Chapter 10

Question 1

What is a risk premium?

Answer 1

The expected ultimate cost in claims of the risk being accepted. Including allowance for a degree of uncertainty. (The amount of money required to fund a claim.)

Question 2

Why are smaller firms at a disadvantage when it comes to dealing with large claims?

Answer 2

They are less likely to be able to absorb such large losses.

Question 3

Are re-insurance costs factored into premiums?

Answer 3

Yes

Question 4

How do insurers protect themselves against large losses?

Answer 4

Reinsurance

Question 5

Why would precautionary reserves be allocated to claims that have been denied. And what is this called.

Answer 5

Insurers have regulatory obligations to identify potential liabilities and ensure that adequate reserves are in place (as if they lose at court, they will have to have enough money to pay.). A run-off.

Question 6

What does IBNR stand for?

Answer 6

Incurred but not reported

Question 7

Name a time of year when many IBNR incidents may happen.

Answer 7

Christmas

Question 8

What are catastrophe claims?

Answer 8

An accumulation of a large number of claims, all arising from the same common event

Question 9

What are latent claims and give an example.

Answer 9

An extreme form of IBNR claim. In some cases, claims might not occur until 50 years later.

Asbestos-related diseases.

Question 10

How can claims inflation affect premiums?

Answer 10

To take account of inflation the premiums needs to be adjusted accordingly.

Question 11

What do we mean when we say claims predictions needs to reflect todays exposure.

Answer 11

Some types of claims data can’t necessarily predict future trends as industry standards have changed. So, claims predictions have to reflect todays exposures.

Question 12

Do insurers take into account fraud in their premiums?

Answer 12

Yes

Question 13

What is LASPO and how has it effect rates in the long term?

Answer 13

Legal aid, sentencing and punishment of offenders act. (Made insurance fraud illegal).

Insurers anticipated this would translate to rate reduction but this has not happened long term.

Question 14

What are some other expenses in insurance businesses (Name 2)

Answer 14

Staff costs, premises, electricity, bills, computers, marketing, commission

Question 15

What is the difference between fixed expenses and variable expenses?

Answer 15

Fixed expenses do not increase with the size of a risk eg, certificate production

Variable expenses vary according to the size of the risk. Eg, MTA administration is often higher for bigger risks

Question 16

What is commission and how much is it on average?

Answer 16

The amount paid to an intermediary who introduces the business to the insurer.

Between 7.5%-25% depending on type of insurance

Question 17

What is a work transfer agreement?

Answer 17

Brokers or intermediaries will agree to do more of the work for a higher commission

Question 18

What is a common commission for real estate and why?

Answer 18

40-50% because there is a large amount of work transferred to the broker.

Question 19

What is a combined operating ratio?

Answer 19

It a combination ratio of expenses, commissions and loss. It’s a common measure of financial health.

Question 20

What is ROCE?

Answer 20

Return on capital employed.

(It shows how well a company is using its money to make more money.)

Question 21

Why do insurers need to have a certain amount of funds in reserves that remain untouched?

Answer 21

To prove they can meet their claims obligations.

Question 22

What is investment income and do all agree with it?

Answer 22

It’s where insurers invest their funds in order to make more money.

No because it can fluctuate and there can be a temptation to reply on this.

Question 23

What is a hard vs soft market and what theory does it relate to?

Answer 23

Hard market = rates and premiums are higher

Soft market = more business at a lower rate

Supply and demand theory

Question 24

What are the 2 main types of investment and why have both?

Answer 24

Interest-bearing investments
Investments whose value can be expected to grow in line with economy

It’s good to have a balance - as one offer a higher potential rate of return but is more volatile. The other is more stable but has lower rates of return.

Question 25

What is the FSCS?

Answer 25

Financial services compensation scheme.

It is a levy on all premiums which provides compensation for when insurers become insolvent.

Question 26

What is the MIB levy for?

Answer 26

Those effected by injury or property damaged from untraced drivers.

Question 27

What is the mesothelioma act of 2014? (Who is it for)

Answer 27

It provides a levy on all premiums for EL to fund the diffuse mesothelioma payment scheme.

This allows those suffering from mesothelioma related illnesses (often a result of asbestos) support if they are unable to trace their employers.

Question 28

What is the levy total as of 2022 for mesothelioma act and how much do individuals claimants get on average civil claims (percentage)

Answer 28

£22 million

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