P80 Underwriting Practice

Front 1

1. What is contract certainty?

Back 1

Complete and final agreement of all terms between the insured and the insurer, including signed lines, by the time they enter into that contract
with contract documentation provided promptly thereafter.

Front 2

4. What is the median?

Back 2

The middle value in a set of data

Front 3

6. What is aggregation of risk?

Back 3

An accumulation of insured risk to a single insurer which exposes that insurer to a significant flow of claims arising from a single cause of loss.
e.g. homes in Florida exposed to single windstorm

Front 4

4. What is relative frequency.

Back 4

The observed frequency of that loss event expressed as a percentage of the total number of observations.

Front 5

5.What is an "Adjustable premium"

Back 5

Premium which is calculated based on estimated values at the beginning of the policy period and adjusted at the expiry of the policy when the insured is obliged to declare the actual values.

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6. What is Facultative reinsurance?

Give an example

Back 6

An optional form of reinsurance which means an insurer is not obliged to reinsure the risk and the reinsurer is not obliged to accept the risk offered,
therefore each risk will be negotiated individually.

Front 7

4. What do we mean by Latent claims?

Give an example.

Back 7

Claims that exhibit a long delay between incidence and manifestation, e.g. diseases relating to asbestos exposure; environmental pollution.

Front 8

5. What do we mean by Burning cost?

Give an example

Back 8

Claims experience based method of rating. It translates the pure claims cost actually generated into a rate against a measure of exposure appropriate to
the risk.

Front 9

6. Why do Reinsurance pools exist?

Give an example.

Back 9

A reinsurance pool is often established to manage market-wide losses arising from catastrophes.
Pool Re the U.K. Terrorism pool.

Front 10

3. What is Money laundering?

Back 10

The process by which criminals convert money that has been obtained illegally into legitimate funds

Front 11

5. What is a Claims triangulation?

Give an example of an insurance where they are particularly useful.

Back 11

Claims experience that has been
compiled, so as to demonstrate the number of claims reported and the incurred loss at a given point in time year on year for consecutive periods of insurance. It therefore reflects the development of the claims experience. Employers Liability.

Front 12

3. What is Risk categorisation?

Give an example

Back 12

Insurers place risk into comparable groups for ease of analysis and rating. Risks in each group will share similar features and characteristics which will have similar claim profiles. Private car rating groups

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6. What is Catastrophe Modelling?

Give an example of where it is used?

Back 13

A mathematical prediction model designed and used to assess catastrophe exposure and the potential impact of any associated losses.Modelling of aggregation exposure to a natural catastrophe e.g. California earthquake.

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3. What is a counter fraud initiative?

Give an example of a counter fraud measure.

Back 14

Measures taken to prevent.
• Detect.
• combat fraud.
• Aims to reduce opportunistic and
• premeditated fraud.
e.g. overt surveillance of individuals claiming for bodily injury in a motor accident

Front 15

4. What do we mean by a Homogeneous risk?

Give an example of one.

Back 15

A group of risks where the underlying risks all exhibit similar characteristics, in terms of frequency and severity patterns.
e.g. Private motor insurance

Front 16

1. What is the role of the PRA

Back 16

The Prudential Regulation Authority is UK financial services regulator. It is responsible for the regulation of all systemically important firms and it thus supervises insurers including Lloyd’s from a prudential standpoint. Its objective is to promote the safety and soundness of PRA regulated firms to to ensure insurance policyholders are appropriately protected.

Front 17

1. What is the role of the FCA

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The Financial Conduct Authority is UK financial services regulator. It regulates the conduct of authorised firms i.e. both insurers and brokers. Its objective is to ensure that relevant markets function well (so that consumers get a fair deal.

Front 18

1. UK regulators principles for business

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1. Integrity
2. Skill, care and diligence
3. Management and control
4. Financial prudence
5. Market conduct
6. Customers' interests and treat fairly
7. Communications with clients
8. Conflicts of interest
9. Customers relationships of trust
10. Client's assets
Relations with regulators

Front 19

1. What is the Financial Ombudsman Service

Back 19

Dispute resolution body of which UK authorised firms have to be a member. Can award up to £150,000. Deals only with disputes between insurers and consumers of micro enterprises. Not normally involved in disputes over underwriting decisions.

