Chapter 5 Flashcards
Role of the Underwriting Department
Responsible for assessing risks and determining premiums for insurance policies
Risk Management Role
Chief Risk Officer or Head of Risk leads a team to identify and mitigate business risks
Claims Department Purpose
Ensures fair settlements for policyholders and compliance with contractual obligations
Delegated Authority
Insurance companies may grant underwriting or policy administration powers to third parties
Managing General Agents (MGAs)
A type of delegated authority arrangement where MGAs handle underwriting, marketing, and administration
Compliance Department
Ensures the firm meets regulatory requirements and prevents legal risks
Actuarial Department
Led by a Chief Actuary, who works with analysts and actuaries to assess financial risks
Sales and Marketing
Drives business growth through strategic sales and customer engagement
Customer Service Functions
Involves handling customer queries, claims processing, and policy management
Investment Management
Insurers invest assets such as premiums, claims reserves, and shareholder funds
Financial Management
Key focus for senior management and the board, ensuring financial stability
Strategic Planning
Guides the business towards long-term success, involving board decisions
Health and Safety Responsibilities
Ensures compliance with regulations and workplace safety standards
Mergers and Acquisitions
Companies may merge or acquire others to achieve efficiency and market expansion
White Label Insurers
Provide insurance policies under a partner company’s brand while managing underwriting
A policyholder applies for car insurance but has multiple speeding convictions. What should the underwriter do?
a) Approve the policy at a standard rate
b) Decline the application
c) Apply higher premiums and policy conditions
d) Ignore the convictions
c) Apply higher premiums and policy conditions
An insurer fails to assess flood risks properly, leading to major financial losses. What should have been done?
a) Ignore past flood records
b) Increase premiums for all policyholders
c) Use risk modelling to predict and mitigate potential losses
d) Refuse to insure properties near water
c) Use risk modelling to predict and mitigate potential losses
A customer submits a claim for a stolen car but provides inconsistent details. What should the claims handler do?
a) Approve the claim immediately
b) Reject the claim without investigation
c) Conduct further checks and request additional evidence
d) Pay a partial settlement to compromise
c) Conduct further checks and request additional evidence
An insurer grants delegated authority to a broker but notices higher claim payouts. What action should be taken?
a) Immediately terminate the agreement
b) Conduct an audit and review underwriting guidelines
c) Ignore the issue and continue operations
d) Reduce claim limits without notifying the broker
b) Conduct an audit and review underwriting guidelines
A company fails to follow GDPR rules, leading to a data breach. What could happen?
a) Regulatory fines and reputational damage
b) Increased customer satisfaction
c) A reward for transparency
d) A reduction in regulatory requirements
a) Regulatory fines and reputational damage
An actuary underestimates the cost of claims, leading to financial instability. What should have been done?
a) Use advanced data analytics for accurate projections
b) Reduce premiums to attract more customers
c) Stop selling high-risk policies immediately
d) Ignore the financial losses
a) Use advanced data analytics for accurate projections
A sales agent misleads customers about policy coverage. What is the consequence?
a) Customer complaints and potential legal action
b) Increased sales revenue
c) A promotion for the agent
d) No impact on the business
a) Customer complaints and potential legal action
A customer has difficulty understanding their policy terms. What should customer service do?
a) Explain the terms clearly and provide written guidance
b) Ignore the customer’s concerns
c) Tell the customer to read the policy themselves
d) Cancel the policy to avoid complaints
a) Explain the terms clearly and provide written guidance
An insurer invests heavily in volatile stocks, leading to losses. How can this be prevented?
a) Diversify the investment portfolio
b) Stop investing altogether
c) Invest only in one high-risk sector
d) Ignore market trends
a) Diversify the investment portfolio
An insurer fails to maintain sufficient reserves for claims. What are the risks?
a) Insolvency and regulatory action
b) Higher customer satisfaction
c) Increased profits
d) No impact on operations
a) Insolvency and regulatory action
A company wants to expand into a new market. What should they do first?
a) Conduct market research and risk analysis
b) Enter the market immediately
c) Ignore competitor activity
d) Offer random discounts
a) Conduct market research and risk analysis
An insurer’s office fails to follow safety protocols, leading to employee injuries. What could happen?
a) Legal penalties and compensation claims
b) Increased staff productivity
c) Higher business revenue
d) No consequences
a) Legal penalties and compensation claims
Two insurers merge but struggle with integrating operations. What can help?
a) Strategic planning and employee training
b) Ignoring operational issues
c) Firing half the workforce
d) Canceling all existing policies
a) Strategic planning and employee training
A white-label insurer offers policies under a partner’s brand, but customers complain about claim delays. Who is responsible?
a) The insurer managing the claims
b) The partner company
c) The customers
d) No one
a) The insurer managing the claims
A multinational corporation applies for a large commercial liability policy. The business operates in multiple high-risk industries, including oil drilling and chemical manufacturing. The underwriter notices discrepancies in their past claims history and financial reports. What is the most appropriate action?
