Chapter 10

Question 1

What is risk premium?

Answer 1

Expected ultimate cost in claims of the risk being accepted, including allowance for degree of uncertainty attaching to claims cost
(Premium to cover the total cost of claims recognising that some may take a while to settle)

Question 2

What are the key features of risk premium?

Answer 2

• Frequency
• Severity
• Large claims
• Reinsurance
• Claims run off
• IBNR claims
• Catastrophe claim
• Latent claims
• Claims inflation
• Exposure
• Fraud
• LASPO 2012

Question 3

How does frequency factor into risk premium?

Answer 3

Expected number of claims should be forecast accurately and account for anticipated changes in environment, portfolio of risks and individual risks

Question 4

How does severity factor into risk premium?

Answer 4

Average cost of different claims should be assessed, allowance for catastrophes

Question 5

How do large claims factor into risk premium?

Answer 5

Smaller insurers less able to absorb. Use of periodic payment orders have increase serious PI claims cost

Question 6

How do catastrophe claims factor into risk premium?

Answer 6

Reflect the accumulation of large number of claims arising from a common event eg hurricane

Question 7

How do latent claims factor into risk premium?

Answer 7

Liability classes - extreme form of IBNR as take up to 50 years to develop eg asbestos

Question 8

How does exposure factor into risk premium?

Answer 8

Claims data is historical so should be adjusted to reflect today’s exposure

Question 9

What are the two types of expenses?

Answer 9

• Fixed - cost doesn’t increase with size of risk, fixed amount per policy
• Variable - vary according to size, complexity and nature of risk

Question 10

Variable expenses - UW

Answer 10

MTAs, risk management, helplines provided irrespective of claims

Question 11

Variable expenses - Commission

Answer 11

Vary by product and case by case

Question 12

Variable expenses - Claims handling

Answer 12

Cost varies according to number and complexity, should be a charge per claim

Question 13

Variable expenses - Other expenses

Answer 13

Incur costs for policies they sell

Question 14

What is return on capital employed (ROCE)?

Answer 14

Risk capital requirement calculated by actuaries and is the proportion of total account premiums which must be kept as free reserves to ensure the insurer can meet it’s claim obligations
Return (profit) is measured as a proportion of the capital employed (ROCE)

Question 15

What is investment income?

Answer 15

Required by law to maintain certain levels of reserves based on total premium income (to pay for future claims)
Allowed to invest this income

Question 16

What is the UW result?

Answer 16

Business result without investment income - combination of LR, commission ratio and expense ratio (combined operating ratio)

Question 17

What two broad classes of investment to insurers balance their portfolio between?

Answer 17

• Interest bearing
• Equities (value expected grow in lien with economy, volatile in short term)

Question 18

What happens if contributions of capital gain and are ignored?

Answer 18

Returns understated and products are overprices and uncompetitive

Question 19

What are the forms of taxation?

Answer 19

Pure - IPT
Quasi-taxation - levies form MIB, FSCS and Mesothelioma Act 2014

Question 20

What happens if capital gains are included?

Answer 20

Investment returns are likely to be volatile

Question 21

What is the levy from FSCS?

Answer 21

Surcharge based on % of gross direct premium to fund claims by policyholders who insurers have become insolvent

Question 22

What is the levy from the MIB?

Answer 22

Annual levy, higher rates for non-comprehensive private motor and fleet

Question 23

What is the levy for the Mesothelioma Act 2014?

Answer 23

Cancer of lungs following exposure to asbestos, long time to manifest
Levy charged on EL premium to fund Diffuse Mesothelioma Payment Scheme which allow those suffering but unable to trace employers to obtain financial support