Chapter 7 - Underwriting Flashcards
What is a subscription market? Is London a subscription market?
More than one insurer participating in risks
Yes
What does an insurer’s share of a risk depend on?
Capacity in any one year - agreed by regulator or company
Appetite - exposure of diff risks to reduce losses
Aggregation - of any one location could increase losses so monitor/spread lines
Broker influence
Insured’s influence - preference
Is the London market the only market used on a risk?
No may be company too on any one risk
When did electronic placing come into play?
2020 due to COVID-19
Should brokers use rating agencies for guidance in their consideration of which insurers to use?
Yes
What happens if brokers recommend insurers that are not financially secure?
Claims for professional negligence
Can there be >1 leader on an overall risk? What are they called?
Yes - 1 for London, 1 for Lloyd’s, 1 for Company
Bureau leads
Are all market cycles the same for each class of business?
No
What happens when profits are high in the market cycle?
New insurers enter the market
What happens following significant losses in the market?
Insurers leave the market and premiums increase due to less competition
Why might an insurer leave a market?
Cannot obtain regulatory permission to continue to operate
What does loss and exposure modelling do?
Helps insurer to know where the concentration of its risks are
Analysis for reinsurance purchase
Informs regulators
Does calculating probable maximum losses (PML) allow a more realistic analysis of potential losses than the sum insured?
Yes - how much reinsurance is needed
Whats are RDSs? What do they do? What analysis?
Realistic Disaster Scenarios (RDSs) allow insurers to see their exposure to certain combinations of events
Managing agent works out what risks are exposed and max claim
Reinsurance to cover the risks? How much does it cost and how much original claim they would cover
Result is gross financial exposure to the insurer of the RDS (i.e. without the impact of any reinsurance)
Secondly the net result (reinsurance as well as any reinsurance reinstatement costs)
What should a premium calculation represent?
The exposure being presented to the ‘common pool’ by the particular risk
How are premiums generally calculated?
Premium rate - the hazards that are being faced with a particular risk or particular insured
Premium base - a measure of the exposure
Does a premium rate deal with the hazards being faced?
Yes
What is the premium base?
Sum insured or other measure of the exposure
Do some classes have estimated premium bases?
Yes
Balanced at the end of the year e.g., employers liability insurance which is balanced on actual wages paid across the year
Cargo open cover - decs to the insurer so when goods are actually shopped or stock throughput - warehouse stock levels
Are ‘following’ market underwriters obliged to accept the same premium as the leader?
No - often require higher premium
Does the policy premium need to factor in?
Operational cost
Reinsurance cost
Profit margin
Contribution to claims reserves
Taxes
What is reserving?
Putting aside funds to pay claims in the future
Either known or unknown
Is under-reserving and over-reserving correct?
Over-reserving = same as sum insured
Under-reserving = pay outside of the reserve, false profitability measure
Equally incorrect
What does incorrect reserving impact?
Insurer’s solvency calculations - higher the reserves (the liabilities side of the equation) the more capital the insurer must have available to balance the solvency equation
Situs funds or Trust funds held overseas to satisfy local regulators
What does RITC mean?
Reinsurance to close (RITC)
Reinsuring one syndicate’s year of account into another
What does RITC allow?
Allows the closing year to calculate its profit or loss after 3 years and report to the investors (the Names)
Close = declaring profit or loss
Door is closed = release some funds to names if declare profit - not liable for anymore claims
‘Closing a year’ = suitable premium has been agreed then reinsurance in place. No further liabilites
Does RITC have to be done with a successor year of the same syndicate?
No
It can be done as a commercial reinsurance with a different provider
Does a reinsurance premium need to be calculated for a RITC transaction? What happens if it cannot be agreed?
Yes
Year has to remain ‘open’ - syndicate year of account carries on as an ‘open year’
Why does a policy year remain open?
Claims are too large or difficult to quantify accurately
Does Lloyd’s get involved to try and manage claims to closure? Why?
Yes
As this potentially exposes the Lloyd’s Central Fund
Is it possible to obtain a RITC at a later date?
Yes once claims have developed further
What does PPL stand for?
Placing Platform Limited
How is an insurer rated?
Financial position
Management
Operation of business as a whole
When would a drop in rating not concern an insurer?
All insurers have their ratings reduced, then no one member of that group should suffer individually
Why is a broker’s choice of lead important?
Set good terms and conditions for the client
Be credible to other insurers so following market support lead
What is the FCA requirement for Consumer Duty?
Insurers evidence good outcomes for clients
Retail/consumer business only
1. Products and services being provided
2. Price and value
3.Consumer understanding
4. Consumer support
What are the general scenarios that managing agents have to consider in RDS?
two 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; and
* four different cyber attacks.
2 OF THEIR CHOICE
Scenarios if exposure to syndicate is above de minimis level - marine, aviation, space, energy, liability and political risks
What does Catastrophe modelling help with?
Helps to ensure that an insurer is aware of the non-financial impact of catastrophes occurring
frequency and severity of any particular type of event
What is the law of large numbers?
nsurers have a significant amount of data
enables them to determine a more accurate premium chargeable to the insured than would
be the case if their experience were limited to a few risks
How is a premium rate expressed?
a rate per cent = price per £100 insured
a rate per mille = £1,000 insured
A vessel is valued at £10m. If the insurer wants to charge £2.00 per £100 of cover (2%)
then the premium calculation would be:
£10m ÷ £100 = £100,000 × £2.00 = £200,000.
Therefore, at £2.00 per £100 of cover (2%), the premium for this vessel would
be £200,000.
If, however, the insurer proposes a premium rate of £2.00 per £1,000 of cover (2‰) then
the premium calculation would be:
£10m ÷ £1,000 = £10,000 × £2.00 = £20,000.
Therefore, at £2.00 per £1,000 of cover (2‰), the premium for this vessel would be
only £20,000.
If a following market requests a higher premium, does the broker need to ask if they want to alter their agreement to the higher premium figure?
No as per European Federation of Insurance
Intermediaries (BIPAR)
What is a blanket reserve?
Reserves for aggregated smaller value, higher volume claims - e.g., household, motor
What are the problems with long-tail business?
Claims reported/settled after the policy year
Inflation or law may change - final settlement higher than when claim was first advised
What does IBNER mean?
incurred but not enough reported (IBNER)
currently posted reserve may not be adequate
