Chapter 1: Insurance Companies

Question 1

Actuarial Roles within general insurance

Answer 1

• Reserving
• Setting premiums
• strategic management of the business
• risk assessment (eg modelling catastrophic events)
• determining a suitable investment strategy
• assessing reinsurance requirements
• expense allocation
• capital allocation
• assessing the effectiveness of marketing campaigns
• assisting with the early settlement of liabilities in the event of a wind-up

Question 2

Technical reserves

Answer 2

Reserves held to cover the liabilities relating to existing policyholders.
Might also be called insurance reserves or insurance provisions because they relate to the liabilities arising from writing insurance business.

Question 3

2 types of technical liabilities

Answer 3

• Past

- Future

Question 4

Past liabilities

Answer 4

Liabilities in respect of accidents or losses from events that have occurred prior to the accounting date.

Question 5

Future liabilities

Answer 5

Liabilities in respect of future insurance cover from policies for which premiums have already been received.

Question 6

Claim characteristics

Answer 6

The ways and speed in which claims

• originate,
• are reported,
• settled,
• and reopened (on occasion).

Question 7

2 Main types of delays

Answer 7

• Reporting delays

- Settlement delays

Question 8

Reporting delay

Answer 8

The time from the event occurrence through to the time that the insurance company is notified of the event.

Question 9

Event delay

Answer 9

The part of the delay that relates to the period when the insured event happens and when the policyholder realises the event has happened.

(e.g. illness might develop long after exposure)

Question 10

Settlement delay

Answer 10

The period between notification to the company and the payment of the claim.

Question 11

4 Causes of settlement delays

Answer 11

• initial administrative processing
• establishing whether the insurer is liable
• waiting for a condition to stabilise
• establishing how much should be paid.

Question 12

Short tail business

Answer 12

Means that the claims are generally reported quickly and settled quickly by the insurer

Question 13

Long tail business

Answer 13

Means that there is a sizeable proportion of total claim payments that take a long time for the insurer to settle.

Question 14

Reserves for outstanding claims: 4 Components

Answer 14

• Reserve for outstanding reported claims
• Reserve for incurred but not reported claims
• Reserve for re-opened claims
• Reserve for claims’ handling expenses

Question 15

Reserve for outstanding reported claims

Answer 15

This is the estimated reserve needed to settle the claims that the company knows about at the accounting date.

Question 16

Reserve for incurred but not reported claims (IBNR).

Answer 16

The IBNR reserve is needed to cover the claim payments for incidents which have happened, but have not been reported to the insurance company.

Question 17

Reserve for re-opened claims

Answer 17

This is an additional reserve which may be explicitly shown to allow for claims that the insurance company treats as being fully settled, but which might one day require further payments.

Question 18

Reserve for claims’ handling expenses

Answer 18

In settling claims, the company will incur some additional expenses (eg legal fees). The reserve for these expenses may be held separately.

Question 19

2 Distinct approaches for estimating outstanding claims reserves

Answer 19

• making estimates of the liability for each individual outstanding claim.
• using statistical techniques to estimate the total outstanding payments for the portfolio.

Question 20

Unearned premium reserve (UPR)

Answer 20

The portion of premiums held in respect of unexpired exposure.

The portion of premiums set aside to cover the claims and expenses for future accounting periods for which premiums have already been received.

Question 21

2 disadvantages of a straight averaging reserving approach

Answer 21

• it ignores the fact that risk from the policy may not be spread evenly over the period of cover
• It ignores the fact that expenses of setting up and servicing the policy may not be incurred evenly over the period of cover.

Question 22

Acquisition costs

Answer 22

The expenses that are incurred by the insurer at the start of a policy.

Question 23

Claims equalisation reserve

Answer 23

A reserve that is used to smooth the profits from one year to another.

In a good year, when profits are large, money is transferred to the claims equalisation reserve, thereby reducing the initial assessment of profit.
In a bad year, money is transferred from the equalisation reserve, thereby increasing the initial assessment of profit.

Question 24

Catastrophe reserve

Answer 24

Additional reserve set aside to cover the losses that might arise from a catastrophe.

Question 25

Free reserves

Answer 25

The excess of the assets over the technical reserves.

Question 26

4 Alternative expressions to “free reserves”

Answer 26

• “free assets”
• “solvency margin”
• “shareholders’ funds”
• “capital employed”

Question 27

Solvency margin

Answer 27

The excess of the assets over liabilities.

Question 28

Solvency margin ratio

Answer 28

Solvency margin divided by the net written premiums (not the assets)

Question 29

Minimum capital requirement (MCR)

Answer 29

The legal requirement for an insurance company’s free reserves to exceed a statutory minimum level.

Question 30

7 Major factors influencing the general insurer’s investment strategies

Answer 30

• Nature
• Term
• Currency
• Uncertainty
  of its liabilities
• Size of its free assets
• Legislative influences
• Taxation

Question 31

post tax profits equation

Answer 31

post tax profits =

premiums
− claims
− expenses
\+ investment return
− tax

Question 32

Deferred Acquisition Costs (DAC)

Answer 32

The acquisition costs that have been paid out but not wholly incurred for any policy that is unexpired at the time.

Question 33

Underwriting result

Answer 33

The excess of premiums over claims and expenses.

Underwriting result =
Earned premium
− claims incurred
− expenses incurred

Question 34

2 Main uses for reinsurance

Answer 34

• Enormous risks

- Accumulations of risk

Question 35

Accumulations of risk

Answer 35

Occur when the insurer has an unbalanced portfolio of risks.

This can be due to the nature of the classes, the geographical areas covered or the types of policyholder attracted.

Question 36

3 Reasons claims reserves occur

Answer 36

There are

• reporting delays
• settlement delays
• premature closure of claims files

Question 37

Unexpired Risks Reserve (URR)

Answer 37

A prospective assessment of the amount required as at the accounting date to cover the claims and expenses from the unexpired risks

Question 38

additional unexpired
risk reserves (AURR)

Answer 38

Additional reserves (or provision) for unexpired risks

AURR = URR - UPR

Question 39

The size of free reserves is an important determinant of (4)

Answer 39

• the amount of business the company can reasonably write
• the size of the risks written
• the amount of risk within the investment strategy
• the need for reinsurance.

Question 40

8 Main monetary flows in the general insurer’s cashflow diagram

Answer 40

• premiums
• claims
• expenses (including commission)
• investment (in and out)
• reinsurance (in and out)
• dividends (out to shareholders)
• rights issues (in from shareholders)
• tax