CH 10 Flashcards
What is Risk Premium
The expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty attaching to the claim cost
What does risk premium represent
The amount of money required today to fund claims, time value of money is also taken into account
What are the key features of risk premium
- Severity
- Frequency
- Large claims
- Reinsurance cost
- Claims run off
- IBNR
- Catastrophe claims
- Latent Claims
- Claims inflation
- Exposure
- Fraud
- LASPO
Which feature ensures the expected number of claims to be foretasted accurately
Frequency, and takes into account for anticipated changes in the environment,the portfolio of risks and individual risks
Under frequency how is each type of claim projected
Each distinctive type of claim, should be projected separately
Severity under risk premium deals with
It deals with assessing the average cost of different types of claims
In severity allowance is made for
Allowance is always made for catastrophes
What is an underwriter required to consider when calculating Risk Premium
They need to consider how many large claims they can expect and how much they need to allow of these claims
What role to large claims play
They play a disproportionate role in pricing and profitability. Small insurers being particularly disadvantaged, their portfolios can’t handle such losses
Which claims have an increasing impact in future ratings
Large claims involving liability to third parties
What are Periodic Payment orders (PPO)
They are designed to make structured payment to claimants for life.
When are Periodic payments orders mostly used
in Serious personal injury claims
Following changes in the personal injury discount rate what impact have insurers observed on both existing and new clients
Increase in reserve of some large personal injury claims increasing by more than 100%, so as to allow the lack of any future investment income
Why do insurers buy reinsurance protection
So as to protect the company from catastrophic single or combined losses
Where are reinsurance costs factored in
The reinsurance costs must be factored into the pricing of the product costs/premium
Why should claims data be adjusted
They should be adjusted to allow for the provisional nature of case estimates
In respect of liability claims insurers use which reserves
They use precautionary reserves even if the insurer has declined being liable for the accident
Why do insurers use precautionary reserves for liability claims, even when insurers have declined liability
Insurers have regulatory obligation to identify its potential liabilities and need to ensure that adequate reserve are in place, as they can decline liability and still lose the legal agreement and have to pay the loss
What are claim run off
When a claim is reopened, and insurer has a possibility of either having to pay the claim, or not needing to pay any claim
Claim run offs have the possibility of
They could produce surplus or claims deficit
Which factor must underwriters consider carefully in establishing pricing
Incurred But Not Reported Claims (IBNR)
Incurred But Not Reported claims
These are claims that usually occur at the end of the year when people are busy with holidays thus have no time to report, thus fail to be recorded in the insurers books
Why are Incurred but not reported claims required to be accounted for when assessing total claims for the underwriting year
If not done then the number on which pricing is based is inadequate
What type of reserves are created for IBNR eventualities
Precautionary reserves
How are Catastrophe claims different from Large claims
They reflect the accumulation of a large number of claims all arising from a single common event
What is the underwriter required to do for Catastrophe claims
They need to estimate the frequency and severity and manage their exposure and buy optimal levels of reinsurance cover
What are Latent Claims
these are extreme IBNR as in some cases they can exceed to 50 years between the cause and the claim
What are some of the examples of latent claims event
Asbestos -related diseases like mesothelioma,stress,toxic mould and EMF
Latent claims have led to insurers
It has led to insurers creating reserves now for incidents that occurred over 40 years
Latent claims are also referred to as
They are referred to as Long tail claims
Which claims are presenting serious issues
Latent Claims
Which lines of b’ness are more likely to be affected by latent claims
Liability Insurance
Why does Claim inflation always exceed Generic Inflation
Due to changes in Legislation
How is premium adjusted to take into account inflation
It needs to be adjusted to reflect any devaluation of the funds available to pay claims
A key issue facing insurers on fraud is
the increasing prevalence of fraud in both claim fraud and application fraud
The implementation of LASPO led to
It led to reduction in rates particularly casualty and Motor b’ness i.e some reduced up to 15%. And also led to improvement in loss ratios especially in motor insurance. But didn’t last for long
What are some of the expenses included in the pricing of an insurance product, thus cost of running an insurance b’ness
- staff cost
- premises
- electricity and other utilities
- computer and machinery
- marketing and advertising
- commission paid to agents and brokers
What are fixed expenses
Cost associated with processing a particular product, that don’t increase with the size of the risk
What are variable Expenses
These are expenses that vary with the size,complexity and nature of each risk
Which risks tend to have higher variable expenses
Larger risks tend to be more complex and thus have higher variable expenses
Variable costs could be grouped into which headings
- Underwriting
- Commission
- Claims handling
What are the variable costs under underwriting
Services like policy alterations/risk management/disaster recovery planning,helplines provided to policyholders are independent of the existence/volume of claims
What are the variable costs under Commission
This is an amount normally percentage paid to agent/intermediary/broker who introduces business to the insurer
What is the commission rate for motor fleet
7.5%
What are other forms of commission
Work Transfer
What is work Transfer arrangement
Insurer pays the intermediary a percentage of the premium charged in exchange for taking on more work like issuing documentation/acting as an underwriter under delegated authority
