Flashcards IF3
In order for a contract to be legally binding, what three elements MUST be present?
Offer, Acceptance and Consideration
Under the duty of disclosure, what information must the proposer provide?
All information which is material, whether the question is asked or not
Utmost Good Faith requires both parties to disclose:
All facts which are material to the risk being proposed
Material facts enable a prudent underwriter to assess:
Whether the risk should be accepted and what premium to charge
Emerging Risks
Sources of potential loss which may result in future claims liabilities
IBNR
Claims which have occurred but not yet been notified to the insurer
Downside Risk
Possibility of the actual return on investments being lower than the expected return. Can be adversely affected by catastrophe losses
Account Performance
Profitability of an underwriting account over a particular monitoring period
Calendar Year
Monitoring period where claims are allocated to a calendar year according to date of loss and premiums are allocated based on the portion of premium earned during the calendar year
Accounting Year
Monitoring period where claims and premiums are allocated to a financial year according to date of loss and portion of premium earned during the financial year with estimates used to project these to the end of the period
Claims Loss Ratio
The overall amount of claims in relation to the overall amount of premiums expressed as a percentage
Earned Loss Ratio (ELR)
The amount of claims paid in relation to the premium earned, expressed as a percentage
Earned Premium
The amount of premium the insurer has received in relation to the specific amount of time on risk since inception
Outstanding Loss Ratio (OLR)
The amount of claims paid in relation to the premium collected, expressed as a percentage
Underwriting Year
Monitoring period used at account level (rather than individual policy level) where claims and premiums are allocated to the year in which the policies are incepted or renewed
Solvency
The ability to meet current and future liabilities from available assets/premium income and reinsurance arrangements
Exposure/Risk Accumulation
Risk of losses caused by large numbers of policies in a particular class of business or geographical area
Return on Capital Employed (ROCE)
Operating profit measured as a percentage of capital employed (capital employed represents the sum of share capital + retained earnings + long term borrowings). ROCE is:Operating Profit / Capital Employed X 100
Reserve Consistency
Reliability of claims reserve amounts per type of claim, in relation to actual settlements, based on methods and processes used by claims staff
Underlying Claims
Large number of predictable claims falling into the typical ‘Heinrich triangle’ pattern of high frequency and low severity
Lapse Flow Analysis
Monitoring of the number of policies being cancelled per year, over a period time
New Business Flow Analysis
Monitoring of the number of policies being incepted per year, over a period time
Combined Operating Ratio (COR)
A measure of the ‘underwriting result’ for an insurer, incorporating the loss ratio, commission ratio and expense ratio
Risk Premium
Funding required to cover the anticipated frequency/severity of claims, including large/catastrophe claims, IBNR claims, latent claims, claims inflation and reinsurance costs
Claims Run-Off
Movements in claims reserves for outstanding claims, which will ‘run-off’ over a period of time as claims are settled or finalised/closed
Latent Claims
‘Long tail’ liability claims which may take many years between the cause and the claim, such as asbestosis
Claims Inflation
Rate at which claims settlements increase, which can often exceed standard rates of inflation. Premium rates need to reflect this
Variable Expenses
Costs which will rise or fall depending on the size, complexity and nature of a risk, such as underwriting administration, commission and claims handling
Proportional Reinsurance
Type of treaty where an insurer cedes a pre-agreed share of every risk covered by the treaty
Non-Proportional Reinsurance
Type of treaty where a reinsurer agrees to contribute towards losses exceeding a pre-agreed figure
Quota Share Treaty
Reinsurance arrangement where the reinsurer will provide cover for a fixed percentage of every risk covered within the treaty, and claims are settled in the same proportion
Surplus Treaty
Reinsurance arrangement where the reinsurer will provide cover for every risk where the sum insured exceeds the insurer’s retention limit (line)
Excess of Loss Treaty
Reinsurance arrangement where the reinsurer will provide cover for claims which exceed the insurer’s pre-agreed liability figure specified
Excess of Loss Ratio Treaty
Reinsurance arrangement where the reinsurer will provide cover for claims which exceed the insurer’s pre-agreed loss ratio percentage
Facultative Reinsurance
Reinsurance for individual risks - particularly those where a total loss would represent a significant claim payment which would fall outside of standard reinsurance arrangements
Risk Capital Requirement
The proportion of total account premiums which must be kept as free reserves to ensure that an insurer can meet its claims obligations
FSCS
Organisation which levies a surcharge on insurers based on a percentage of gross direct premium to fund claims by policyholders where their insurer has become insolvent
MIB
Organisation which levies a surcharge on insurers based on the mix of motor business, and dependent on claims experience to fund claims by motorists where they are involved in an incident with an uninsured/untraced driver
Catastrophe Claims
Claims relating to the accumulation of losses all arising from a common event
Under the duty of disclosure, what information does the proposer NOT need to provide?
