Chapter 2: Underwriting Procedures Flashcards
How are terms and conditions sometimes referred to?
Subjectivities
eg a quote may be valid “subject to” a risk survey
What must the underwriter do when providing a quote for consumer insurance?
Draw the proposers attention to any specific limitations and exclusions, particularly those which may differ from other insurer’s
What is a quotation?
The premium, terms and conditions, and other relevant information is provided by the underwriter to the proposer before they make any commitment. This enables them to make an informed choice and comply with contract certainty
What is commonly included within a quotation pack?
- Covering letter
- Document outlining risk to be insured
- Statement of fact
If requested the policy wording may be provided
What is the main benefit to the proposer and the insurer of providing a quotation?
For the proposer it allows them to make an informed choice
For the insurer it helps to comply with contract certainty
What statute deals with the best practice around providing a quotation for consumer insurance?
Consumer Rights Act 2015
For how long is a quotation valid?
This will normally be stated in the quotation - standard is 30 days
If it is not stated then it is valid for “a reasonable time” but the insurer can withdraw it at any time
Does a quotation constitute a contract?
No - the quotation counts as an offer but there has not yet been acceptance
If the proposer accepts the quotation in the time it is valid, is the insurer legally bound by it?
Yes, unless there has been a change of material circumstances altering the risk
If the proposer wishes to accept the quotation after it is no longer valid is the insurer bound by it?
Not legally bound but they may still choose to honour it
How is the information required for a quotation usually gathered for consumer insurance?
Traditionally via proposal form but increasingly via the internet or phone (eg via an aggregator or online questionnaire)
A proposal form may not be necessary for the quotation to be provided but it will usually be subject to one being completed
What must the insurer ensure they do with the consumer’s answers to their questions in the proposal?
They must repeat the questions and answers back to the proposer/insured in the quotation, after going on risk, and during mid-term adjustments/renewal negotations
What is a declaration and when it is made?
A declaration states that the information supplied by the proposer is true to the best of their knowledge or belief. Made as part of the proposal for both consumer and commercial insurance
Why may a proposal form not be suitable for commercial insurance?
The risks are larger and more complex so more information is required or the information may be more difficult to obtain/communicate
How may information be gathered for commercial insurance?
Presentations of the risk, usually made by an intermediary, and possibly supplemented by surveys, questionnaires and meetings
What is a warning/important note and when is this made?
For commercial insurance as part of the proposal - tells the proposer what material circumstances and information needs to be disclosed and what the consequences may be if they are not disclosed. Also tells the proposer if they are unsure if something is material or not they should disclose it
What two types of questions are included in a proposal form?
General and specific
What are general questions? Provide some examples
Questions common to most general insurances
Name Address for correspondence Occupation Period of insurance Past insurance history (declinatures, claims history)
What are specific questions? Provide some examples
Questions about particular details of the risk
Where the risk is located Proposer's age Description of subject matter Business activity Requested sum insured/limits
What must a premium be?
Equitable and fair - the contribution should represent the risk
What does the law of large numbers allow insurers to do?
More accurately predict future claim payments
How are premiums usually calculated?
Premium rate x Premium base = Premium
Discounts may be applied
When calculating a premium what is a premium base?
The measure of the exposure. Depends on line of business. For example property is usually sum insured, employer liability is usually payroll, public liability is usually turnover, etc
When calculating a premium what is a premium rate?
A figure based on the likelihood that a claim would have to be paid on the policy (or estimation of)
What is rate per mille and rate per cent?
Rate per mille = Price in pounds for each thousand pounds of exposure
Rate per cent = Price in pounds for each hundred pounds of exposure
1 per cent = 10 per mille
A property is valued at £200,000. What would the premium be if the insurer set a rate of:
A) 0.7 per cent
B) 0.7 per mille
A) £1400
(200,000 * 0.7%)
B) £140
(200,000 * 0.07%)
What happens when the premium base/exposure measure is unknown at the start of the insurance?
