Q&A Bank Part 1 Flashcards

Question

Describe industry loss warranties

Answer 1

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.

Answer 2

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.

Answer 3

An insurer wholly owned by an industrial or commercial enterprise set up with the primary purpose of insuring the parent.

Answer 4

- 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

Answer 5

- 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.

Answer 6

- 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

Answer 7

- 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

Answer 8

Reciprocity is an arrangement between two insurers who agree to reinsure risks with each other

Answer 9

- 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.

Answer 10

- 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.

Answer 11

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.

Answer 12

- 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.

Answer 13

Likely a claims-made basis

Answer 14

Turnover | - Net assets and liabilities of the company

Answer 15

- nature of business - past experience - state of the economy

Answer 16

- principle measure of the risk - practical: - ---- obtainable / measurable - ---- verifiable - ---- objective / not manipulable - ---- acceptable to policyholder - helps avoid selection

Answer 17

- type of vehicle - nature of goods transported - vehicle weight and carrying capacity - area of operation (local, national, international) - vehicle maintenance procedures

Answer 18

- 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

Answer 19

Indemnity is compensation for a loss that restores the insured to the same position as before the loss occurred.

Answer 20

- 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

Answer 21

- 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