chapter 3

Question 1

Equalisation Reserves:

Answer 1

These are required by law and are designed to smooth fluctuations in loss
ratios (i.e. the ratio of premiums to claims) for certain classes of business

This reserve ensures that the insurer remains solvent and can meet its claims obligations even during periods of unusually high losses.

Question 2

Unearned premium reserve

Answer 2

Portion of premium for which insurance cover hasn’t been provided.

Question 3

Catastrophe Reserves:

Answer 3

Cover many related losses from one event (e.g., hurricane).

Question 4

Unexpired Risk Reserve:

Answer 4

Needed when a loss is foreseen related to the unearned premium reserve.

a provision that insurers set aside to account for the anticipated claims and associated costs on policies that are still in force but whose premiums may not be sufficient to cover future liabilities.

Question 5

Provision for claims handling
expenses

Answer 5

To cover the anticipated future costs of settling claims; it includes direct
costs (e.g. loss adjusters’ fees) and indirect costs (e.g. office expenses)

Question 6

Re-opened claims reserves

Answer 6

For claims initially closed but later reopened due to deteriorating circumstances (e.g., personal injury claims).

Question 7

policy fraud conditions

Answer 7

Often state that in the event of fraud, “all benefit of the policy is forfeited,” allowing insurers to recover past legitimate claim payments.

Question 8

purpose of Criminal Justice and Courts Act 2015 (CJCA) Section 57

Answer 8

Allows defendants to request the dismissal of an entire personal injury (PI) claim if any part is found to be ‘fundamentally dishonest’.

Question 9

aim of Criminal Justice and Courts Act 2015 (CJCA) Section 57

Answer 9

discourage exaggerated personal injury claims.

Question 10

Prudential Regulation Authority (PRA)

Answer 10

part of the Bank of England. The PRA is
responsible for the prudential supervision of systemically important firms operating in the
industry, such as banks and insurers

Question 11

Financial Conduct Authority (FCA)

Answer 11

responsible for the prudential regulation of
smaller firms such as insurance brokers as well as the business conduct of all firms. It
focuses on generic, industry-wide issues, rather than firm specific issues.

Question 12

ICOBS Rules on Claims Handling main purpose

Answer 12

Ensure customers are treated fairly.
Claims must be handled fairly and settled promptly.

Customers should receive appropriate information on the claims handling process.

Conflicts of interest must be disclosed and managed without harming the policyholder.

Question 13

basis of contract clause

Answer 13

The Act bans ‘basis of the contract’ clauses, which are already not used in consumer contracts. Business insurers can’t avoid this rule. These clauses used to turn initial statements in a proposal form into warranties. If there was any error in the proposal form, even if it didn’t affect the loss or influence the insurer’s decision, the insurer could avoid responsibility.

Question 14

breach of warranty

Answer 14

The Act states that if a warranty is suspends, the insurer’s obligation under the contract is only paused, not ended. During this pause, the insurer isn’t liable for any claims. However, once the breach is fixed, the full coverage of the policy is restored.

Question 15

Contracting out

Answer 15

refers to the practice where parties to a contract agree to exclude or modify certain statutory protections or legal requirements. In the context of insurance law, “contracting out” typically means that an insurer and an insured can agree to change or override certain rules established by law, provided that the law allows such changes.

In summary, contracting out allows insurers and policyholders to customize their contracts to suit specific needs, but it must be done with clear communication, fairness, and within the limits of the law—especially to protect consumer rights.

Question 16

transparency
requirements

Answer 16

refer to the obligations placed on parties, particularly insurers, to ensure that contractual terms and deviations from statutory protections are communicated clearly and understood by the policyholder. These requirements are crucial in maintaining fairness and preventing the misuse of complex legal provisions

Question 17

enterprise act 2016

Answer 17

aims to create a more dynamic and fair business environment by modernizing insolvency procedures, enhancing competition regulation, and improving corporate governance. They helped whistle blowers

Question 18

FOS

Answer 18

The Financial Ombudsman Service (FOS) is an independent organization in the UK that resolves disputes between consumers and financial businesses, such as banks, insurers, and investment firms. It provides a free and impartial service to help consumers who are unable to resolve complaints directly with financial firms.

Question 19

Arbitration clause in insurance:

Answer 19

Many insurance contracts have an arbitration clause. If a customer disagrees with the settlement offer for their claim, they can choose to take the dispute to arbitration.

