0 - General Insurance Overview Flashcards

1
Q

Why do general insurers exist?

A
  • To meet a need:
  • —->Small known outlay vs risk of large loss
  • —->Pass on risk
  • To make profits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why do some insurance companies quote higher premiums than other insurance companies for car insurance for the same individual and period of cover?

A
  • Different estimates of the expected claim amount
  • Different levels of expenses, commission, reinsurance costs, investment returns and profit
  • Some insurers don’t want the business, so quote too high
  • Others may undercharge, hoping the policyholder will stay for years and that they will make money later
  • Different forms of cover may have been requested
    quotations
  • Could have related to driving in different countries
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the roles of actuaries in GI sector?

A
  • Capital allocation
  • Risk assessment, eg modelling catastrophic events
  • Strategic management of the business
  • Determining a suitable investment strategy
  • Assessing reinsurance requirements
  • Expense allocation
  • Assessing the effectiveness of marketing campaigns
  • Assisting with the early settlement of liabilities in the event of a wind-up.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the three components of pricing?

A
  • decide pure risk premium
  • decide office premium
  • decide other adjustments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is pure risk premium based on?

What do we adjust it for?

A

Pure risk premium is based on:

  • past experience
  • adjustments to past experience

It is adjusted for:

  • unusual experience
  • trends
  • inflation
  • incomplete past data
  • changes in risks
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the office premium? What are some other considerations do we make?

A

Simply the pure risk premium adjusted for:

  • expense loading
  • reinsurance premium and recoveries
  • profit
  • investment income

Other adjustments we consider:

  • business objectives of insurer
  • competition
  • insurance cycle
  • reaction of policyholders
  • no claims discounts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are technical reserves about?

A
  • For all business written in the PAST, claims occur and wrt these, insurers hold OUTSTANDING CLAIMS RESERVES
  • There is usually a delay b/w reporting & settlement of claims
  • For active policies insurers hold UNEXPIRED RISK RESERVES for cover that is yet to be provided
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the types of outstanding claims reserves & how are they estimated?

A
  • Reported claims
  • IBNR
  • IBNER (incurred but not enough reported)
  • Reopened claims
  • Claims expenses

Estimated using:

  • Statistical methods (from high vol. of similar policies)
  • Case estimates (from loss adjustors)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the types reserves for unexpired policies?

A
  • Unearned premium reserve (UPR)
  • Unexpired risk reserve (URR)
  • Additional unexpired risk reserve (AURR)
  • Claims equalisation reserves (smoothing profits)
  • Catastrophe reserves (held by insurers w-out reinsurance in place)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the role of the insurer?

A
  • Accept risks
  • Management of risks through using:
    • > Premiums
    • > Reserving
    • > Product design
    • > Reinsurance
    • > Accounts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the defn. of unearned premium reserve (UPR)?

A

UPR = proportion of unexpired risk x (premium - initial acquisition costs)

  • Assumes that incidence of risk is uniformly spread over the lifetime of policy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the Unexpired Risk Reserve Defn. ?

A

Expected cost of claims & expenses from unexpired proportion of the policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is Additional Unexpired RIsk Reserve (AURR)?

A

AURR = UPR - URR

- only formed when policy is believe to be underpriced

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are free reserves?

A

Defn. : Excess assets over technical reserves + regulatory solvency margin

Also called:
Shareholders’ funds
Capital employed
Solvency margin (min. solvency margin required by regulations)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does the minimum regulatory solvency margin depend on?

A
  • Volume of business
  • Risks involved
    -> Variability of claims
    -> Management style (risk-averse or not, reinsured or
    not?)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

High level overview of the pricing process:

A

(1) Actuaries FAMILIARISE themselves w risk to create a model which pieces together various bits of data to price the risk

(2) RISK COSTING (GROSS)
- Claims data (details about the claims and various rating factors for the policies at the times claims occurred)
- Exposure data (ALL policies that existed regardless of if any claims arose from them)
-> Possibly for many years, some data might be
old/irrelevant or new/partially incomplete
** Exposure data and Claims data are likely to be on
U/W basis and Accident year bases respectively,
need policy numbers to reconcile the two

(3) RISK COSTING (NET)
- Incorporate cover data (new/current p/h information) into pricing model and we end up with (net premium)
-> Money needed to cover claims but nothing else
DONE.

