Chapter 7 - Underwriting Flashcards
Why would an insurer take less than 100% of the risk?
Capacity - each insurer has a stated capacity it must not exceed
Appetite - diversifying portfolio to spread risk
Aggregation - stopping too many risks being located in one place
Broker influence - may decide to spread the risk
Insured influence - the insured may have a view about the choice of insurers for their risk.
What is Placing Platform Limited (PPL)?
electronic placing system developed by the market, which handles the whole process while providing a full audit trail
what do brokers do first regarding markets?
They consider markets then use rating agencies to determine appropriate insurers. Ratings are a good indicator for brokers to gauge whether the insurer is likely to be able to pay claims for their client.
Rating agencies consider financials, management and operation of the business and peer comparisons
why is the choice of the leader in a subscription basis important?
they should set good T&Cs for the client
Be credible to other insurers so that the following market will support them
How is the client’s risk usually presented to potential leaders?
MRC/slip (Market Reform Contract), presented alongside additional info to allow the potential leaders to consider the risk
The broker will also have to identify some potential following insurers as well, if the leader isn’t accepting 100% of the risk
what do the 4 outcomes regulators are focusing on relate to in terms of Consumer duty?
The products and services being provided
price and value
consumer understanding
consumer support
How does a market cycle work?
Profits are high, insurers enter the market
Losses are made, insurers leave the market
Insurers withdraw from the market following sustained losses leading to less competition and higher premiums
Repeats itself as profits get higher again
What is exposure modelling?
looks at the way in which different risks that an insurer writes combine to create a concentration or risk in one area.
Calculations such as geographical mapping and probably maximum loss (PML) are used
How is loss modelling done?
Realistic Disaster Scenarios (RDS) - to calculate the likely financial losses that might occur in predetermined catastrophe situations
Cat modelling - makes the insurer aware of the non-financial impact of CATs
How are premiums usually calculated?
by applying a premium rate (the hazards that are being faced with a particular risk) to a premium base (measure of the exposure)
How does premium calculation differ for liability insurance?
Employers’ liability - payroll of the insured is used as a basis
Products/Public liability - often rated on turnover
PI - rated on fees earned
what are some other components of premium calculations?
Operational costs
Reinsurance costs
Profit margin
Contribution to claims reserves
Taxes
What does reserving mean and impacts of it?
Putting aside funds to pay claims in the future, under and over reserving are equally incorrect
Incorrect reserving can distort solvency calculations as well as have an impact on overseas trust funds which satisfy regulators such as in the USA
Should also include an element of not yet known claims (incurred but not reported IBNR) but may be reported later in the year
What is reinsurance to close (RITC)?
Reinsuring one syndicate’s year of accounts into another, allowing the closing year to calculate its profit or loss and report to the investors (names)
