Chapter 7 - Underwriting

Question 1

Why an insurer would take less than 100% of a risk

Answer 1

Capacity
Appetite
Aggregation - too many risks in one place = higher loss if event such as earthquake occurs
Broker influence
Insurers influence

Question 2

Why might other markets be used?

Answer 2

Lack of capacity in London

Loyalty of brokers or insured

Question 3

Electronic placing

Answer 3

• Traditionally negotiation and presentation of risk face to face
• LMGroup developing electronic processes to support placement of business in LM.
• Target Operating Model (wider market modernisation)
• Operating costs in LM 30-40% can’t compete with leaner operating models
• Market developed own placing system PPL

Question 4

Brokers in London Market

Answer 4

In LM a broker has to be used and acts as agent of the insured.

Question 5

What is one of the determine factors for a broker selecting an insurer?

Answer 5

It’s security or ability to pay any claims in the future

Question 6

What to broker security committees use to consider the security of insurers?

Answer 6

Rating agencies who consider financial position, management and operations of the business

Question 7

Why are brokers concerned about ratings?

Answer 7

If insurer unable to pay future claim broker may face claim of negligence from client.

Question 8

Why is choice of leader important?

Answer 8

• Should set good terms and conditions for client

- Should be credible to other insurers so that following market supports leader of leader decides not to take 100%

Question 9

When might there be an overall lead overseas?

Answer 9

If part of risk is placed in another market.

Question 10

Who will the slip lead normally be?

Answer 10

One of the two bureau leaders

Question 11

Duties of brokers, UWs and principals

Answer 11

Brokers duty is to principal

Broker may also owe duty of care to insurer as their principal if the insurer delegates authority to the broker for underwriting or settling claims

Insurer owes duty to its investors (names and shareholders) to produce a return on their investment

Question 12

Market Cycles

Answer 12

• Few insurers
• increase premium
• making profit
• new insurers join market
• new insurer reduce premium
• catastrophe occurs, large losses, no large reserves for this as they haven’t been charging enough
• insurers leave market/class of business
• remaining insurers raise premiums

Question 13

What is a rare trigger for insurers to leave the market?

Answer 13

Impact of regulators - they might not agree to business plans

Question 14

Exposure questions for property

Answer 14

Are number of properties in close proximity to each other?

What is total sum insured of any combo of properties in an area?

Are same perils being covered for all properties?

Question 15

What is PML?

Answer 15

Probable Maximum Loss - calculation used to work out realistic likely maximum of all sums insured.

Important to calculate how much reinsurance should be purchased

Question 16

What is Realistic Disaster Scenarios?

Answer 16

Guidance to insurers in Lloyd’s for loss modelling so they can work out the financial impact

Specific ones managing agents must analyse (plus 2 of their own choice)

• 2 consecutive Atlantic seaboard windstorms
• Florida windstorms
• Gulf of Mexico windstorm
• European windstorm
• Japanese windstorm
• California earthquakes in 2 areas
• New Madrid earthquake
• Japanese earthquake
• UK flood
• terrorism in two places in New York

Question 17

What does a managing agent work out when analysing specific disaster scenarios?

Answer 17

• which risks they’ve written might be exposed and what max claim is on each
• if they have any reinsurance to cover those risks
• how much the reinsurance costs and how much of original claims they would cover
• final result is gross financial exposure to the insurer (no reinsurance) then net result (including reinsurance and reinsurance cost)

Question 18

What do Catastrophe modellers have to consider?

Answer 18

Non financial impact of catastrophes

• claims volumes increasing
• frequency and severity of any event
• combination and levels of reinsurance required

Question 19

How do underwriters usually calculate premium?

Answer 19

Applying a premium rate to a base rate.

Premium rate = hazards being faced with a particular risk
Premium base = a measure of the exposure

Contribution to the pool must be fair and reflect the degree of risk it brings. This is measured in frequency of loss and severity of loss

Question 20

How can premium rate be expressed?

Answer 20

Rate per cent (per £100)

Rate per Mille (per £1000)

Question 21

Premium base is different for liability

Answer 21

EL - payroll of insured
Product liability - turnover
PI - fees earned

Question 22

Premium and following market insurers

Answer 22

No obligation for following market to accept premium rate leader has set

Can request a different rate however agreements already made with original underwriter can’t be changed (aligned upward)

Question 23

Other components of premium calculations

Answer 23

• operating costs
• reinsurance costs
• profit margin
• contribution to claims reserves
• taxes

Question 24

How do insurers reserve?

Answer 24

• reserve has to represent likely cost of claim
• review claims data
• use expert input
• use claims adjusters knowledge and experience
• larger claims reviewed individually in LM on case by case basis
• cost of any experts also added to reserve

Question 25

The higher the reserve…

Answer 25

… the more capital the insurer must have available to balance the solvency equation

Question 26

Short tail and long tail business

Answer 26

Short tail = claims reported and settled quickly

Long tail = claims take long time to report and be settled. Might make final settlement far higher than first anticipated

Question 27

What does IBNR / IBNER stand for?

Answer 27

Incurred but not reported
Incurred but not enough reported

Insurer applies uplift to reserves to allow for IBNR claims

Actuaries review how previous years developed to consider if this year will perform the same
(Presuming no material changes to type of business being written)

Question 28

What are trust funds used for?

Answer 28

Reserves held in overseas country due to their conditions of permission to write there

Question 29

Reinsurance to open and close years management

Answer 29

Lloyd’s syndicates give business three years to develop and premiums and claims are reviewed at end of that period

When syndicate wants to close year of account they can buy reinsurance from next year of account to cover potential claims

Has to calculate remaining future liabilities

Question 30

When year has to remain open because liabilities can’t be calculated

Answer 30

Investors can’t be released from their liabilities and syndicate year of account carries on

Reason is often that outstanding claims are large or difficult

Proactive management of those claims needed to resolve efficiently and not make financial situation worse

May use up premium funds and expose central funds

Question 31

What does Open Years Management department do?

Answer 31

For Lloyd’s it works with managing agents that have open years of account for syndicates under their control

Question 32

Does RITC have to be next year of account?

Answer 32

(Reinsurance to close)
No..
Market for commercial RITC where organisations who don’t have historic link with syndicate take over future liabilities

Insurance companies have no concept of annual venture (whereas names are invested for a single year) so don’t need to transfer liabilities formally from one year to next