Chapter 5 Flashcards
What does an insurer’s risk appetite refer to?
A) The insurer’s total annual profit target
B) The insurer’s willingness to accept specific types and levels of risk
C) The insurer’s marketing and advertising strategy
D) The insurer’s claims handling procedures
B) The insurer’s willingness to accept specific types and levels of risk
How does the concept of pooling of risks benefit an insurer?
A) It allows insurers to charge the same premium to all policyholders
B) It spreads individual losses across a large group, making claims more predictable
C) It ensures that only low-risk individuals are accepted into the insurance pool
D) It eliminates the need for underwriting and pricing adjustments
B) It spreads individual losses across a large group, making claims more predictable
Which of the following is not a key component of motor insurance premium pricing?
A) Anticipated claims cost
B) Reinsurance costs and levies
C) The vehicle’s resale value
D) Fixed and variable operating expenses
C) The vehicle’s resale value
Which of the following is considered a fixed cost in motor insurance operations?
A) Handling claims and policy alterations
B) Commission payments to brokers
C) Office rent and salaries of senior specialists
D) Processing policy renewals
C) Office rent and salaries of senior specialists
Explanation:
Fixed costs remain constant regardless of the volume of business written, such as office rent and salaries of underwriting, actuarial, and HR specialists. Variable costs (A, B, D) fluctuate with business activity.
What is considered the most difficult factor to assess when pricing motor insurance?
A) Fixed operating costs
B) Claims cost (frequency and severity)
C) Marketing and advertising expenses
D) Reinsurance charges
B) Claims cost (frequency and severity)
Explanation:
Claims cost is the hardest to predict because it depends on multiple variables, such as accident rates, fraud, repair costs, and bodily injury claims. Insurers rely on historical data and actuarial analysis to estimate it.
Why is motor insurance pricing particularly competitive in the UK?
A) The government regulates all motor insurance premiums
B) Motor insurance accounts for over 35% of total UK general insurance premium income
C) Vehicles in the UK have lower repair costs than other countries
D) Most motor insurers operate as non-profit organizations
B) Motor insurance accounts for over 35% of total UK general insurance premium income
Explanation:
Because motor insurance is such a large part of the UK insurance market, insurers compete aggressively through pricing, marketing, and technology (e.g., price comparison websites).
Why are profit margins in motor insurance typically low?
A) Insurers do not include profit margins in pricing
B) Motor insurance is a highly competitive market
C) Investment income always offsets underwriting losses
D) Insurance premium tax (IPT) eliminates most profit
B) Motor insurance is a highly competitive market
Explanation:
Due to intense competition, insurers must price policies aggressively, often resulting in low profit margins. They rely on investment and ancillary income to maintain overall profitability.
What can cause an insurer to experience a trading loss in motor insurance?
A) A reduction in the number of policyholders
B) Lower-than-expected claims frequency
C) Investment and ancillary income exceeding claims costs
D) High claims costs and operating expenses exceeding premiums
D) High claims costs and operating expenses exceeding premiums
Explanation:
Even with investment and ancillary income, unexpectedly high claims and expenses can lead to trading losses in certain years.
How does investment income impact an insurer’s motor insurance profitability?
A) It guarantees a profit, regardless of underwriting losses
B) It helps offset underwriting losses in bad years
C) It directly reduces claims costs
D) It eliminates the need for pricing adjustments
B) It helps offset underwriting losses in bad years
Explanation:
Insurers invest premiums to generate income, which can help cover losses from underwriting, though it does not guarantee profitability every year.
Which of the following is an example of ancillary income for a motor insurer?
A) Investment returns on premiums
B) Earnings from additional products like breakdown cover
C) Reinsurance payments from reinsurers
D) Reduced claims due to safer driving habits
Answer: B) Earnings from additional products like breakdown cover
Explanation:
Ancillary income comes from add-on products, admin fees, and commissions, providing insurers with extra revenue beyond premiums.
Which of the following is not a key component of motor insurance claims costs?
A) Vehicle repairs and replacement costs
B) Costs of alternative transport for third parties
C) Underwriting expenses and staff salaries
D) Third-party bodily injury compensation
C) Underwriting expenses and staff salaries
Explanation:
Claims costs mainly involve vehicle-related costs and third-party claims, whereas underwriting expenses and staff salaries are part of operating expenses.