Work Transfer arrangement is common under which class of insurance
Real estate Market
The Variable cost under claims handling
The cost will vary according to the number and complexity of the claims
So what are the variable cost under claims handling
- a charge per claim
- a charge reflecting the differences in the volume of work required for more involved cases
In general an underwriter should ensure that the model by which expenses are allocated does what
It bears a close resemblance to the actual day-day realities of what takes up everyone’s time
What is common in the real estate market in relation to other expenses
Risk Management funds (RMF) to be offered to customers so as to put towards the agreed costs in maintaining or protecting the assets
How are Risk Management Fund paid
It can be paid by insurer entirely or matched pound for pound(50/50) between the insurer and insured
What other expenses to insurers incur
Sometimes insurers offer Low Claim Rebates (LCR ) or profit shares where they payback a proportion of the premium
Why would an insure offer Low claims rebate or profit shares to an insured
So as to incentivise the more positive risk management by the insured, leading to fewer and potentially smaller claims
How is profit of an insurance company measured
it’s measured as a proportion of the Capital Employed (ROCE)
What is ROCE
Return on Capital Employed is an important financial concept
How would shareholders be able to justify risk if the class of insurance had a high degree of volatility
The class of insurance must be able to generate higher profits. As higher risk investments carry greater return
How are insurers able to earn Investment Income
This is by virtue of the substantial amount of capital and reserve they control
Why are insurers required by law to maintain a certain level of reserves
This is required so they are able to pay future claims
What do insurers do with the income they recieve
They are allowed to invest it, this the income received from this investment process is another earning stream for the b’ness
What is the underwriter result
This is the business result without income investment
The underwriting result consist of
Its a combination of the loss ratio,commission ratio and the expense ratio
What is the Combined Operating ratio(OCR)
This is the loss ratio, commission ratio and expense ratio together form the Combined Operating Ratio
The combined Operating Ratio (OCR) is a common measure for
Its a common measure for financial health of general insurers
The underwriting result of the Combined Operating ratio is
This is an actual profit/lass value
What produces the cyclical nature of insurance
The relationship between the profit and the yield of the underwriting result plus investment income
What is the hard market
This is when rates and premiums are high
What is soft Market
This is when rates and premiums are low to attract more b’ness on which secure investment return is made
When will the market turn soft to hard
When the returns for insurers are inadequate and capital is withdrawn
Insurers tend to balance their portfolios with two broad classes of investment which are
- Interest bearing Investment
- Investment where the value is expected to grow at least in line with the economy (equities)
What would happen if the contributions of gains would be ignored
The insurer’s products may become overpriced and uncompetetive
If the contribution of gains are relied upon then
Products become very competitive which is good but this will cause difficulties if the investment returns diminish
What does the ABI statement of Recommended Practice require from the insurer
It requires full amount of capital movement to be shown in the profit and loss account
What type of Premium taxes exist in the UK
In the UK there is a variety ranging from pure taxation expressed as a fixed percentage of premium and to other quasi- taxation
Policyholder Protection Board was replaced by
Financial Services Compensation Scheme (FSCS)
The Financial Services Compensation Scheme levies a surcharge based on
It bases it on percentage of gross direct premium
The Financial Service Compensation Scheme uses the levies to fund
It funds claims by policyholders whose insurer has become insolvent
Why is The amount of levy surcharge by the Financial Services Compensation Scheme not easily assessed
This is because it is difficult to forecast the demand
What is the Motor Insurer’s Bureau (MIB)
In the UK its the last resort for property damage or injury by uninsured or untraced driver
The Motor Insurers Bureau is levied depending
it’s levied depending on the claims experience
Mesothelioma Act 2014 levy is charged on
It’s charged on all premium for employers liability cover
The levy of Mesothelioma Act 2014 is used ti fund
It funds the Diffuse Mesothelioma Payment Scheme, which allows those suffering from mesothelioma -related diseases but are unable to trace their employers to obtain financial support
How much is the annual amount raised by the Mesothelioma Act 2014 levy
Expected to be Circa 35 Million Pounds
What’s the levy rate charged in insurers for Mesothelioma Act 2014
2%-3%
Initially how did the Mesothelioma Payment Scheme provide its compensation
It compensated individual claims based on 80% of the average civil claims
How has the Mesothelioma Payment Scheme compensation changed from 2015
It now compensates individual claims based on 100% of the average civil claims under the diffuse mesothelioma payment scheme amendment Regulation
What is Mesothelioma
This is a cancer of the lining of lungs and other organs following exposure to asbestos or materials containing it
Following implementation of LAPSO what did insurer anticipate
They anticipated improvements in claim costs
Why did insurers anticipate improvement in claims cost
This is due to changes in the way claims are settled and notified
What more needs to be done by LAPSO
more needs to be done to protect against undue costs as a result of spurious/exaggerated claims and claims farming
Example of fixed expenses are
Accounting entries,record keeping, policy issue and certificate production for a given product
Fixed expenses are allocated per
policy
What is the commission rate for commercial credit insurance
25% or more on some on some of these cases