Facts which the insurer has waived their rights to
ABC Insurance company issued a motor policy for Sid Smart and later discovered that he had not disclosed a previous claim. Sid has now submitted a claim for theft damage to his vehicle. What is the strongest action the insurers can take?
Void the policy ab initio
Rozanes v. Bowen (1928) illustrated the principle of:
Utmost Good Faith
Utmost Good Faith requires:
The proposer and the insurers to voluntarily disclose material facts
When considering a proposal for a commercial combined policy, which fact does NOT need to be disclosed?
‘spent’ convictions
What principle requires the policyholder to disclose material facts?
Utmost Good Faith
What facts should be disclosed?
Material facts
What is an example of physical hazard?
Construction of building
In what way can policy wordings modify the duty of disclosure?
A policy condition,such as the alterations clause, can extend the duty to a continuing one
Where is the current legal definition of Material Fact contained?
Marine Insurance Act 1906
Which of the following would be least likely to be used as a method to gather material facts on a household insurance risk?
Meeting with the client
How long is a quotation normally valid for?
As stated by the insurer, normally for 30 days, or for a reasonable time, if the number of days is not specified
Premier Accident insurers issue a household quotation to Sally for her renewal which is due in 28 days time, and stipulate a 30 day acceptance period. Ten days later, before Sally has accepted the quotation, her house is damaged in a fire and her current insurers start dealing with the claim. Two days before renewal, Sally then contacts Premier Accident to accept the quotation and request cover as per their original offer. What is the position with Premier?
They are not obliged to hold their original quotation at the same terms as the material facts have now changed, and may elect to withdraw their quotation or provide revised terms
What is the purpose of the warning given in a typical proposal form?
It is intended to draw the proposer’s attention to the consequences of non-disclosure of material facts, and state that if the proposer is in any doubt as to whether a fact is material or not they should disclose it
What is the purpose of the declaration within a proposal form?
It asks the proposer to declare that all information supplied is true to the best of their knowledge and belief, and must be signed by the proposer
What is the difference between a rate per cent and a rate per mille?
Rate per cent is the price in pounds for each hundred pounds of insurance cover and rate per mille is the price in pounds for each thousand pounds of insurance cover
Joanne insures her house for £350,000 at a rate of 0.18% What is the premium?
£630.00
Smart Solutions insure have a £5m limit of indemnity on their public liability insurance, with a turnover of £250m per year. What would their premium be based on a rate of 0.3 per mille?
£75,000
What type of insurance would be likely to have an adjustable premium?
Employers Liability
What is the purpose of a policy document?
To set out the terms and conditions of the cover, and act as evidence of the contract which exists between the insurer and the policyholder
For what types of cover must a certificate of insurance be produced in order to comply with legislation?
Motor insurance and Employers Liability insurance
What is meant by the term Contract Certainty?
It is the basis of a code of good practice within the insurance industry to ensure that both parties to a risk are aware of the level of protection being provided and the details of the risk being insured before protection starts
What is the normal period of cover on an insurance contract?
It will usually be for 12 months
What type of cover will not be subject to IPT?
Reinsurance contracts
Sid arranges travel insurance for his forthcoming holiday, at a premium of £100. What IPT will be payable on top of this?
£20
Smart Solutions have just arranged their Professional Indemnity insurance for the coming year - what is the most likely premium base that the premium rate will be applied to?
Fee income
What is meant by the term Deposit Premium?
It is the initial premium paid by a policyholder on an adjustable policy and may be adjusted up or down based on the year end declaration
What cover is likely to be rated on a flat premium basis?
Motor
In what circumstances would it be necessary for an Employers Liability certificate to be on display at at Sid Smart’s business premises?
When his employees are not able to easily access an electronic version
Caroline receives a call from Sally at 9am on the 1st Feb asking to arrange motor insurance with effect from 11am on 2nd Feb when she is collecting her new car. Caroline is then interrupted and doesn’t remember to issue the cover note until 11.30am on 2nd Feb. What should she show on the covernote as the commencement date and time of cover?
11.30am on 2nd Feb
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