Chapter 7 - Underwriting Flashcards by Darcy Baldwin

What is a subscription market? Is London a subscription market?

More than one insurer participating in risks

Yes

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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

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Is the London market the only market used on a risk?

No may be company too on any one risk

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When did electronic placing come into play?

2020 due to COVID-19

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Should brokers use rating agencies for guidance in their consideration of which insurers to use?

Yes

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What happens if brokers recommend insurers that are not financially secure?

Claims for professional negligence

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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

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Are all market cycles the same for each class of business?

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What happens when profits are high in the market cycle?

New insurers enter the market

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What happens following significant losses in the market?

Insurers leave the market and premiums increase due to less competition

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Why might an insurer leave a market?

Cannot obtain regulatory permission to continue to operate

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What does loss and exposure modelling do?

Helps insurer to know where the concentration of its risks are
Analysis for reinsurance purchase
Informs regulators

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Does calculating probable maximum losses (PML) allow a more realistic analysis of potential losses than the sum insured?

Yes - how much reinsurance is needed

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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)

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What should a premium calculation represent?

The exposure being presented to the ‘common pool’ by the particular risk

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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

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Does a premium rate deal with the hazards being faced?

Yes

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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