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LM2 > Underwriting In The London Market > Flashcards

Underwriting In The London Market Flashcards

1
Q

What is main difference about underwriting in the London Market?

A

Subscription Market-multiple insurers on one risk

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2
Q

Why are multiple insurers usually on one risk in the London Market?

A
  1. Insurer capacity is limited per year
  2. Appetite to spread exposure and minimise loss impact.
  3. Consider aggregation (avoid concentration in 1 area)
  4. Brokers want best deal for clients
  5. Client may only want particular insurers on risk
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3
Q

At what point, are international markets used?

A

Risk is too big to be written in LM alone

Brokers and/or client want to support home market

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4
Q

What are the benefits of PPL and Whitespace?

A

Cost effective (reduced 30-40%)

Efficient

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5
Q

Why is selecting insurers a vital role for LM brokers?

A

To ensure insurer is solvent and can pay future claims.

To get best deal for client.

To prevent claims of negligence if insurer rating drops and becomes insolvent.

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6
Q

Explain the relationship between broker and the Leader.

A

Broker approaches insurer they would like as Lead.

Risk presented to insurers in MRC. Slip and Bureau leads confirmed.

*Leads chosen for credibility and known to see good terms.

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7
Q

Can an overall leader be overseas?

A

Yes

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8
Q

At what point in the placing process are followers selected?

A

After Leads selected (slip and bureau) and agreed.

NB followers still entering into individual contract of insurance

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9
Q

Who should have a duty of care when conducting business?

A

Broker with client

Broker with insurers

Insurer with investor

Insurer with client

The FCA requires all parties to evidence positive client outcomes.

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10
Q

What does broker need to consider when approaching Leads?

A

They have all material information pertinent to the risk.

Insurance Act 2015- non-consumer make fair presentation of the risk, disclosure of MI.

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11
Q

What are the main FCA requirements for brokers and insurers conducting business?

A

-Products must be fit for purpose and not disadvantage client.

-Clients get value for money and no large charges for changes.

-Understandable information for client

-Ensure client gets product benefit.

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12
Q

What is a Leader’s main role in a subscription market?

A

Calculate a suitable premium

Reflect degree of risk and contribution to pool

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13
Q

How are risks measured for premium?

A

By frequency and severity

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14
Q

How does Law of Large Numbers contribute to premium calculation?

A

By predicting likelihood of similar losses occurring.

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15
Q

Can all risk premiums be calculated using Law?

A

No. In LM types of risk and newer risks.

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16
Q

What is the difference between premium rate and premium base?

A

Premium rate- risk hazards

Premium base- measure of exposure

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17
Q

Example: What is premium for vessel valued at £10m, if insurer charges £2 per £100 of cover?

A

Answer: £200,000

Calculation: value (£10m) / cover (£100) x rate (£2)

18
Q

How are liability premiums calculated?

A

-EL payroll

-P + P annual turnover

-PI fees earned

19
Q

Why are Cargo premiums calculated in stages?

A

Goods value fluctuates during policy year

20
Q

What is Open Cover?

A

Cargo insurers give declarations about goods regularly.

Premium calculated in stages

21
Q

Do followers accept rate set by leader?

A

No. They don’t have to unless they have already agreed to it.

22
Q

What else does Leader consider in calculating premiums?

A

-Operational costs (UW, claims, business, office)

-Reinsurance costs

-Profit Margin

-Claims reserves

-Taxes

23
Q

What triggers market cycle?

A

Few insurers in class of business that increase premiums.

24
Q

Why do insurers leave the market?

A

Cannot maintain aggressive pricing

Large loss, reserved too low, insolvency

25
Q

How does exposure modelling assist insurers when looking at risks?

A

Ensures there are no concentration of risks in one area.

Potential for losses to multiple risks from one event

26
Q

How are exposures managed by insurers?

A

Producing accurate data (postcodes for property risks)

Calculating PML (realistic total SI)

Reinsurance

27
Q

What is PML?

A

Probable Maximum Loss

Calculation of realistic max of total SI for risk

28
Q

Why might PML not be accurate for some risks?

A

Risks in certain areas may be less affected by certain perils.

E.g. Property risk on coast of Jamaica more liable to flood but not fire

29
Q

Why is it difficult to map exposure of Cargo risks?

A

Constantly on the move

30
Q

How does loss modelling help insurers looking at risks?

A

Allows insurers to predict financial impact of losses

31
Q

How is loss modelling managed by insurers?

A

Follow Lloyd’s Realistic Disaster Scenarios.

Assesses gross and net* financial exposure for different outcomes.

*After reinsurance

32
Q

What RDS are advised by Lloyd’s that must be completed by insurers?

A

-Windstorms (Atlantic, FL, Gulf of Mexico, Europe)

-Earthquake (Japan, California, Nee Madrid)

-Flooding

-Terrorism (NYC)

-Cyber

33
Q

How is catastrophe modelling different from loss modelling?

A

Assess non-financial impact of loss.

E.g. claim frequency, severity, claims staff.

34
Q

What is reserving?

A

When Insurers put aside capital to pay claims.

35
Q

How do household and motor insurers reserve differently?

A

Blanket reserve

36
Q

What has been UK government impact on reserving?

A

2019 Personal Injury claims, insurer discount reduced to -0.25%

Consequence: reserving higher

37
Q

Why is it important for insurers to reserve?

A

-Balance solvency equation

-Long Tail business impacted by inflation and new legislation

-IBNR: claims happened but not reported

-IBNER: claims known but reserve insufficient

38
Q

What is Open Years Management?

A

-Policy years that remain open due to claims being too big.

-Cannot be closed by RITC.

-Handled by MGA

-Central fund used if other level’s exhausted

39
Q

What is Reinsurance To Close?

A

Syndicate closes previous YOA by buying reinsurance from next YOA.

40
Q

What is the purpose of RITC?

A

-Close previous YOA and pay any OS claims from reinsurance.

-Report profit or loss to investord

41
Q

Why should insurers avoid over or under reserving?

A

Under-false image of profits, misleading

Over-not necessary as money has to be set aside

LM2 (4 decks)

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