CH 11 MANGING EXPOSURE

Question 1

If an insurer experiences higher profits in a particular class of b’ness what will the insurer want

Answer 1

Insurer and it’s re insurers will want to increase investment in that class to accept more business

Question 2

As insurers are experiencing increase in investments as the market wide capacity increases, what will happen to the premium rates

Answer 2

The premium rates are reduced as insurers are trying to maintain the market share and underwrite more new business risk

Question 3

Eventually what factors will affect underwriting profits from the reduced premium rates to maintain market share

Answer 3

The rising of the claims cost will lead to claims inflation, this plus a reduced premium rate will affect underwriting profits

Question 4

When is the market said to be softening

Answer 4

When the rates are reducing

Question 5

When is the market said to be hardening

Answer 5

When the rates are increasing

Question 6

What is the length of the market cycle

Answer 6

It’s difficult to identify but it varies from 2-5 years

Question 7

Which class of insurance has a more frequent hardening and less frequent hardening of the market

Answer 7

Motor Insurance has the most frequent and property insurance has the least frequent

Question 8

From a risks perspective, cycles can shortened but not exclusively by

Answer 8

• Major disasters like hurricanes or terrorism acts
• Weather-related incidents
• Amendments to legislation
• More onerous legislation

Question 9

How do economic issue drive the insurance market cycle too

Answer 9

Insurers are major investors in the financial market and so the impact of their returns from such activities can have an effect on their own profitability

Question 10

If the returns are not forth coming then emphasis is place on

Answer 10

Greater emphasis is placed on their underwriters result that may drive a requirement to apply increased rates

Question 11

Loss exposure can arise from

Answer 11

• Single Risk

- Single event

Question 12

Single Risk will depend on

Answer 12

It will depend on whether the business written is property or liability

Question 13

Calculating the maximum exposure of any one risk involves

Answer 13

It involves assessing the estimated maximum loss (EML) which is likely to occur

Question 14

Why must EML be accurate

Answer 14

For it to have any purpose it needs to be accurate. As it has an important reinsurance implication

Question 15

Who plays an important role in helping identify the estimated maximum loss

Answer 15

The risk Surveyor and its vital for them have an effective communication with the underwriter, so that all aspects of the risks in question are understood

Question 16

If the Estimated Maximum loss is greater than the insurer’s acceptability, what options does the insurer have

Answer 16

The insurer will have two either to

• Purchase reinsurance so that it can write 100% of the risk
• It could take a proportion of the risk and co- insurance would be arranged

Question 17

A single risk for risk accumulation is divided into

Answer 17

1. Property and Business Interruption Risk

2. Liability Risks

Question 18

For Single event resulting to an accumulation of risk what must insurers do

Answer 18

A threat of catastrophe is a phenomenon that insurers have to accept as part of their business, they must seek financial stability that catastrophe reinsurance protection can offer

Question 19

What is Reinsurance

Answer 19

This is the sharing of risk,an insurance effected by an insurer against claims incurred under contract of insurance written by the insurer

Question 20

Why do underwriters seek reinsurance

Answer 20

• -protect the account against a large single event
• protection the account against a large claim on a single item
• protect the company capital
• protect against fluctuating claims cost from year to year
• operational capacity
• entering a new market
• building up the account
• minimizing loss impact on income generated
• underwriters peace of mind
• sharing heavy/hazardous risk

Question 21

Even with reinsurance an underwriter should always bear in mind that

Answer 21

They should bear in mind that they are legally bound to pay for losses arising before seeking their indemnity through re insurers

Question 22

How many types of re insurers are there

Answer 22

There are two types of reinsurance

• Proportional
• Non Proportional

Question 23

What is proportional reinsurance

Answer 23

The re insurer accepts an agreed share of risk to be ceded(put forward for reinsurance) and pays any loss incurred on the same basis

Question 24

How many groups can proportional reinsurance be divided into

Answer 24

It can be divided into quota share and surplus

Question 25

What does quota share reinsurance deals with

Answer 25

Quota share reinsurance an agreed proportion of all insurance written by an insurer will fall within the treaty

Question 26

what are the advantages of quota share reinsurance

Answer 26

It is very easy to administer, re insurer will accept its proportion as soon as the b’ness is written

Question 27

what are the disadvantages of quota share reinsurance

Answer 27

The insurer must pay the re insurer premium for risks ti could retain for its own account

Question 28

Who uses quota share reinsurance

Answer 28

This form is utilized by new insurance company or where an existing company is embarking on a new class of insurance

Question 29

What is Surplus reinsurance

Answer 29

Insurer only re insurers those risks where the sum insured exceeds their own retention limit

Question 30

What is an insurer own retention limit also known as

Answer 30

Line

Question 31

What is the formula for reinsurance Surplus

Answer 31

Sum insured in excess of the insurer’s retention limit/ Total Sum insured

Question 32

What is non proportional reinsurance

Answer 32

This type of reinsurance where re insurer agrees to contribute to loses exceed specific figure for a premium negotiated with the insurer

Question 33

Non-Proportional reinsurance can be divided into

Answer 33

Excess of loss and stop loss

Question 34

Stop Loss is also known as

Answer 34

Excess of loss ratio

Question 35

Excess of loss can be written on what basis

Answer 35

• Per risk Basis

- Per event Basis

Question 36

Excess of loss per risk basis reinsurance is arranged in

Answer 36

Its arranged in layers

Question 37

on Excess of loss per event basis re insurers liability is based on

Answer 37

Its based on the total losses incurred by the insurer due to the occurrence of one event

Question 38

Stop Loss reinsurance the insurer is concerned with

Answer 38

The insurer is primarily concerned with protecting its loss ratio

Question 39

Stop Loss ratio reinsurance is taken

Answer 39

Its taken by the insurer when they want to prevent the maximum loss ratio from exceeding a specific percentage