Chapter 7 - Underwriting Flashcards

1
Q

What is meant by a Subscription Market?

A

More than one insurer can participate in any single risk, rather than just one.

Does not mean a single insurer cannot take 100% of any one risk.

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2
Q

What are some reasons why an insurer would take less than 100% of any risk?

A
  1. Capacity
  2. Appetite
  3. Aggregation
  4. Broker influence
  5. Insured’s influence (often a preference for lead insurer)
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3
Q

What does ‘aggregation’ mean?

A

Accepting too many risks in one location can lead to far higher losses if a large single event occurs (e.g. earthquake).

Insurers protect themselves by accepting smaller shares of each risk as well as plotting the location for each risk.

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4
Q

What 2 categories of insurers are there in a ‘subscription market’?

A
  1. Leaders
  2. Followers
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5
Q

Can insurers outside of London participate in a subscription market?

A

Yes. Brokers may choose insurers from outside the London Market.

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6
Q

Why might international markets be used in a subscription market?

A

Lack of capacity in London:
- some risks may be too large for London alone.

Loyalty of brokers or insured:
- broker/insured may wish to support their home market as well as the London Market.
- means part of the risk will be placed in another market (e.g. Scandinavia), and part in the London Market.

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7
Q

What does ‘electronic placing’ provide the opportunity for?

A

Does not intend to remove the need for face-to-face negotiation of risks.

But provides the opportunity to remove the face-to-face element when it adds no real value to the transaction.

This increases efficiency.

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8
Q

Name 2 electronic placing platforms used in the market?

A
  1. Platform Placing Limited (PPL)
  2. Whitespace
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9
Q

What is the Law of Agency?

A

Agent is the broker.
Principal is the insured.
Insurer is the third party.

The agent acts on the behalf of the principal, and brings the principal and third party into a contractual relationship.

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10
Q

In what market does a broker have to be used?

A

The Lloyd’s Market.

In other areas of London this may not be the case.

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11
Q

What is an important factor for brokers when considering markets?

A

Rating Agencies ratings of insurers.

Brokers can utilise these publicly available ratings created by rating agencies.

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12
Q

What 2 factors do rating agencies rate insurers on?

A
  1. the financial position of the insurer.
  2. the management & operation of the business as a whole.
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13
Q

Who compares insurers to their peer groups?

A

Rating Agencies do this.

They compare insurers of a similar size and structure.

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14
Q

When might a drop in an insurer’s rating NOT cause business issues for the insurer?

A

When all insurer’s have their ratings reduced, this effectively neutralises the decrease.

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15
Q

When might a drop in an insurer’s rating cause a business issue for the insurer?

A

If ONE insurer has their rating reduced & all of its peers remain at the same level this can cause a problem for the insurer.

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16
Q

When might an insurer face a claim of negligence from their client?

A

If an insurer is unable/does not have enough funds to pay future claims.

(brokers choose insurers with high ratings to avoid this).

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17
Q

What is important for a ‘Leader’ to do?

A
  • set good terms & conditions for the client.
  • be credible to other insurers so a following market will support the leader if they don’t take 100% of risk.
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18
Q

Can a broker approach a number of possible leaders?

A

Yes. The broker then reviews the best quotation with the client.

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19
Q

How is the Market Reform Contract (MRC) used?

A

The brokers present the client’s risk on the MRC and present it to potential leaders to allow them to consider the risk.

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20
Q

Describe the ‘Market Cycle’?

A
  1. There are very few insurers in a class of business.
  2. Insurers increase premium with no loss of business.
  3. The insurance market is making a profit.
  4. New insurers come into the market.
  5. New insurers reduce their premiums to try capture market share.
  6. A large catastrophe loss occurs which causes large
    losses for many insurers that don’t have large reserves
    as they’ve not been charging enough premium.
  7. Some insurers leave the market altogether, and some leave that particular class of business.
  8. The remaining insurers can raise premiums to more
    reasonable levels as there is less competition for the
    business.
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21
Q

What does ‘Exposure Modelling’ show?

A

Uses data to calculate an insurers exposure on a combination of risks in any location or region, to ascertain whether there’s any more capacity in that area to accept more risks.

i.e. In property - are there a number of separate properties in close geographical proximity?

22
Q

What does ‘PML’ stand for?

A

Probable maximum loss.

23
Q

What does ‘PML’ calculate?

A

PML the maximum loss that an insurer is expected to lose on an insurance policy.

PML calculation is important for calculating how much reinsurance should be purchased.

24
Q

What does ‘Loss Modelling’ show?

A

Works out the financial impact of certain events occurring.

25
Q

What does ‘RDS’ stand for? What are they? What is their purpose?

A

Realistic disaster scenarios.

In the Lloyd’s Market all managing agents must calculate what their maximum claim would be for each RDS, based on the risks they have written.

The purpose of RDS’ is to calculate the likely financial loss that may be suffered in certain predetermined catastrophe situations.