Purpose of Periodical Payment Orders (PPOs)
Question:
Why were Periodical Payment Orders (PPOs) introduced in motor insurance?
A) To allow claimants to receive structured payments over time instead of a lump sum
B) To reduce insurers’ overall claim costs
C) To prevent claimants from suing for additional compensation
D) To eliminate the need for third-party liability insurance
Answer: A) To allow claimants to receive structured payments over time instead of a lump sum
An insurer is disputing a compensation award, arguing that the discount rate should be based on historical stock market returns rather than government bonds. Which legal framework determines how the discount rate is set?
A) The Civil Liability Act 2018
B) The Damages Act 1996
C) The Insurance Act 2015
D) The Personal Injury Claims Act 2005
B) The Damages Act 1996
A motor insurer notices a sharp increase in third-party injury claims costs. What is the most likely reason for this?
A) A reduction in the Personal Injury Discount Rate
B) A decrease in Ogden Table multipliers
C) A rise in the number of fraudulent claims
D) A change in liability laws making it harder to claim compensation
A) A reduction in the Personal Injury Discount Rate
A legal adviser is explaining to an insurer when the next review of the Personal Injury Discount Rate must take place. What is the legal requirement for reviewing the rate?
A) Every 2 years
B) Every 3 years
C) Every 5 years
D) Only when major changes occur in the investment market
C) Every 5 years
A personal injury lawyer is working on a claim in Northern Ireland and needs to apply the correct discount rate. As of March 2022, what is the discount rate in Northern Ireland?
A) +2.5%
B) -0.25%
C) -0.75%
D) -1.5%
D) -1.5%
A claimant’s solicitor is demanding that the insurer pays the success fee for a no-win, no-fee case. The insurer disputes this, stating that changes in the law prevent them from covering such costs. Which reform supports the insurer’s position?
A) The Compensation Act 2006
B) The Civil Liability Act 2018
C) The Legal Aid, Sentencing and Punishment of Offenders Act 2012
D) The Road Traffic Act 1988
C) The Legal Aid, Sentencing and Punishment of Offenders Act 2012
An insurance broker is offering to refer personal injury claims to a solicitor in exchange for a referral fee. Which legal development prohibits this practice?
A) The Ogden Tables Reform Act
B) The Jackson Reforms
C) The Civil Justice Act 2015
D) The Compensation Recovery Act
B) The Jackson Reforms
A claimant has filed a personal injury claim for £85,000 in October 2023. The solicitor argues that legal costs should be uncapped due to the complexity of the case. Under the new Jackson Reforms, what is the general rule for legal costs?
A) Legal costs are fixed for claims below £100,000, unless deemed complex
B) There are no limits on legal costs for personal injury claims
C) Fixed recoverable costs only apply to claims below £50,000
D) All personal injury claims must go through arbitration
A) Legal costs are fixed for claims below £100,000, unless deemed complex
A claimant has suffered a personal injury and their solicitor explains that they cannot recover the success fee from the defendant. However, the solicitor mentions that compensation for pain and suffering will be higher than before. Why is this?
A) Due to inflation adjustments made every year
B) Because of a 10% uplift in general damages after LASPO 2012
C) As a result of stricter liability laws in the Civil Liability Act 2018
D) Since the claimant has no legal representation, the court awards extra damages
B) Because of a 10% uplift in general damages after LASPO 2012
An insurer is reviewing its claims payment pattern. What percentage of claims are typically paid after two years?
A) 90%
B) 50%
C) 10%
D) 40%
C) 10%
An insurer has been underestimating claim reserves, leading to financial strain. Why is accurate reserving essential?
A) It helps reduce claims frequency.
B) It ensures the insurer remains solvent and premiums are set correctly.
C) It guarantees faster claim settlements.
D) It eliminates fraudulent claims.
B) It ensures the insurer remains solvent and premiums are set correctly.
An insurer is reviewing its reserves for claims that may not yet have been reported but stem from past events. What is this reserve category called?
A) Case reserves
B) Ultimate loss reserves
C) Claims development reserve
D) Incurred But Not Reported (IBNR) claims
D) Incurred But Not Reported (IBNR) claims