Definitions

Question 1

Capital Loss

Answer 1

[Claim Cost] - [Reserve]

(if negative
=”Capital Released”
or
=”Supervisory Profit”)

Question 2

Overall Accumulated Loss

Answer 2

[Claim Cost] - [Asset Share]

(if negative
= “Overall Accumulated Profit”)

Question 3

Replacement Ratio

Answer 3

Ratio of post-claim income to pre-claim income

both net of income tax

Question 4

Credit Rating

Answer 4

External assessment of the aggregation of risks faced by the company and the control it has over them

Question 5

Definition of Embedded Value

Answer 5

Value of future profit from company’s existing business
+
Value of net assets separately attributable to shareholders

(the PV of shareholder profits in respect of existing business)

…may be used in published accounts as supplementary info or for internal management accounts

Question 6

Disadvantages of Capital Intensive Business

Answer 6

• Reduced rate of return
  (all else being equal)
• Solvency issues
  (supervisory in short term or weakened resilience )
• Reduced apparent financial strength
  (free asset size)
• Opportunity cost of writing less capital intensive business
• Unexpected solvency problem if more business sold than anticipated
• Reduced diversification
  (concentration risk)

Question 7

Definition of Appraisal Value

Answer 7

Embedded Value
+
Goodwill
(corresponds to estimated profits from expected future/new business)

Question 8

Definition of Going Concern

Answer 8

Assumption that company will continue to issue new business in the future

Question 9

Definition of break-up basis

Answer 9

Assumes new business ceases either immediately or at some point in the future.

Different forms like…
-Closed fund
(existing business managed by company)
-Liabilities transferred to be administrated until run-off

Question 10

Enterprise Risk Management (ERM)

Answer 10

Risk management framework which considers risk of the enterprise as a whole instead of the individual risks it faces in isolation

Allows for preparation w.r.t. risk concentrations and allowance of diversification benefits

Question 11

Definition of Underwriting

Answer 11

• The process of considering an insurance risk
• Includes assessing
  1. Whether the risk is acceptable
  2. T’s and C’s of cover
  3. Appropriate premium
• May include assessing risk in context of other risks in the portfolio

Question 12

Definition of Anti-Selection

Answer 12

• People being more likely to purchase insurance when they believe their risk is higher than the insurer has allowed for in the premiums/pricing
• In options/guarantees:
  Those most likely to gain from exercising will do so