Q&A Bank Part 1 Flashcards
12 Possible risk factors for a comprehensive private motor policy
- the ability of the driver
- how long on risk
- the number of miles driven
- how much time the car is used
- how many passengers carried
- the density of traffic where the car is driven
- the time of day the car is driven
- the speed at which the vehicle is usually driven and its general level of performance
- where the car is left when not used (theft risk)
- the ease with which the vehicle can be damaged and the cost of repairing it
- size and weight of the vehicle
- fire risk
Domestic household insurance:
Cover
- damage to buildings from specified perils
- damage to contents from specified perils
- public liability
- accommodation costs / loss of rent if home is uninhabitable
- possible extensions to cover
Domestic household insurance:
Possible Perils
- wind storm
- flood
- lightning
- fire / explosion
- eqrthquake / subsidence / land-heave
- impact from vehicles, animals
- theft and burglary damage
- damage from vandalism / civil commotion
- damage from other assorted perils (pipes bursting etc).
Domestic household insurance:
Possible Extensions to cover
- index-linked claims / premiums
- accidental damage to possessions
- personal accident cover with defined benefits
- all risks for items outside the home (cameras, bicycles, credit cards, money)
- freezer contents
Domestic household insurance:
Bases of claim settlement
Policies may be on:
- INDEMNITY basis
- REPLACEMENT basis (new-for-old)
- Replacing losses with funds to buy new items
Domestic household insurance:
Rating and underwriting factors
- cover (buildings / contents / both)
- basis for cover (new-for-old / indemnity)
- sum insured
- location
- extensions / options selected
- use of property
- no claims discount, if applicable
- excess (voluntary / compulsory)
- age of proposer
- house / flat / other
- construction material
- age of property
- heating method
- ownership (freehold, leasehold, rented)
- day-time occupation
- whether there are long periods vacant
- window locks and type of door locks
- burglar and smoke alarms
Domestic household insurance:
Measurement of exposure
Sum insured
Give the formula for:
Loss ratio
Net claims incurred
/
net earned premiums
Give the formula for:
Expense ratio
Net expenses and commission paid
/
net written premiums
Give the formula for:
Commission rate
Net commission paid
/
Net written premiums
Give the formula for:
Operating ratio
Loss ratio + expense ratio
Give the formula for:
Proportion reinsured
Reinsurance premiums paid
/
Gross written premiums
Give the formula for:
investment return
Total investment income
/
Average total assets
Give the formula for:
Profit margin
Insurance profit
/
net earned premiums
Give the formula for:
Return on capital
pre-tax profit
/
initial free reserves
Give the formula for:
Solvency ratio
Free reserves
/
net written premiums
Give the formula for:
Asset to liability ratio
Total assets
/
Total liabilities
5 Main perils associated with marine liability insurance
- storm
- fire
- explosion
- collision
- pollution
9 Risk factors associated with marine liability insurance
Vessel:
- Size
- Type
- Age
- Condition and maintenance
- Miles travelled
- Routes travelled
- Crew training / ability
- Management ability
- Nature of the cargo
20 Items that should be included in a catastrophe excess of loss reinsurance treaty
- parties involved
- period of operation
- class of business
- geographical limits
- definitions of a catastrophe
- excess point
- upper limit
- indexation arrangements
- limits on volume of business written
- underwriting restrictions
- premium rates
- exclusions
- procedures for payment of premiums and claims
- reinstatement arrangements
- claim payment arrangements above excess point
- arbitration clause
- termination clause
- interaction with other reinsurance arrangements
- procedures for verification of direct writer’s records
5 Features of stop loss reinsurance
- treaty for class or classes
- non-proportional
- reinsurer pays when total claims in the preiod exceed an agreed level
- cover may be for a proportion of claims only
- as cover is against all adverse experience, it could be expensive
5 Providers of reinsurers
- professional reinsurers
- Lloyd’s syndicates
- State, national or government-owned reinsurance companies
- reinsurance pools and schemes
- captive insurers
Explain how financial quota share can benefit an insurer
Financial quota share is a quota share arrangement under which a generous commission payment is made from the reinsurer to the insurer at the outset.
Under normal circumstances, the commission payment should cover:
- commission payments incurred by the insurer (return commission)
- the work of attracting and administering the business (override commission)
Under financial quota share, the initial commission may significantly exceed these components.
The surplus amount can be used in order to:
- help cover new business strain
- finance a partner strategy (Take-over of another insurer)
- improve the solvency position of the insurer
In future years, the commission payment would be less than the sum of these components to compensate the reinsurer for the high initial commission.
Since financial quota share is essentially a quota share arrangement, it will have the usual benefits of a standard quota share arrangement:
It will:
– spread risk
– increase the capacity to accept risk
– encourage reciprocal business
– directly improve the solvency ratio without losing market share
– be administratively simpler than alternatives
The insurer may also benefit from the expertise of the reinsurer, particularly in pricing
Describe spread loss covers
Spread loss covers involve the insurer paying annual or single premiums to the reinsurer for coverage of specified claims.
These accumulate with interest in an axperience account, the balance of which is settled at the end of the multi-year period.
These types of contracts involve very limited underwriting risk, but provider the insurer with the liquidity and security of the reinsurer.
Describe industry loss warranties
Industry loss warranties are a type of reinsurance where the basis of cover is not indemnity.
