Chapter 10 Flashcards
What is the risk premium?
The risk premium can be defined as ‘the expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty attaching to the claims cost (whether in the estimating process or through the nature of the claims themselves)’. Essentially, it is the amount of money required to fund claims.
What is the difference between IBNR and run-off claims?
IBNR claims are ‘incurred but not reported’, i.e. the claim has happened, but the insurer has not been notified. Run-off claims involve claims which have been reported to the insurer, but following progression of the claim through to negotiation the claims reserve changes.
Why is claims inflation a problem for insurers in fixing the price of insurance?
The value of the money set aside to settle claims will have reduced in real terms. Underwriters should check Government indices and economic forecasts.
What is the difference between fixed and variable expenses?
Fixed costs are generally the costs associated with processing a particular product, irrespective of risk size. On the other hand, many other product expenses vary with size, complexity and nature of risk (e.g. risk surveys); these are variable costs.
What is ROCE?
This is ‘return on capital employed’, that is, the profit made on the capital invested.
What is the purpose of the levy charged by the Financial Services Compensation Scheme?
To fund claims by policyholders whose insurer has become insolvent.