26
Q

What are some of the general RDS scenarios that managing agents must cover?

A
  • Florida windstorm
  • European windstorm
  • UK flood
  • Gulf of Mexico windstorm
  • Japanese windstorm
  • Japanese earthquake
  • Terrorism in New York (i.e. 9/11)
27
Q

Do syndicates need to report on any other RDS’?

A

Yes. Syndicates must identify & report on another 2 scenarios of its choice that could have a significant financial impact on the syndicate should they occur.

28
Q

Name 2 reasons why loss and exposure modelling is important for the Lloyd’s & Company Market?

A
  1. monitoring business.
  2. assisting with reinsurance purchasing.
29
Q

Who calculates a suitable premium?

A

The leader.

30
Q

How is ‘Premium’ usually arrived at?

A

By applying premium rate to premium base.

31
Q

What is ‘premium rate’?

A

The hazards that are being faced with a particular risk or particular insured.

32
Q

What is ‘premium base’?

A

A measure of the exposure.

33
Q

Premium example 1:

A vessel is valued at £10m. If the insurer charges £2 per £100 of cover (2%), what is the premium calculation? And the reasons for its steps?

A

£10m / £100 = £100,000.
£100,000 X £2 = £200,000.

  1. First you need to find out how many 100’s are in £10m.
  2. Next you need to X this number by the rate (i.e. £2).
34
Q

Premium example 2:

A vessel is value at £10m. If the insurer charges a premium rate of £2 per £1,000 of cover (2%), what is the premium calculation?

A

£10m / £1,000 = £10,000.
£10,000 X £2 = £20,000.

35
Q

Do following market insurers have to accept the leading market’s premium rate?

A

No. There is no obligation on any following market to accept the leader’s premium rate, and they can choose to request a different rate.

If they do so, the broker cannot return to previous committed underwriters to ask if they want to increase their premium figure.

36
Q

What are some general expenses that should be considered when calculating the insurance premium?

A

Operational costs:
- underwriters, claims staff etc., costs of business.

Reinsurance costs:
- for this specific risk or the costs of reinsurance generally.

Profit margin:
- insurers should consider making profit on their risks written.
- taking into account reinsurance costs, taxes etc.

Contribution to claims reserves:
- all insurers should build up reserves in case of the catastrophe losses that may occur.

Taxes:
- insurers should take its tax expenses into account.
- if an insurer ignores this, it may find a substantial proportion of what it thought was net income disappears as tax.

37
Q

What is meant by ‘reserving’?

A

Making sure there are sufficient funds available for the payment of any future claims.

38
Q

What does ‘under-reserving’ mean?

A

Holding insufficient reserves to pay any future claims.

39
Q

What is ‘short-tail’ business?

A

Claims which are generally reported & settled quickly.

40
Q

What is ‘long-tail’ business?

A

Claims that can take a long time to report & a long time to be settled.

(mainly liability)

41
Q

How is each 12 months treated by Lloyd’s and the Company Market?

A

Each 12-month cycle is treated as a separate year of account.

For Lloyd’s this always starts on 1 January. If a syndicate starts mid-year, their first year of account will be less than 1 calendar year.

For some classes of business at the end of the 12 month period not all the claims will have been advised to insurers.

42
Q

What does IBNR stand for?

A

Incurred but not reported.

43
Q

What is the IBNR?

A

The amount reserved for losses that have not yet been reported at all to the insurer.

This reserve should be a calculated figure based on previous experience of how claims have developed.

44
Q

What does IBNER stand for?

A

Incurred but not enough reported.

45
Q

What is the IBNER?

A

The amount reserved for losses that are KNOWN about, but the current reserve may not be adequate.

46
Q

What is a ‘Trust Fund’?

A

As a condition of some overseas regulators, insurers are required to maintain physical funds of reserves within the particular country’s borders that a risk is written.

47
Q

What does RITC stand for?

A

Reinsurance to close.

48
Q

How long do Lloyd’s Syndicates accept risks/keep their accounts open?

A

Each syndicate accepts risks for 1 year (‘years of account’).

Syndicates give the business 3 years to develop (so syndicates keep their books open for another 2 years - 3 in total).

49
Q

What does RITC entail?

A

Syndicates reinsure any outstanding liabilities into the next year of account.

Actuaries calculate any remining future liabilities so that a premium can be charged.

50
Q

Why would a Syndicate have to keep their year of account ‘open’?

A

When the outstanding liabilities of the syndicate trying to purchase reinsurance cannot be calculated (so they essentially cannot RITC).

A year often remains open because the claims are too large or difficult to quantify accurately.

51
Q

In Lloyd’s, who helps manage any ‘open’ years of account?

A

Lloyd’s has the ‘Open Years Management Department’.

They work with Managing Agents that have open years of account.

52
Q

What does it mean if an insurer is in ‘run off’?

A

The insurance company has stopped writing business (do not write any new risks), but deal with all outstanding claims that arise on the business already in the books.