Chapter 4 Flashcards
What is an insurer’s “risk appetite”?
a) The level of premium they wish to charge
b) The types of risks they will or will not accept
c) The amount of profit they expect to make
d) The total claims they anticipate per year
Answer: b) The types of risks they will or will not accept
What is the purpose of underwriting in motor insurance?
a) To determine the legality of the vehicle
b) To evaluate and price risk accurately
c) To investigate fraudulent claims
d) To process claims faster
Answer: b) To evaluate and price risk accurately
Which factor is NOT typically considered in motor insurance underwriting?
a) Driver’s age
b) Vehicle color
c) Vehicle modifications
d) Driving history
Answer: b) Vehicle color
Which of the following is NOT a component of a motor insurance premium?
a) Claims cost
b) Marketing expenses
c) Vehicle resale value
d) Reinsurance costs
Answer: c) Vehicle resale value
What is the main challenge insurers face when estimating claims cost?
a) Predicting policyholder behavior
b) Uncertainty in accident frequency and severity
c) Determining competitor pricing
d) Legal compliance issues
Answer: b) Uncertainty in accident frequency and severity
What is the ‘incurred claims ratio’?
a) The percentage of premiums paid out in claims
b) The discount applied to long-term policyholders
c) The portion of the insurer’s profit from claims
d) The tax charged on insurance policies
Answer: a) The percentage of premiums paid out in claims
Which pricing method is used to set insurance premiums based on past claims data?
a) Arbitrary rating
b) Market-based pricing
c) Statistical modeling
d) Flat-rate pricing
Answer: c) Statistical modeling
Why do insurers request a proposer’s occupation?
a) To verify financial stability
b) To assess moral hazard and vehicle use
c) To check if the proposer can afford the premium
d) To determine if they need commercial insurance
Answer: b) To assess moral hazard and vehicle use
Which is a high-risk occupation for motor insurance?
a) Teacher
b) Police officer
c) Courier
d) Office administrator
Answer: c) Courier
Why is the garaging address important in underwriting?
a) It helps determine policyholder identity
b) It affects the risk of theft and accidents
c) It determines the vehicle’s resale value
d) It ensures the vehicle is legally registered
Answer: b) It affects the risk of theft and accidents
What is the primary purpose of an excess in a motor policy?
a) To increase insurer profits
b) To reduce moral hazard
c) To make policies cheaper for all
d) To limit cover for expensive cars
Answer: b) To reduce moral hazard
What happens if a policyholder claims during a No Claims Discount (NCD) period?
a) Their premium is reduced
b) Their NCD is affected or lost
c) They get additional discounts
d) The policy is automatically cancelled
Answer: b) Their NCD is affected or lost
What is “fronting” in motor insurance?
a) A type of fraud where a young driver is falsely named as a secondary driver
b) A premium calculation method
c) A way to avoid insurance premium tax
d) A discount for low-mileage drivers
Answer: a) A type of fraud where a young driver is falsely named as a secondary driver
What is case underwriting?
a) Applying uniform rates to all policies
b) Assessing each risk individually
c) Automatically generating quotes
d) Using only historical claims data
Answer: b) Assessing each risk individually
What is an insurer’s ‘book rate’?
a) The standard premium before discounts or loadings
b) The maximum premium an insurer can charge
c) A fixed rate for all customers
d) A special discount for returning customers
Answer: a) The standard premium before discounts or loadings
What is an example of a moral hazard in motor insurance?
a) Leaving a car unlocked in a high-crime area
b) Driving in a high-risk area
c) Having multiple traffic violations
d) Choosing a low-cost insurer
Answer: a) Leaving a car unlocked in a high-crime area
What role does telematics play in motor insurance?
a) It tracks driving behavior to assess risk
b) It calculates premium based on vehicle color
c) It replaces the need for an insurance policy
d) It allows policyholders to dispute claims
Answer: a) It tracks driving behavior to assess risk
What is an insurer’s “risk appetite”?
a) The level of premium they wish to charge
b) The types of risks they will or will not accept
c) The amount of profit they expect to make
d) The total claims they anticipate per year
Answer: b) The types of risks they will or will not accept
What is the purpose of underwriting in motor insurance?
a) To determine the legality of the vehicle
b) To evaluate and price risk accurately
c) To investigate fraudulent claims
d) To process claims faster
Answer: b) To evaluate and price risk accurately
What is the primary reason insurers differentiate between case underwriting and account-level underwriting?