a) Decline the policy immediately to avoid risk
b) Approve the policy with a high deductible without further investigation
c) Conduct enhanced due diligence, including third-party risk assessments and financial audits
d) Offer the policy at standard terms to maintain the relationship with the client
c) Conduct enhanced due diligence, including third-party risk assessments and financial audits
An insurance company detects an unusual spike in high-value personal injury claims from a specific geographic area. The claims appear to be from different policyholders, but all involve the same law firm and medical provider. What should the claims team do first?
a) Approve the claims quickly to avoid complaints
b) Flag the cases for fraud investigation and liaise with anti-fraud agencies
c) Deny all claims from that area without investigation
d) Increase premium rates for all policyholders in that region
b) Flag the cases for fraud investigation and liaise with anti-fraud agencies
An insurance firm operating in multiple countries is found to be significantly below the required solvency margin due to excessive claims payouts and poor investment decisions. What immediate action must senior management take?
a) Continue operations as usual and hope for financial recovery
b) Transfer funds from policyholder reserves to cover business expenses
c) Inform regulators immediately, implement capital-raising measures, and revise risk management strategies
d) Close down the company and liquidate assets without notifying policyholders
c) Inform regulators immediately, implement capital-raising measures, and revise risk management strategies
A ransomware attack encrypts sensitive customer data, and hackers demand a large payment to restore access. The insurer has no immediate backup available. What is the best course of action?
a) Pay the ransom quickly to regain access to customer data
b) Report the incident to regulators, law enforcement, and activate the company’s cybersecurity incident response plan
c) Ignore the issue and claim it was a system malfunction
d) Announce that the breach was caused by an external IT provider and shift responsibility
b) Report the incident to regulators, law enforcement, and activate the company’s cybersecurity incident response plan
An insurance company’s investment team has placed 80% of the firm’s capital into high-yield but highly volatile assets. A sudden market downturn results in heavy losses, reducing the company’s ability to pay claims. What action should the Chief Financial Officer (CFO) take?
a) Immediately rebalance the portfolio to include lower-risk investments and secure emergency funding
b) Ignore the losses and wait for the market to recover
c) Borrow heavily to cover immediate claim payments without changing investment strategy
d) Shift all investments into cryptocurrencies for potential high returns
a) Immediately rebalance the portfolio to include lower-risk investments and secure emergency funding
A major retailer submits a business interruption claim after a government-mandated lockdown due to a pandemic. The policyholder argues the policy covers all forms of disruption, but the insurer’s terms state that only physical damage triggers coverage. What should the claims department do?
a) Pay the claim in full to avoid reputational damage
b) Deny the claim and ignore customer complaints
c) Conduct a detailed policy wording review and seek legal interpretation before making a decision
d) Offer a partial payout without explanation
c) Conduct a detailed policy wording review and seek legal interpretation before making a decision
A senior executive at an insurance company learns about a pending acquisition of a smaller competitor before it is publicly announced. They secretly buy shares in the competitor’s company before the acquisition is made public. What legal and regulatory consequences could they face?
a) None, since they work in the insurance industry, not finance
b) Fines, criminal prosecution, and a permanent industry ban
c) A small warning from the regulator but no real consequences
d) A promotion for making a smart financial decision
b) Fines, criminal prosecution, and a permanent industry ban
A long-standing corporate client files a large property damage claim after a fire. The company’s CEO is a personal friend of the insurer’s director and pressures the claims team to fast-track approval, despite concerns over inconsistencies in the claim. What is the correct response?
a) Approve the claim immediately to maintain the business relationship
b) Conduct a full investigation and apply standard due diligence, regardless of the personal relationship
c) Offer a small payout to avoid conflict and delay the full investigation
d) Ignore the inconsistencies and approve the claim as a goodwill gesture
b) Conduct a full investigation and apply standard due diligence, regardless of the personal relationship
A new competitor enters the market, offering significantly lower premiums for motor insurance. In response, your company is pressured to cut prices drastically to retain customers, despite concerns over profitability. What is the best long-term strategy?
a) Lower premiums below sustainable levels to compete aggressively
b) Maintain pricing discipline while improving service quality and risk selection
c) Exit the market entirely to avoid losses
d) Reduce claims payouts to compensate for lost revenue
b) Maintain pricing discipline while improving service quality and risk selection
An insurance company is considering acquiring a smaller firm to expand its market reach. During due diligence, auditors discover irregularities in the target company’s financial statements, including misreported claim reserves. What should the acquiring company do?
a) Proceed with the acquisition without changes, as the market opportunity is too good to miss
b) Halt the acquisition until further investigations clarify the financial risks
c) Complete the purchase quickly before regulators notice the irregularities
d) Offer a higher price to compensate for the irregularities
b) Halt the acquisition until further investigations clarify the financial risks
