to understand their rights and remedies
Terms must be: T & P (a tran prom)

Answer 12

1) transparent: plain language

2) prominent: average consumer should be aware of it

Question 13

Contracts (rights of third parties) act 1999

What is privity of contract

Answer 13

A privity of contract means that a person can only enforce a contract if they are party to it I.e they’re name must be expressly identified in the contract by name, class or description

Question 14

DPA act: an insurer must ensure that any data held is:

Answer 14

1) relevant
2) accurate
3) disclosed only to those authorised to know it

Question 15

What has the introduction of solvency 2 achieved?

Answer 15

A harmonised risked based regulatory regime across all 28 EU states

Question 16

What is contract certainty?

Answer 16

Contract certainty is achieved wen complete agreement from both the insured and the insurer of all terms has happened BEFORE they enter into the contract
Documentation must be provided promptly after

Question 17

What is the motors insurers bureau?

Answer 17

A central fund set up by Insurers to compensate victims of uninsured motors

Question 18

Who must have compulsory insurance?

Answer 18

Third party motor- Road Traffic act

Dangerous dogs, dangerous wild animals & horse riding establishments

Employers liability

Solicitors &a financial services market

Energy act

Question 19

What is the criteria that justifies data to be held?

Answer 19

Relevant
Only given to those who are authorised
Accurate

Question 20

What 5 conditions are taken into account when considering motor insurance?

Answer 20

• age of driver
• age &a condition of vehicle
• area where car is used
• engine capacity
• number of people it is carrying

Question 21

What 6 new rating factors could technology provide for car insurance?

Answer 21

• time of use
• location of use
• average speed
• mileage
• length of time driven

Question 22

What two general types of legislation affect the underwriter?

Answer 22

1) legislation that applies to insurance practice

2) legislation that applies to specific class

Question 23

What is the relationship between the availability of capital between a hard and a soft market?

Answer 23

Soft market=less capital due to increased market capacity, falling premium levels and lower profits

Hark market= more capital due to less market capacity, higher premium levels and higher profits

Question 24

What % of homes in the U.K. Are at significant risk to flooding?

Answer 24

5%

Question 25

What is subsidence?

Answer 25

Structural damage usually from hot summers

Question 26

What is the degree of government help for flood for the below:
UK
France
Germany
Rest of EU
Japan
Australia

Answer 26

UK: none (flood RE pool)
France: unlimited
Germany: None
Rest of EU: some have pooled systems
Japan: primary insurance and reinsurance provided through private market
Australia: primary insurance and reinsurance through private market
USA: federal government covers flood perils

Question 27

What properties does flood re cover?

Answer 27

Top 1-2% of high risk properties
Private homes in tax bands A-G

Ineligible properties:
Built after 2009
For commercial use
In council tax H or above

Question 28

What are the three types of misrepresentation that can appear from a consumer?

Answer 28

• honest and reasonable: insurer must pay claim
• careless: can choose whether it would have a) added to Premium in which case the claim pay out is reduced or B) if it would have been an exclusion they don’t have to pay
• reckless &a deliberate: the insurer can void and get back the premium

Question 29

What is a material circumstance?

Answer 29

When it would have affected whether the insurer would have accepted the risk and if so on what terms?

Question 30

What 7 areas does the discrimination act cover?

Answer 30

• race, religion, belief
• pregnancy
• gender reassignment
• marriage and civic partnerships
• sexual orientation/ sex
• age
• disability

Question 31

How long must a sentence be to never be able to be “spent”

Answer 31

48 months

Question 32

What are the issues in a soft market?

Answer 32

• rising expense ratios: fixed costs stay the same but profits are less
• RI cover stays the same
• pressure to expand scope of cover

Question 33

What are the issues in a hard market?

Answer 33

• withdrawn capacity means underwriting is more difficult

Question 34

The cycle is usually driven by claims or price?

Answer 34

Claims