Chapter 7: Underwriting Flashcards
Capacity
Maximum amount of business and insurer can insure in one year
Insurers can have their own internal capacity limits for individual CoBs
Subscription Market
More than one insurer can participate in a single risk
Appetite
Insurer has to consider if a risk fits the terms of its portfolio
- Looking to avoid putting a lot of their exposure in one basket
Aggregation
Insurers monitor the potential for accepting risks that would be exposed to one event (i.e. Fire/Earthquake)
Insured Influence
Insured may have a preference for how the risk is placed, preferring either 1 insurer or splitting amongst more
Why might other markets be used?
Lack of capacity in London
Loyalty of brokers/insured (might want to support home market)
PPL
Placing Platform Limited
System to handle whole process from quote to bind to post bind endorsements
Broker security committees
Responsible for considering the relative security of an insurer
Rating agencies
Grade individual insurers
- A.M Best
- Fitch
- Standard & Poors
- Moody’s
- Kroll Bond
Basis on which ratings are made
- Financial position
- Management and operation of the business as a whole
- Compare insurer to peer group (similar sized orgs)
When a drop in rating might not concern an insurer
If everyones rating drops no reason to concern
Why brokers are concerned about ratings
- Broker is agent of the insured and want to make sure an insurer will be able to pay claims
What makes a good leader
- Set good T+Cs for the client
- Be credible to other insurers so that following market will support
Broker must explain the difference in the various options of leader
IA2015 - Duties of the broker to principals
Under 2015 Insurance act, any knowledge held by broker is deemed to be known by client
Insurer duty under July 2023 Consumer Duty FCA requirement
Increase requirement that the insurers evidence positive steps to ensure clients have good outcomes
Consumer Duty outcomes that regulators focus on
- Products and services provided
- is it fit for purpose
- Price and value
- is it value for money
- Consumer understanding
- are communications provided understandable
- Consumer support
*Do customers benefit from product
Exposure modelling
Looks at the way different risks written combine to create a concentration in one area
Property Exposure
- Are there a number of separate properties in close proximity?
- What is the total sum insured of any combo of properties
- Are the same perils being covered
Stock throughput exposure
Are different clients storing goods in the same warehouse
Satellites exposure
- Are several satellites being launched using the same vehicle at the same time
PML
Probable Maximum loss
- not working out the total of all sums insured but the realistic likely maximum
Why might PML be lower than total sum insured
property may be over a very wide area, sum insured might be high but the likelihood of everything being destroyed is unlikely
What Lloyds convention is used during Loss Modelling
Use RDS (Realistic Disaster Scenarios)
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RDS
Realistic Disaster Scenarios
Specific scenarios set out by Lloyd’s that managing agents must analyze
How insurers evaluate RDS
- Work out which risks they might be exposed by and the maximum claim
- Work out if they have any RI to cover it
- How much RI cost and how much original claim would cover
Final result = Gross financial exposure and then the net after RI
Gross financial exposure of RDS
Impact without reinsurance
Net Financial Exposure of RDS
Impact after taking into account applicable RI into consideration as well as RI and reinstatement costs
General scenarios of RDS
- 2 consecutive Atlantic seaboard windstorms
- Florida windstorms in different areas
- Gulf of Mexico windstorm
- European windstorm
- Japanese windstorm
- California earthquakes in two areas
- New Madrid earthquake
- Japanese earthquake
- UK flood
- Terrorism in two places in new york
- 4 different cyber attacks
Must also identify 2 scenarios of its own choice
Equally important for company market
New Madrid
Fault line in Missouri where earthquakes have potential to impact 7 different states
Illinois
Indiana
Missouri
Arkansas
Kentucky
Tennessee
Mississippi
Catastrophe Modelling
- Helps ensure the insurer is aware of the non-financial impact of catastrophes occuring
- Modellers consider frequency and severity of any event to help determine reinsurance
i.e. Claims volume will increase significantly
Premium calculation
- task of the leader
- insured contribution to the common pool
*must be fair and reflect the degree of risk
Law of large numbers
- larger data pool increases the chance of setting an accurate premium
How premiums are determined
Premium rate - hazards faced with a particular risk/insured
Premium base - measure of the exposure
When calculating both the insured and the insurer contribute to the calculation
* insured provides the value they want to have insured
*insurer provides the rate they are prepared to charge
Insured value divided by per amount of cover (i.e. £2 per £100)
Premium example
Vessel value = 10,000,000
Insurer rate = 2.00 per 100 (2%)
10,000,000 / 100 = 100,000 * 2.00 = 200,000
Premium base: sum insured
Sum insured is good for many property lines but is not good for EL, PL or PI
EL = Payroll
PL = Rated on turnover
PI = Fees earned
EL premium base
- not a factual figure
Insured estimates total salary cost
rate is applied to estimated figure and end of year declaration is submitted by insured showing actual salary.
Premium is then adjusted up or down depending on actual alary figure
Marine Cargo insurance premium
Often paid in stages as and when goods are actually shipped
Done via regular declarations under Open cover insurance contract
BIPAR
European Federation of Insurance Intermediaries
No longer automatically applicable now that the UK left the EU
Premium for following market
No obligation to accept the premium rate the lead set and can choose a different one
In this instant broker cant return to the UWs who they got the original commitments
Additional components of premium calculations
- Operational Costs
- some business may cost more to manage
- Reinsurance costs
*RI to cover may be expensive - Profit Margin
*might not be profitable - Contribution to claims reserves
- Taxes
Reserving
Making sure there are sufficient funds to pay claims
How insurers reserve
- Ascertain how much a claim will be ASAP
*review claim data
*consult experts - For higher volume, lower value claims (household/motor) insurers use statistical datas to create blanket resetves
- have to also estimate the cost of experts as well as the liability/building price
Claims Adjuster considerations
- Location / Jurisdiction of risk where legal proceedings may take place
- UK vs US personal injury claims are much lower
UK gov have now changed discount rate to -0.25% so any reserve should now be 100.25% of the actual value of policy
Why its not worth reserving the full policy limit
- More capital they must have in reserve, the more additional capital they have to tie up which could be used for other business
- still dangerous to under-reserve
Under-reserving
Hold insufficient reserves
Short tail
Claims are reported and settled within the policy year
Long tail
(mainly liability)
Claims can take a long time to report
IBNR
Incurred but not reported
Making provisions/estimates relating to claims which have not been reported at all to the insurer
IBNER
Incurred but not enough reported
Making provisions/estimates relating claims which are known about but reserve is not adequate
Developed claims
- claims will come in in stages
- some paid during the year
- some will be advised but not paid
- Some will not even be advised during the year
By seeing how previous year developed, actuaries can estimate how current years will develop
Trust funds
Insurer required to maintain physical funds/reserves within countries
Situs funds
Calculated using reserves that are held on open claims within market
UK GAAP
- Financial statements using annual accounting rules for individual UW year
- purpose of review is to close year
Closed year
Names (investors) are not liable for claims
2021 would be reviewed start of 2024
RITC
Reinsurance to close
- calculate remaining liabilities
- Should contain an element of IBNR
Incalculable circumstances for liabilities
- RITC cannot be finalised and year remains open
- Outstanding claims are large or difficult
- could use up premium funds and members’ funds
Does RITC have to be the next YOA
no
- commerical RITC where orgs take over the future liabilities without a link to the syndicate
- Names may have invested for a single year, so liabilities arent transferred
Run off
no longer write new risks but will remain on books for outstanding claims from existing business
- commercial companies exist to deal with this too