Here one party will purchase protection based on the total loss arising from an event to the entire insurance industry rather than their own losses.
The original size of the industry loss is used as a trigger for a recovery.
Describe Committed capital arrangements
Committed capital is based on a contractual commitment to provide capital to an insurer after a specific adverse event occurs that causes financial distress.
The insurer purchases an option to issue its securities at a predetermined price in the case that the defined situation occurs, on the understanding that the price would be much higher after such an event.
Define a captive insurer
An insurer wholly owned by an industrial or commercial enterprise set up with the primary purpose of insuring the parent.
6 Advantages of setting up a captive insurer
- fills gaps in cover that may not be available from the traditional insurance market
- helps manage the total insurance spend of the company and in particular to make financial plans more predictable due to the increased stability of premiums
- allows direct access to the reinsurance market
- helps focus effort on risk management
- retains profits that would otherwise have been passed to other inurers
- may gain tax or regulatory advantages
7 Disadvantages of setting up a captive insurer
- expenses of setting up a captive and hiring the insurance expertise needed
- capital is required to set up the captive
- regulatory approval may be required from all the countries that the multinational operates in
- risk is retained within the same group
- risk of accumulations building up due to a lack of diversity in the business written
- no access to insurers’ expertise
- setting up a captive may divert management attnetion from the core business.
State 3 conditions under which stop loss reinsurance is most likely to be made available to a direct writer
- where there is a close relationship between the insurer and reinsurer
- where the underwriting behaviour has less impact on the outcome of the insurance
- where quality of claims handling cannot prejudice the total claims bill
13 Factors that will influence the amount of reinsurance that a general insurance company uses
- The current size of the company’s free reserve and the expected size and volatility of free reserves in future.
- The size of the company, since a large company will need a higher level of free reserves to support the higher new business volumes.
- Volatility and size of claim frequency and claim amount, which depend upon the classes of business written.
- Shareholders attitude towards fluctuation in profit levels, and towards risk in general.
- Shareholders attitude towards publishing a volatile solvency margin ratio.
- The exposure to accumulations of risk, such as by class or territory.
- Need for technical assistance, which depends upon the company’s experience of the market.
- Need for financing assistance
- The type and cost of reinsurance available
- The reinsurer’s requirement for a minimum retention
- Size of individual risks
- Availability of coinsurance
- Financial security of reinsurers
Define reciprocity
Reciprocity is an arrangement between two insurers who agree to reinsure risks with each other
5 Advantages of reciprocity
- Reciprocity increases net premiums, assuming that the alternative is to cede business to a reinsurer and not to accept any business in return.
- It increases the insurer’s market share.
- It may improve the insurer’s reputation in the market.
- Should increase diversification which will increase the STABILITY of results
- The financial strength of insurers may be improved, since they are effectively merging resources.
6 Disadvantages of reciprocity
- If the insurer’s operate in the same field then they may not get a better spread of business and the catastrophe position may not be improved.
- The exchange of business may result in disclosure of market knowledge
- The insurers may need to spend time and money underwriting the business received
- This may place unnecessary demands on management time, expecially if there are several agreements in place.
- There may be new types of management problems
- It will be necessary to consider the security of the other insurer and the standard of its underwriting.
Directors and Officers insurance
Purchased by companies to protect against the directors and officers of the company being sued for acts they have performed in their capacity as directors and officers of the company.
Deliberate fraud will be excluded.
This type of cover tends to be distributed through Lloyd’s.
Perils for Directors and Officers insurance
- Allowing a company to continue operating in circumstances when it should have been declared insolvent
- Any act resulting in the insured being declared unfit for his or her role.
- Allowing false financial statements to be published.
Basis for Directors and Officers insurance
Likely a claims-made basis
Typical exposure measures for Directors and Officers insurance
Turnover
- Net assets and liabilities of the company
Typical risk/rating factors for Directors and Officers insurance
- nature of business
- past experience
- state of the economy
6 desirable properties of a measure of exposure
- principle measure of the risk
- practical:
- —- obtainable / measurable
- —- verifiable
- —- objective / not manipulable
- —- acceptable to policyholder
- helps avoid selection
5 Risk factors for commercial motor insurance (different to risk factors for private motor insurance)
- type of vehicle
- nature of goods transported
- vehicle weight and carrying capacity
- area of operation (local, national, international)
- vehicle maintenance procedures
4 Examples of possible fraudulent claims within household insurance
- claiming for more than the vlaue of goods lost / stolen
- claiming for fictitious goods that have not been lost / stolen
- engineering “accidents” to old / bloken items and claiming full replacement
- arson
Indemnity principle
Indemnity is compensation for a loss that restores the insured to the same position as before the loss occurred.
4 Distinct examples of general insurance policies that DO NOT PROVIDE INDEMNITY for a policyholder in the event of a claim
- individual personal accident (payment is a fixed sum)
- new-for-old policies under domestic contents
- creditor insurance, where the benefit may be say 80% of the insured’s monthly mortgage payment
- any insurance policy with an element of self-insurance
6 Examples of risks that may be excluded from personal accident policies
- dangerous pastimes or occupations
- aviation other than as a passenger
- suicide or self-inflicted injury such as alcohol abuse
- pre-existing conditions such as pregnancy
- AIDS
- illegal activities such as drug abuse
