Chapter 0.1: General Flashcards
Requirements for an insurable risk
[3]
- policyholder should have an interest in the risk
- risk should be quantifiable
- amount payable must bear some relationship to the financial loss incurred
Ideal characteristics of risk events
[6]
- be independent
- have low probability of occurring
- be pooled with similar risks
- have an ultimate liability
- avoid moral hazards
- sufficient data to enable the insurer to estimate the size of the risk and likelihood of occurrence
What are the key components of cover?
[6]
- Benefits
- Insured perils
- Basis of cover
- Measures of exposure
- Claims characteristics
- Risk and rating factors
BIBMCR
What is a peril?
Type of event that may cause a loss e.g. fire
What are the typical basis of cover?
[3]
- Losses occurring
- Claims made
- Risk attaching
What is an exposure measure?
Principle measure of risk for an insurance policy, which should meet the following criteria:
- measurable
- objective
- verifiable
- easy to obtain
- good measure of amount of risk
- free from manipulation
What are claims characteristics?
Frequency and severity of claims.
Ways and speed in which claims:
- originate
- notified
- settled
- paid
- reopened (possibly)
Will vary by class of business
What are rating factors and rating factors?
Risk factors are any factors that have a bearing on the risk (i.e. have a relationship to the risk)
Rating factors are measurable risk factors or proxies for the underlying risk factors
What might cause selection against the insurer?
- may occur where an insurer’s premium rating structure does not reflect the underlying risks
- especially if premiums differ from those offered by the rest of the market
Why would an insurer write a risk that does not meet the ideal risk criteria?
- To generate an income
- To develop a new market
- To build relationships
Factors that influence the level of risk and uncertainty?
[10]
- homogeneity of risks
- non-independence of risks
- changing risks
- numbers of claims
- claim cost
- claim inflation
- delay patterns
- variability of experience
- accumulations
- fraudulent claims
What is the aim of an excess?
[4]
- Reduce size of claims
- Encourage p/h to prevent claims
- Eliminate small claims
- Lower premium charged
Reasons for using exclusions?
[10]
- Probability of loss
- Risk cannot be reliably estimated by an insurer
- Loss occurs as part of normal course of events (e.g. wear and tear)
- Information asymmetry
- Claim event under control of p/h
- Claim event difficult to verify
- Reduce moral hazard
- Reduce premium (competitive reasons)
- Risk covered by third party
- Limit scope of cover to make it more appropriate for target market
What are the key accounting principles?
[5]
- Accruals
- Going concern
- Consistency
- Prudence
- Separate valuation of Assets and Liabilities
What is a loss ratio and how is it used?
It is claims over premium (incurred and earned preferred)
It is a key indicator of profitability. Including the expense ratio results in the combined ratio.
What is a gross-to-net ratio and its purpose?
Ratio of gross premium to net premium which is used to indicate volume of reinsurance purchased and ultimate net exposure.
Credit ratings of the reinsurer are another useful metric
What is an analysis of run-off patterns and its purpose?
Analysing the size of OCR, IBNR and length of tail. Looking at reserves split by origin year.
Important in understanding risk of adverse run-off developments
What is the key difference between annual accounting and funded accounting?
Annual accounts based on earned premium, while funded accounting based on written premium
How would you convert an underwriting year account to accident year account?
Underwriting year o/s claims includes both amounts from incidents already reported and in respect of claims that will occur in future accounting periods
So claims outstanding will need to be reduced to only cover events occurring up until the end of the accounting period.
A URR will also need to be raised for claims that are yet to occur on policies that have been written but not earned
What is the going concern principle?
The enterprise will continue in operational existence for the foreseeable future
What is the accruals principle?
Revenue and costs are recognised as they are earned or incurred, not as money is received or paid
How is the solvency ratio defined?
Free reserves / Net written premium
How is return on capital calculated?
Post-tax profit / Free reserves (start of year)
How is profit margin calculated?
Insurance profit / Net earned premium
Areas that regulation may affect?
[12]
- Insurance business written (type, mix, location, mandatory cover and restrictions)
- Authorisation of insurance companies and management
- Restrictions on sales methods
- Underwriting and premium restrictions
- Capital requirements
- Investment restrictions
- Contributions to consumer protection bodies
- Requirements to treat customers fairly
- Restrictions on anti-competitive behaviour
- Reporting and disclosure requirements
- Audit requirements and requirements to produce a statement of actuarial opinion
- Reinsurance requirements
Disadvantages of regulation?
[7]
- Monitoring and compliance costs
- Fewer business opportunities
- Lower investment returns
- Barriers to entry
- Higher costs passed on to policyholders
- Fewer economies of scale
- Less insurance provision to some sectors of the population
Possible reasons for setting up a captive insurer?
[6]
- To fill gaps in insurance cover that may not be available from the traditional insurance market
- To manage the total insurance spend of large companies or groups of companies
- To focus effort on risk management
- To reduce the impact of market cycles on risk pricing
- To gain tax and other legislative or regulatory advantages
- To gain access to the reinsurance market
Downsides: May be lack of risk transfer if no reinsurance can be obtained. May be insufficient expertise in dealing with complicated claims.
What are the economic factors to consider?
[4]
- Claims inflation
- Underwriting cycle
- Investment conditions
- Currency movements
What are the external legal, political and social factors?
[3]
- Court awards
- Legislative changes
- Trends in behaviour and awareness
What are the external climate and environmental factors?
[3]
- Seasonality of weather claims
- Catastrophes
- Latent claims