(for example employers liability - the employer may not know the true value of their payroll until year end)
The insured can estimate the figure. The rate is applied to that figure to calculate a deposit premium. At the end of the period the insured then makes a declaration of the true figure. The premium is then adjusted based on this new figure
What is a flat premium?
Rather than apply a rate to a premium base in some circumstances it may be more suitable to consult rating tables based on appropriate factors (eg motor insurance or one off events). Often computerised
What is a policy document?
A document detailing all the details of the risk insured, insured perils, period of coverage, conditions, exceptions, other relevant information and the premium
Is a policy document a contract of insurance?
No - it is evidence of the contract but not the contract itself
What is a cover note?
Issued as temporary proof of coverage until a policy document can be issued for example if the insurer is providing cover pending more information
What will be included in a cover note?
Period of insurance
A statement that the insurance follows normal terms and conditions
Special terms (if applicable)
Information identifying the risk
For which class of business is a cover note and certificate of insurance particularly important and why?
Motor insurance. The Road Traffic Act 1988 makes it a compulsory requirement to prove a policy is in force
What is a certificate of insurance? When are these normally issued?
Evidence that insurance is in place and that the policyholder is legally compliant. Required for compulsory insurances such as motor insurance and employer’s liability,
What must be shown on a certificate of insurance under the Road Traffic Act 1988?
Registration Name Period of cover Person(s) covered to drive Limitations Confirmation that policy fulfils legal requirements
What must be shown on a certificate of employer’s liability insurance?
Name
Period of cover
Insurer
Signature of insurer (usually CEO)
Level of cover (must be £5 million minimum)
Confirmation that policy fulfils legal requirements
Why is contract certainty important?
To avoid disputes
How is contract certainty achieved?
By complete and final agreement of all terms between the insured and the insurer by the time they enter into the contract, with policy documentation issued promptly thereafter
In what 3 ways are premiums normally paid?
- Single upfront payment
- Credit
- Monthly instalments
How does premium payments by credit work?
Payment will be due at the inception of the policy. If arranged by an intermediary they may offer the policyholder a credit facility where the intermediary will pay the insurer and then collect payment from the policyholder
How does premium payments in instalments work?
Instalments will be paid on a pre agreed schedule via direct debit. An additional charge will apply to reflect loss of interest and additional admin
Who is responsible for insurance premium tax?
It is paid by policyholders but the insurer is responsible for collecting and accounting for it and passing it to HMRC
What is the standard rate of IPT?
12%
What is the higher rate of IPT and when is this charged?
20%
Travel insurance
Household/electrical appliance insurances
Some vehicle insurances
Engineering risk management fees
When may insurance be exempt from IPT?
Reinsurance
Life insurance
Certain marine policies
When the risk is located outside the UK (local rates may apply)
What must insurers avoid under the Consumer Rights Act 2015?
Assumptive answers
Why can an insurer not agree to take on a risk with terms to be agreed later?
This would break the principles of contract certainty
How often do insurers update MID with policyholder details?
Daily (usually overnight)
MID is the Motor Insurance Database
An insurer provides a proposer with a quotation, which they accept. Upon checking the insurer discovers an error in their calculations which meant they should have charged a higher premium - what happens?
The insurer is legally bound by the quotation (unless the circumstances surrounding the risk have changed)
You apply for insurance and receive a quotation, which you accept. Unless otherwise stated on the quotation, when is cover effective from?
When the quotation is accepted
After purchasing a new car, you remember you need to insure it. When is the earliest you can obtain cover?
From the time and date you request cover
When is contract certainty achieved?
After complete and final agreement of all terms between the insured and insurer prior to contract inception
You phone an insurer to obtain a quote for your motor insurance. You are happy with the quote and inform the insurer you wish to proceed. What are you likely to receive in the post first following this?
A statement of fact
What is the rate of insurance premium tax on travel insurance?
20%
What is the rate of insurance premium tax on reinsurance?
Nil
What line of business sometimes have adjustable premiums?
Liability - particularly employers’
For which line of business are flat premiums more common?
Motor
Also used for one off events eg exhibitions
What statement is made by the insurer on a certificate of insurance?
A statement confirming that the policy meets the relevant legal requirements
