Pricing Awareness

Question 1

What are the chief four components of the premium?

Answer 1

1. Claims payments
2. Expenses
3. Profit
4. Levies

Question 2

What must underwriters consider when allowing for the portion of the premiums intended to pay claims?

Answer 2

The uncertainty relating to the costs and the fact that some claims may take some time to settle so the final payment may be inflated

Question 3

What is used to factor protracted claims settlements?

Answer 3

Ogden tables

Question 4

What is the purpose of the Ogden tables?

Answer 4

To calculate loss of future earnings in personal injury or fatality claims. They account for life expectancy and loss of earnings until retirement and provide a range of award modifiers from -2% to 3% in increments of 0.5% set by the Lord Chancellor

Question 5

What are attritional claims?

Answer 5

Claims that are frequent but low severity eg broken windscreen or lost phone

Question 6

What are catastrophe claims?

Answer 6

Multiple claims all arising from a single event

Question 7

How may insurers protect themselves from catastrophe claims?

Answer 7

Reinsurance

Question 8

What is the difference between catastrophe claims and large claims?

Answer 8

Catastrophe claims are multiple claims arising from the same event, large claims are substantial isolates losses

Question 9

What does IBNR mean?

Answer 9

Incurred But Not Reported

Claims that have occurred but not yet been reported to the insurer

Question 10

What are the two types of expenses?

Answer 10

Fixed and variable

Question 11

What are fixed expenses?

Answer 11

Do not vary with the business written

Question 12

What are variable expenses?

Answer 12

Change according to the business written

Question 13

Give some examples of fixed expenses

Answer 13

Salaried employees
Insurance cists
Policy issuance
Loan payments
Bills (eg utility, rent)
Advertising

Question 14

Give some examples of variable expenses

Answer 14

Stationery
Raw materials
Temporary/hourly employees
Commission
Shipping

Question 15

What is needed in order to underwrite business?

Answer 15

Capital

Question 16

What is profit? What would you expect this to be?

Answer 16

The return on capital which the shareholders expect for supplying it. Also known as return on equity (ROE) - expect it to be between 10-15%

Question 17

How can insurers earn interest from collected premiums?

Answer 17

They can invest a portion of the common pool to generate returns on it, generally in low risk investments

Question 18

What are the main 2 levies on insurance premiums in the UK?

Answer 18

MIB - on motor insurance depending on the insurers mix of business (higher rates for non-comprehensive)

FSCS - based on an insurers gross direct business

Question 19

Who are the FSCS and what do they do?

Answer 19

Financial Services Compensation Scheme

Provide compensation to policyholders where their insurer has become insolvent.

Question 20

What is a technical price?

Answer 20

The price for a risk determined by a rating tool and an underwriter’s subjective judgement. Considers market conditions, competitors, and the insurer’s plan and strategy

Question 21

What is meant by subjective risk assessment?

Answer 21

Factors not accounted for in the rating tool which the underwriter knows and think should affect the price

Question 22

What is exposure pricing?

Answer 22

Determining expected losses and pricing a risk based upon the insurer’s claims experiences based on similar risks in their book