Question 20

Why insurers prefer arbitration

Answer 20

Insurers like arbitration because it’s private and handled by an expert in the dispute area. Courts are public (which could lead to bad publicity) and the judge might not be an expert in the dispute. However, arbitration usually costs more than court cases.

Question 21

Choosing an arbitrator

Answer 21

usually, one arbitrator is enough, but up to three can be chosen. Each party picks one, and a third is chosen as chairman. Having two arbitrators is possible, but there’s a risk they might not agree.

Question 22

The arbitration process:

Answer 22

The arbitration, also known as the tribunal, lets each side present its case and respond to the other side’s case. The tribunal must act fairly and impartially, and both parties must fully cooperate.

Question 23

Powers of the arbitrator:

Answer 23

The arbitrator can order the parties to do or stop doing something, just like a court. They can also order specific performance of a contract or rectification. The tribunal’s findings can be challenged, but only on specific grounds. The arbitrator’s decision is final on all factual matters.

Question 24

litigation

Answer 24

Litigation refers to the process of taking legal action. It involves using the court system to resolve disputes and seek compensation for damages. Lawsuits are a formal part of the litigation process

Question 25

Adjudication

Answer 25

The formal issuing of a judgment or decision by a judge after all of the evidence has been reviewed, and after both lawyers have made their arguments in court.

Question 26

Difference between adjudication and arbitration

Answer 26

Adjudication is faster, often less formal, and typically used for interim resolutions or specific sectors like construction. Its decisions are binding but can be challenged later

Arbitration is more formal and comprehensive, used for a wide range of disputes including international ones, and its decisions are final and binding with limited grounds for appeal.

Question 27

What are the main objectives of the Insurance Fraud Bureau (IFB)?

Answer 27

Help insurers identify fraud and avoid financial consequences.
Support law enforcement in finding and prosecuting fraudsters.

Question 28

What does Section 12 of the Insurance Act 2015 allow insurers to do if a fraudulent claim is made?

Answer 28

Terminate the contract from the time of the fraudulent act.
Remain liable for legitimate claims before the fraud.
Invalidate the fraudulent claim and subsequent legitimate claims.
Recover payments made on fraudulent claims.

Question 29

What does ICOBS stand for, and what is its purpose in claims handling?

Answer 29

Insurance: Conduct of Business Sourcebook (ICOBS). Its purpose is to ensure that customers are treated fairly during the claims process, with claims handled promptly and fairly.

Question 30

Under the Criminal Justice and Courts Act 2015, what happens if a personal injury claim is found to be ‘fundamentally dishonest’?

Answer 30

The entire claim can be struck out, even if part of the claim is genuine.

Question 31

What change did the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) make regarding consumers’ duties in insurance contracts?

Answer 31

Consumers now only need to respond honestly and with reasonable care to insurers’ questions, rather than disclosing all material facts.

Question 32

How does the Insurance Act 2015 change the effect of a breach of warranty in an insurance contract?

Answer 32

A breach of warranty now suspends the insurer’s liability rather than terminating the contract. Full cover resumes once the breach is remedied.

Question 33

What is the significance of ‘irrelevant warranties’ under the Insurance Act 2015?

Answer 33

Insurers cannot avoid claims if the breach of warranty did not increase the risk of the loss that occurred.

Question 34

What are equalisation reserves, and why are they required?

Answer 34

Equalisation reserves are required by law to smooth fluctuations in loss ratios for certain classes of business.

Question 35

What is the purpose of the Motor Insurance Database (MID)?

Answer 35

The MID contains details of all registered vehicles in the UK and their insurance details, helping the police tackle motor vehicle crime.

Question 36

What does the term ‘utmost good faith’ refer to in insurance contracts?

Answer 36

It is the requirement for all parties in an insurance contract to fully disclose all material facts to one another, whether asked for or not.

Question 37

How does the Insurance Act 2015 impact ‘basis of the contract’ clauses?

Answer 37

The Act prohibits ‘basis of the contract’ clauses, which previously converted pre-contractual representations into warranties.

Question 38

What is a ‘qualifying misrepresentation’ under CIDRA, and what are the two types?

Answer 38

A qualifying misrepresentation is one that is either:

Deliberate or reckless: The consumer knew it was untrue or misleading.
Careless: It was not deliberate or reckless.

Question 39

What does the Insurance Fraud Register do?

Answer 39

It is an industry-wide register of known insurance fraudsters, helping prevent future fraud.

Question 40

What is the role of the Financial Conduct Authority (FCA) in regulating insurance claims?

Answer 40

The FCA regulates the business conduct of all firms, ensuring fair treatment of customers in claims handling.