Chapter 5 Flashcards
Principle of Pooling Risks
The losses of few are met by the contributions of the many
Forming a common pool
Law of Large Numbers
By underwriting a large number of risks, insurers can predict losses more accurately and stabilise their financial results
Anti-Selection
When insurers fail to price and underwrite risks properly, attracting higher risk customers while deterring desirable ones
Underwriting Footprint
The boundaries within which an insurer operates, including the types of risks accepted and the limits on income and retention
Personal Lines v Commercial Lines in Underwriting
Personal lines use standardised terms and competitive pricing
Commercial lines require customised underwriting and higher commissions
Risk Appetite
Defines the type of risk an insurer will or will not accept, the limits on income and the use of reinsurance
Main Elements of Motor Insurance Premiums
- anticipated claims costs
- operating expenses
- reinsurance and levies
- contribution to profit
Two Types of Expenses in Motor Insurance
Variable costs - dependent on transaction volume
Fixed costs - independent on transaction volume
What factors influence reinsurance costs
The type of business written and the minimum premium levels set by reinsurers
Periodical Payment Orders
Structured settlements where periodic payments are made to cover future needs
Courts Act 2003 and PPOs
The Act gave courts the power to order PPOs without the consent of both parties
Personal Injury Discount Rate
The discount rate was set at -0.75%, a significant decrease from 2.5%
It is now 0.25% from 2019
Legal Aid, Sentencing and Punishment of Offenders Act 2012
Introduced key reforms in civil litigation funding, including abolishing the recoverability of success fees in “no win, no fee” agreements
Fixed Recoverable Costs
Predefined costs associated with legal claims, ensuring costs remain proportionate to the severity of the claim
District of Garaging or Use
- high traffic areas lead to higher claim frequency
- garaging areas influences rating
- postal codes now used to classify risks
- rural areas generally lower risk
Classification of Vehicle
- vehicles classified by engine capacity, value, performance, repair cost and safety features
- original 7 groups expanded to 50 over time
Earned Vehicle Years
Exposure for risks in force during a specific period
Earned Premiums
Portion of premiums reflecting the exposure during the review period
Risk Factor Analysis
Analysing risks based on factors like district, driver age, vehicle type, usage and cover type
Ratios in Underwriting
Incurred Claims Ratio - ratio of claims paid and estimated future liabilities to premium charged
Expense Ratio - portion of the premium allocated to cover operating costs
Elasticity of Demand
Elasticity measures the change in demand as a result of a price change
If demand increases when the price decreases, the product is considered elastic
Cap and Collar
Limits the maximum price increase (cap) and reduction (collar) to maintain price stability
Motor Car Underwriting Factors
- Proposer’s Information
- Drivers Age, Medical History, Occupation and Experience
- Driver’s Claims History
- Driver’s Conviction History
- Value and Age of vehicle
- Previous insurance applications
- Security of Vehicle
Rehabilitation Periods
Fine - 1 year
Endorsement - 5 years
Penalty Points - 3 years
Disqualification - The end of the disqualification period
Imprisonment is spent after periods varying between 2 and 11 years, sentences of more than 4 years are ‘never spent’
