Chapter 5 Flashcards
What is the purpose of pooling risks in motor insurance?
To group homogeneous risks together to calculate standard or ‘book’ rates effectively
What is telematics, and how is it used in underwriting?
Telematics involves using vehicle and driver behavior data to predict claims and assess risk
Name three main rating factors for motor car risks.
Class of business, extent of cover, and district of garaging
What are the key components of underwriting strategy?
Corporate objectives, rating models, and the distinction between account-level and case underwriting
How do advancements like Advanced Driver Assistance Systems (ADAS) affect underwriting?
They reduce accident frequencies, influencing premium calculations
Define ‘pure risk premium.’
The part of the premium covering the expected cost of claims only
What legal frameworks affect underwriting practices?
Rehabilitation of Offenders Act 1974 and Equality Act 2010
Explain the concept of loadings and discounts in motor insurance.
Adjustments to premiums based on specific risk factors or customer attributes
What is a no-claim discount (NCD), and how does it operate?
A reduction in premiums for drivers with no recent claims, incentivizing safer driving
What is ‘fronting’ in motor insurance?
Misrepresenting the primary driver on a policy, often resulting in void policies if detected
How do insurers validate information disclosed during underwriting?
Through databases, engineer reports, medical reports, and no-claim discount proof
Why is driver age a critical factor in motor insurance underwriting?
Younger and older drivers typically present higher risk
What role does market competition play in pricing strategies?
It forces insurers to balance desired premiums with competitive pricing
Differentiate between written premium and earned premium.
Written premium is the total premium charged, while earned premium is the portion covering the elapsed policy term
What are the consequences of a fronted policy for a policyholder?
Policy voidance and possible legal penalties
How is risk visualized during underwriting?
Using tools like graphs, historical data trends, and predictive models
What impact does vehicle modification have on underwriting?
It may increase risk, requiring additional premiums or exclusions
Why do insurers assess the garaging location of vehicles?
To evaluate theft and vandalism risks based on the area’s crime rate
What does elasticity of demand refer to in motor insurance pricing?
The sensitivity of policyholders to changes in premium pricing
How does rehabilitation influence underwriting decisions?
Prior convictions may be excluded after a certain period under the Rehabilitation of Offenders Act
What is the primary goal of underwriting in motor insurance?
A) To maximize premiums charged to policyholders
B) To ensure risks are appropriately priced
C) To reduce the number of claims made
D) To enforce policyholder compliance
B) To ensure risks are appropriately priced
What does a ‘pure risk premium’ cover?
A) Administrative costs of the insurer
B) Expected claims costs only
C) Commissions for intermediaries
D) Profit margins for the insurer
B) Expected claims costs only
What is the primary purpose of telematics in motor insurance?
A) To reduce the cost of repairs
B) To predict driver behavior and assess risk
C) To manage policy cancellations
D) To facilitate premium payments
B) To predict driver behavior and assess risk
Which of the following factors is NOT typically used to calculate motor insurance premiums?
A) Vehicle type
B) Policyholder’s diet
C) Garaging location
D) Driver’s age
B) Policyholder’s diet
What is the key advantage of Advanced Driver Assistance Systems (ADAS) for insurers?
A) It reduces the frequency of accidents
B) It eliminates the need for insurance policies
C) It increases vehicle repair costs
D) It prevents all vehicle thefts
A - It reduces the frequency of accidents
What is the main legal concern addressed by the Rehabilitation of Offenders Act 1974 in underwriting?
A) Limiting claims frequency
B) Ensuring previous convictions are disregarded after a certain period
C) Reducing fraudulent claims
D) Standardizing premiums across all drivers
B) Ensuring previous convictions are disregarded after a certain period
What does the term “fronting” refer to in motor insurance?
A) Falsifying a claim amount
B) Providing incorrect details about the primary driver
C) Overestimating the vehicle’s value
D) Delaying premium payments
B) Providing incorrect details about the primary driver
How is a no-claim discount (NCD) typically earned?
A) By driving a luxury vehicle
B) By avoiding claims over a specified period
C) By increasing the policy’s deductible
D) By insuring multiple vehicles
B) By avoiding claims over a specified period
Which of the following is a key tool used by insurers to validate information disclosed by policyholders?