17
Q

High level overview of capital modelling process:

A

After net risk premium calculation:

  • Add on loading for capital/profit
  • Discount for the investment income generated from time b/w inception/claim/reporting/settlement
  • Add on allowances for various expenses:
    • > Underwriting expenses
    • > Claims management
    • > Reinsurance
    • > General admin overheads
18
Q

Capital modelling purpose:

A

Helps decide how much capital is required to meet the insurer’s liabs at a required confidence level

19
Q

Methods used for capital modelling

A
  • Stochastic modelling
  • Scenario tests
  • Stress tests
20
Q

Capital model assumptions include:

A
  • Cashflows in the future
    -> Need to have enough PV of funds & LIQUIDITY to
    pay liabs when they are due
  • Financial variables (inflation, interest rates, prob. of default)
  • Catastrophes
  • Reinsurance
  • Insurance cycle (competitive considerations)
  • Operational losses (theft, fraud)
21
Q

Capital model assesses capital requirements based on:

A

The various risks of the insurer:

  • > Insurance risk (risk from cover provided)
  • > Reserving risk (risk of insufficient/excessive reserves)
  • > Market risk (risk of adverse change in value of A/L)
  • > Credit risk (eg. risk of reinsurers failing, p/h not paying premiums, intermediaries failing etc.)
  • > Operational risk (eg. risk of theft fraud etc.)
  • > Liquidity risk (risk of not having sufficient liquid form assets despite being solvent)
  • > Group risk (risk associated with insurer part of a wider group as opposed to individual)
  • > Strategic/political risks (eg. risk of increased tax on insurers)
22
Q

GI capital modelling falls into three main categories:

A
  • Stochastic modelling
  • Triangulation methods (Chain-ladder, Bornheutter etc)
  • Asset-Liability modelling (Investment strategy)
23
Q

Investment strategy depends on:

A
  • Currency of liabilities
  • Uncertainty associated with liabs
  • Nature of liabs (real or fixed)
  • Term of liabs
  • Size of free reserves
  • Legislation (Restrictions on acceptable investments)
  • Taxation (Mainly concerned w after tax returns, tax can make investments artificially attractive and artificially unattractive)

CUNTS Leg Tax

24
Q

What does a general insurer balance sheet look like?

A

ASSETS:

  • > Investments
  • > Fixed assets
  • > Net current assets

LIABILITIES:
-> Technical reserves (outstanding claims, IBNR, IBNER,
CAT, Equalisation)
-> Free reserves

25
Q

Why do insurers need balance sheets?

A
  • Statutory accounts
  • Management accounts (for operation of firm)
  • Valuation assumptions
26
Q

Defn. earned premiums:

A
  • The proportion of the premium that can be classified as income because it has been “earned” for the period of cover that has been provided
27
Q

Defn. incurred claims:

A
  • A claim is incurred at the point when the event triggering a claim happens
  • Analogous defn. for incurred expenses
  • Defined to apply accrual accounting concept in company accounts
28
Q

Defn. claims paid:

A
  • The total amount of incurred claims that have been settled, are paid claims
  • Analogous defn. for paid expenses
  • Defined to apply accrual accounting concept in company accounts
29
Q

What is the underwriting profit and how is it calculated?

A
  • Underwriting profit is the amount declared as the insurer’s OPERATING PROFIT for the year and it is calculated as:

Earned premiums - Incurred claims - Incurred Expenses

30
Q

Profits after tax calculation for insurers:

A

Profit after tax = Underwriting profit + investment income (on non-technical reserves) - tax paid

31
Q

Cashflow structure for general insurance companies:

A
Premiums paid
- Claims paid
- Expenses paid
\+ Investment income
- Tax paid
\+ Reinsurance recoveries
- Reinsurance premiums
\+ Money from share issues
- Dividends paid
32
Q

Why do reinsurers exist?

A
  • To meet a need:
    • > Small known outlay vs risk of large loss
    • > Pass on risk
  • Quite similar to what insurers do, except reinsurers can also operate wrt a group of policies as opposed to a particular policy like insurers
  • Risks covered include:
    • > Individual large risks
    • > Accumulations of risk
  • To make profit