7. Underwriting

Question 1

Why might an insurer take less than 100% of a risk?

Answer 1

• Capacity
• Appetite
• Aggregation
• Broker influence
• Insured’s influence

Question 2

How are insurers rated?

Answer 2

Financial position
Management and operation of the business
Compared to its peer group (similar size and structured insurers)

Question 3

When might a drop in rating not concern an insurer?

Answer 3

When all insurers in a similar group have their rating lowered

Question 4

Why are brokers concerned about ratings?

Answer 4

Agent of the insured

Duty to exercise due care in the placement of a risk with robust insurers

Broker could face a claim of negligence if an insurer fails to pay

Question 5

Why is the choice of leader important?

Answer 5

• Set good t&c’s for the client
• Be credible to other insurers so that a following market will support the leader

Question 6

What four insurance elements are regulators most concerned with?

Answer 6

1. Products and services (fit for purpose)
2. Price and value (fair value for money)
3. Consumer understanding
4. Consumer support

Question 7

What is exposure modelling?

Answer 7

Looks at the way in which different risks that an insurer writes combine to create a concentration of risk in one area

Question 8

What is loss modelling?

Answer 8

Financial impact of certain events occurring

Use of realistic disaster scenarios

Lloyd’s set put scenarios that managing agents must analyse with some syndicate specific options

Question 9

What is catastrophe modelling?

Answer 9

Helps ensure that an insurer is aware of the non-financial impact of catastrophes

E.g. increase in claims volume following a disaster

Question 10

How is premium calculated?

Answer 10

Apply a premium rate to a premium base

Question 11

What is a premium rate?

Answer 11

The hazards being faced with a particular risk or particular insured

Usually expressed as a rate percent (rate per £100 or £1000 insured)

Question 12

What is a premium base?

Answer 12

A measure of the exposure (sum insured in most cases)

Sum insured is not appropriate for liability

Question 13

What are some other components of premium calculation?

Answer 13

Operational costs
Reinsurance costs
Profit margin
Contribution to claims reserves
Taxes

Question 14

What does reserving mean?

Answer 14

Making sure sufficient funds are available for claims

Question 15

How does claim size impact reserve calculations?

Answer 15

Large claim exposures are calculated individually and smaller claims are aggregated to create a blanket reserve

Question 16

Why don’t insurers reserve the full policy limits?

Answer 16

Higher the reserves, the more capital the insurer must have available to balance the solvency equation

Being conservative in reserving means tying up more capital

Question 17

Difference between Incurred but not Reported (IBNR) and IBNER

Answer 17

IBNR relate to claims which have not been reported at all to the insurer, whereas the latter relates to claims
which are known about but for which the currently posted reserve may not be adequate.