A) Online surveys
B) Motor Insurance Database (MID)
C) Customer satisfaction scores
D) Social media profiles
B) Motor Insurance Database (MID)
Why is garaging location important in underwriting?
A) To assess potential damage from weather
B) To determine the driver’s commuting habits
C) To evaluate theft and vandalism risks
D) To reduce vehicle maintenance costs
C) To evaluate theft and vandalism risks
When calculating premium rates for motor insurance, what element is typically the most difficult to predict?
a.
The required contribution to profits.
b.
Reinsurance costs.
c.
Expenses and commission payments.
d.
The cost of claims.
D
Maggie is arranging insurance for her motorcycle that, as part of the cover, allows additional riders. The additional riders are Maggie’s two children: James aged 22 and Jess aged 25. How will the risk typically be rated?
a.
It will be based on each of the riders’ individual age and experience.
b.
It will be based on Maggie with a premium loading applied to both Jess and James.
c.
It will be based primarily on Maggie with a premium loading applied to both Jess and James based on their amount of usage.
d.
It will be based on James with a premium loading applied to both Jess and Maggie.
D
What will an insurer take into account when determining its ‘risk appetite’?
Question 3 Select one:
a.
How much reinsurance to use.
b.
Shareholder returns.
c.
The market position of competitors.
d.
The reliability of electronic data interchange.
A
Larry was released from prison two years ago having served a five year sentence. He now intends to apply for motor insurance and the insurer asks a specific question about convictions. Does Larry have to declare and why?
Question 4 Select one:
a.
He does not need to declare his conviction because it is spent at the point he leaves prison.
b.
He must declare his conviction because the original sentence was over four years and cannot be regarded as spent.
c.
He does not need to declare his conviction because it is spent after two years.
d.
He must declare his conviction because he left prison only two years ago so it could not be regarded as spent.
B
Assuming the same type of vehicle and personal circumstances, which policyholder is most likely to pay the highest motor premium?
Question 5 Select one:
a.
Jeff, who has a comprehensive policy, lives in a small town and has class B2 cover.
b.
Ahmed, who has a comprehensive policy, lives in a village and has cover on a social, domestic and pleasure basis.
c.
Steff, who has third party, fire and theft cover, lives in Cambridge and has cover on a social, domestic and pleasure basis.
d.
Jana, who has third party, fire and theft cover, lives in a rural location, and has class A cover.
A
Underwriting motorcycles presents a different risk to underwriting motor cars. This is primarily due to the greater:
Question 6 Select one:
a.
costs due to the theft of helmets and protective clothing.
b.
costs of providing personal accident benefits.
c.
moral risk and cost of the theft of helmets and protective clothing.
d.
risk of theft and injury.
D
When is a Periodical Payment Order [PPO] most likely to be paid?
Question 7 Select one:
a.
Under Road Traffic Act third party bodily injury awards.
b.
Where there is a partial loss to a motor vehicle.
c.
Where there is a total loss to a motor vehicle.
d.
In cases of serious injury requiring long term care.
D
Pedro is applying for motor insurance and has been told that he will have to pay a higher premium due to his occupation. He is most likely to be a:
Question 8 Select one:
a.
civil servant.
b.
cleaner.
c.
professional cricketer.
d.
part-time worker in a casino.
C
An insurer’s underwriting strategy is typically broken down into three key elements:
Question 9 Select one:
a.
premium targets, claims and expense ratios and expected investment returns.
b.
claims and expense ratios, premium targets and returns to investors.
c.
returns to investors, expenses and claims.
d.
actual expenses, claims, and market share.
A
The insured has a motor policy with a maximum four year no claims discount [NCD] of 60%. This is not protected. If he had an accident where he was not at fault, and the insurer was unable to make a full recovery, what effect typically would this have on his NCD?
Question 10 Select one:
a.
It would be stepped back to two years’ NCD immediately and he would need to pay an extra premium.
b.
It would be stepped back to two years’ NCD at renewal.
c.
It would remain unaffected as he was not at fault.
d.
It would be stepped back to three years’ NCD at renewal
B