a) To ensure compliance with FCA guidelines
b) To maintain a consistent pricing model across all policies
c) To balance portfolio-level risk while addressing individual risk characteristics
d) To reduce the workload of underwriters
Answer: c) To balance portfolio-level risk while addressing individual risk characteristics
Why might an insurer use geospatial analytics in motor insurance underwriting?
a) To assess road maintenance costs in different regions
b) To analyze the likelihood of claims based on traffic patterns and crime data
c) To ensure all policyholders pay the same premium within a postcode
d) To replace traditional actuarial models with AI-based decision-making
Answer: b) To analyze the likelihood of claims based on traffic patterns and crime data
Which factor would most likely result in an underwriter declining a motor insurance policy?
a) A previous claim within the past five years
b) A high-value vehicle with low annual mileage
c) A driver with multiple speeding convictions and a history of non-disclosure
d) A policyholder with a high NCD but an imported vehicle
Answer: c) A driver with multiple speeding convictions and a history of non-disclosure
What is the primary limitation of using past claims data as the sole basis for risk assessment?
a) It does not account for inflation in claims settlements
b) It assumes past patterns will continue unchanged in the future
c) It cannot differentiate between at-fault and non-fault claims
d) It is difficult to integrate into telematics models
Answer: b) It assumes past patterns will continue unchanged in the future
Which statistical technique is most commonly used in predictive modelling for motor insurance risk?
a) Bayesian inference
b) Ordinary Least Squares (OLS) regression
c) Generalized Linear Models (GLMs)
d) Monte Carlo simulations
Answer: c) Generalized Linear Models (GLMs)
What is the significance of the loss ratio in underwriting?
a) It determines whether an insurer is meeting regulatory compliance standards
b) It assesses an insurer’s profitability by comparing claims costs to earned premiums
c) It represents the total number of claims settled in a given year
d) It measures the efficiency of the insurer’s claims-handling team
Answer: b) It assesses an insurer’s profitability by comparing claims costs to earned premiums
Which of the following underwriting actions is LEAST effective in detecting application fraud?
a) Cross-checking information with the Claims and Underwriting Exchange (CUE)
b) Using AI-driven pattern recognition to identify inconsistencies in policyholder data
c) Applying a standard pricing model with no validation against external data sources
d) Requesting additional verification for high-risk occupations or frequent address changes
Answer: c) Applying a standard pricing model with no validation against external data sources
Why do insurers apply “burn cost analysis” in fleet underwriting?
a) To predict the expected claims cost per unit exposure
b) To calculate the impact of fraudulent claims on the fleet’s premium
c) To determine whether a fleet should be covered under a group or individual rating model
d) To ensure the fleet meets regulatory safety requirements
Answer: a) To predict the expected claims cost per unit exposureq
What is “adverse selection” in the context of motor underwriting?
a) A situation where policyholders intentionally misrepresent risk factors
b) A scenario where higher-risk drivers are more likely to purchase insurance, leading to unbalanced risk pools
c) A rating adjustment applied to young drivers with clean records
d) A regulatory requirement for insurers to disclose pricing models
Answer: b) A scenario where higher-risk drivers are more likely to purchase insurance, leading to unbalanced risk pools
Which type of reinsurance is most commonly used to protect an insurer against high-severity motor claims?
a) Facultative reinsurance
b) Quota share reinsurance
c) Excess of loss reinsurance
d) Treaty reinsurance
Answer: c) Excess of loss reinsurance
Why are fleet policies often rated using “experience rating” instead of individual driver ratings?
a) Because individual driver data is too complex to analyze
b) Because fleet owners typically self-insure their vehicles
c) Because historical claims performance provides a more accurate risk measure for fleets
d) Because it is a regulatory requirement for commercial motor policies
Answer: c) Because historical claims performance provides a more accurate risk measure for fleets
Which of the following would be considered a “disruptive risk” in motor underwriting?
a) The increased adoption of driver-assistance technology
b) The standardization of third-party claim settlements
c) The requirement for insurers to hold a solvency margin
d) The implementation of blockchain-based policy administration
Answer: d) The implementation of blockchain-based policy administration
How might the widespread adoption of self-driving vehicles impact traditional motor underwriting?
a) It will reduce the importance of driver-related risk factors and increase emphasis on manufacturer liability
b) It will make motor insurance obsolete
c) It will result in higher claims frequency but lower claims severity
d) It will remove the need for claims handling departments
Answer: a) It will reduce the importance of driver-related risk factors and increase emphasis on manufacturer liability
