Chapter 10 Flashcards
What is a risk premium?
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.)
Why are smaller firms at a disadvantage when it comes to dealing with large claims?
They are less likely to be able to absorb such large losses.
Are re-insurance costs factored into premiums?
Yes
How do insurers protect themselves against large losses?
Reinsurance
Why would precautionary reserves be allocated to claims that have been denied. And what is this called.
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.
What does IBNR stand for?
Incurred but not reported
Name a time of year when many IBNR incidents may happen.
Christmas
What are catastrophe claims?
An accumulation of a large number of claims, all arising from the same common event
What are latent claims and give an example.
An extreme form of IBNR claim. In some cases, claims might not occur until 50 years later.
Asbestos-related diseases.
How can claims inflation affect premiums?
To take account of inflation the premiums needs to be adjusted accordingly.
What do we mean when we say claims predictions needs to reflect todays exposure.
Some types of claims data can’t necessarily predict future trends as industry standards have changed. So, claims predictions have to reflect todays exposures.
Do insurers take into account fraud in their premiums?
Yes
What is LASPO and how has it effect rates in the long term?
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.
What are some other expenses in insurance businesses (Name 2)
Staff costs, premises, electricity, bills, computers, marketing, commission
What is the difference between fixed expenses and variable expenses?
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
What is commission and how much is it on average?
The amount paid to an intermediary who introduces the business to the insurer.
Between 7.5%-25% depending on type of insurance
What is a work transfer agreement?
Brokers or intermediaries will agree to do more of the work for a higher commission
What is a common commission for real estate and why?
40-50% because there is a large amount of work transferred to the broker.
What is a combined operating ratio?
It a combination ratio of expenses, commissions and loss. It’s a common measure of financial health.
What is ROCE?
Return on capital employed.
(It shows how well a company is using its money to make more money.)
Why do insurers need to have a certain amount of funds in reserves that remain untouched?
To prove they can meet their claims obligations.
What is investment income and do all agree with it?
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.
What is a hard vs soft market and what theory does it relate to?
Hard market = rates and premiums are higher
Soft market = more business at a lower rate
Supply and demand theory
What are the 2 main types of investment and why have both?
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.
What is the FSCS?
Financial services compensation scheme.
It is a levy on all premiums which provides compensation for when insurers become insolvent.
What is the MIB levy for?
Those effected by injury or property damaged from untraced drivers.
What is the mesothelioma act of 2014? (Who is it for)
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.
What is the levy total as of 2022 for mesothelioma act and how much do individuals claimants get on average civil claims (percentage)
£22 million
100%
