Underwriting Procedures

Question 1

What does a quotation state regarding its validity?

Answer 1

It states for how long it is valid, usually a set number of days, e.g. 30 days.

This establishes the time frame within which the proposer must accept the quotation.

Question 2

Is cover effective when a quotation is issued?

Answer 2

No, cover is not effective when the quotation is issued.

The insurer is not on risk and the proposer is not covered until the contract is accepted.

Question 3

What must happen for a contract to come into existence?

Answer 3

There must be a valid offer and acceptance.

The quotation acts as the offer that needs to be accepted by the proposer.

Question 4

What happens if the proposer accepts the quotation within the specified timescale?

Answer 4

The insurer is legally bound to honour the quotation.

This is contingent on the terms quoted remaining unchanged.

Question 5

Under what condition is the insurer not bound to maintain the quotation?

Answer 5

If the circumstances upon which the quotation was based change.

For example, if the proposer has an accident or changes to a more expensive car.

Question 6

What option does the proposer have during the validity period of the quotation?

Answer 6

The proposer has the option to accept or decline the quotation.

This allows flexibility for the proposer to consider their options.

Question 7

What happens if the proposer does not accept the quotation before it expires?

Answer 7

The quotation is no longer valid and the insurer is not bound to honour it.

However, the insurer may choose to honour it after expiry.

Question 8

If no time is stipulated for the quotation, how long does it remain open?

Answer 8

It remains open for a reasonable time.

This is based on general rules for the interpretation of contracts.

Question 9

What is the traditional mechanism for underwriters to receive risk information?

Answer 9

The proposal form.

It is completed by the proposer and submitted to the underwriter.

Question 10

What types of risks do commercial package insurances typically cover?

Answer 10

Compulsory insurances or part of fixed packages.

They include risks like apartments, shops, salons, and small contractors.

Question 11

What is a key difference between personal lines and commercial markets in insurance?

Answer 11

The prevalence of personal lines insurance products available via aggregators.

Aggregators are more common in personal lines than in commercial markets.

Question 12

What types of risks often require more detailed proposals than personal insurances?

Answer 12

Large and complex risks, such as industrial complexes and satellites.

These require more comprehensive information due to their complexity.

Question 13

What is a subjectivity in the context of a quotation?

Answer 13

A condition that must be met as part of the quotation to proposers.

It should not be a way to obtain information that should be asked for upfront.

Question 14

What should a proposer do if they are in doubt about whether information is material?

Answer 14

They should disclose the information.

This emphasizes the importance of transparency in the proposal process.

Question 15

What is a premium in insurance?

Answer 15

A premium is the amount paid to an insurer by the insured in consideration of the insurer agreeing to cover the risk.

Question 16

What is the role of an underwriter in premium calculation?

Answer 16

An underwriter calculates a suitable, or fair (equitable) premium that reflects the risk presented by the proposer.

Question 17

What principle underlies the collection of insurance premiums?

Answer 17

The principle is that premiums collected for similar risks proposed form a common pool.

Question 18

What does the law of large numbers enable insurers to do?

Answer 18

It enables insurers to determine a more accurate premium chargeable to the insured by dealing with a large number of similar exposures to risk.

Question 19

What is the formula for calculating premium?

Answer 19

The formula is: sum insured × rate = premium.

Question 20

What is a rate per cent in premium calculation?

Answer 20

Rate per cent is the price in pounds for each hundred pounds of exposure.

Question 21

What is a rate per mille in premium calculation?

Answer 21

Rate per mille is the price in pounds for each thousand pounds of exposure.

Question 22

What is a flat premium?

Answer 22

A flat premium is a fixed amount charged rather than applying a rate to a premium base.

Question 23

What information does a policy contain?

Answer 23

A policy contains:
* details of the item/exposure insured
* operative perils
* period of cover
* exceptions
* conditions
* premium
* other relevant information

Question 24

What is a cover note?

Answer 24

A cover note is a document issued as evidence that insurance has been granted, pending the issue of a policy.

Question 25

What information must a cover note contain?

Answer 25

A cover note must contain: * commencement date * statement of normal terms and conditions * risk-specific information * any special terms * expiry date

Question 26

What is the purpose of a certificate of insurance?

Answer 26

A certificate of insurance proves that a policy is in force and that the policyholder complies with legal requirements.

Question 27

What information is required on a motor insurance certificate?

Answer 27

A motor insurance certificate must include: * registration mark of vehicle * name of policyholder * date of commencement of cover * expiry date * person or classes of persons entitled to drive * limitations as to use * confirmation of compliance with UK statutory requirements

Question 28

What are the requirements for employers’ liability insurance certificates?

Answer 28

The certificate must include: * Name of policyholder * Date of commencement of cover * Expiry date * Name of insurer * Authorized signature * Level of cover * Statement of legal requirement satisfaction

Question 29

What is contract certainty in insurance?

Answer 29

Contract certainty is achieved by the complete and final agreement of all terms between the insured and insurer before entering into the contract.

Question 30

What methods are used to collect insurance premiums?

Answer 30

Premiums can be collected by: * single upfront payment * credit * monthly instalments by direct debit

Question 31

What happens in the event of non-payment of premium?

Answer 31

If the premium is not paid, the policy is not renewed and cover lapses.

Question 32

What is Insurance Premium Tax (IPT)?

Answer 32

IPT is a tax payable by policyholders, but insurers are responsible for collecting and accounting for the tax.

Question 33

What is the current standard rate of IPT?

Answer 33

The current standard rate of IPT is 12%.

Question 34

What is the higher rate of IPT and when does it apply?

Answer 34

The higher rate of 20% applies to travel insurance and engineering inspection service fees.

Question 35

What is an adjustable premium?

Answer 35

When exposure is not known at the start of the year, a deposit premium can be paid, which can be adjusted up or down at a later date

Question 36

What is minimum cover for employee liability?

Answer 36

£5m + costs

Question 37

For a quotation to be taken up and the policy to be in force, what is needed?

Answer 37

Offer, acceptance, and consideration