Front 20

1. What is the Financial Services Compensation Scheme

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Scheme to compensate eligible claimants and policyholders if authorised firms i.e. insurers are unable to satisfy claims against them due to insolvency. 100% for compulsory coverage 90% for other claims

Front 21

3. What is a Money Laundering Reporting Officer?

Back 21

Senior manager responsible for establishment of effective systems and controls for the money laundering risk.

Front 22

3. What is a Managing General Agent

Back 22

An corporate entity that has been given
delegated underwriting authority by an insurer
- could be independent or owned by insurer or a broker.

Front 23

2. What is the Motor Insurers' Bureau

Back 23

U.K. body that
1. Manages fund to compensate uninsured drivers (funded by levy on motor premiums)
2. Issues green cards
3. Manages Motor Insurance Database
4. Influences behaviour of insurers through Article 75 insurers required to accept liability even though not liable under Road Traffic Act.

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6. What are CRESTA zones

Back 24

Catastrophe Risk Evaluation and Standardizing Target Accumulation. CRESTA divides countries into zones based on the degree of hazard for earthquake, flood, windstorm so used for measuring risk aggregation and in pricing.

Front 25

3. What is the CUE

Back 25

Claims and Underwriting Exchange
Established 1994. Central database of motor, household and personal injury claims for six years to help insurers combat fraud. Insurers provide information – 95% household insurers access.

Front 26

3. What is MIAFTR

Back 26

Motor Insurance Anti-Fraud and Theft Register
Launched 1987 run by ABI allows motor insurers to share information> Helps motor insurers combat fraud e.g.
identify vehicles insured with several insurers or
, fictitious thefts

Front 27

3. What is the MID?

Back 27

Motor Insurance Database
Holds details of all vehicles registered and insured to combat uninsured drivers and motor vehicle crime

Front 28

2. What is the U.K.Environment Agency
National Flood Assessment

Back 28

Snap shot of U.K. flood risk in 2004. Map that shows whether flood risk is significant, moderate or low
Based on likelihood of sea or river flooding and flood defences. Some insurers have their own flood maps.

Front 29

2. Four areas an insurer needs to understand in order to manage its capital

Back 29

1. How much capital it has at any one point
2. How much capital it needs to support its targeted volumes and types of business.
3, How much capital it needs to meet both current and future regulatory capital requirements
4. what it plans to do in the event of:
- too much capital for its planned business volumes;
- too little capital for its plans.

Front 30

3. Six strategic reasons why a UK insurer would write international business

Back 30

1. Diversify risk more widely.
2. Support UK based customers overseas
3. Competitive pressures within the UK and opportunities abroad.
4. Possibility of profit potential outside the UK.
5. Take advantage of different underwriting and economic cycles around the world.
6. Take full advantage of the UK product innovation

Front 31

3. Four possible ways through which an insurer can write international business

Back 31

1. Appointing local agents or representatives/ binding authorities/ MGA/ local intermediaries.
2. Enter into a joint venture with a local insurer/ broker
3. Acquiring a local insurer.
4. Opening a local branch or using a foreign subsidiary

Front 32

3. Four practical issues that insurers should consider when deciding to write international business

Back 32

1. Local legislation may require cover to be purchased from a Iocally authorised insurer
2. Some territories insist on state insurers covering all or a percentage of certain types of risks.
3. Local taxes may be payable.
4. Exchange controls and potential of inflation

Front 33

1. Main contract certainty principles

Back 33

1. Insurer and broker must ensure all terms are agreed before contract entered into
2. All terms must be clearly expressed including conditions or subjectivities/warranty.
3. Documentation must be provided to the insured promptly (7 days for retail customers and 30 days for all other customers)
4. Insurer and broker must resolve any issues around the achievement of contract certainty principles as soon as practicable

Front 34

3. Risks to an insurer of underwriting binding authorities

Back 34

1. Reputation if the intermediary does not perform well.
2. The insurer is handing over the ‘underwriting pen’ to intermediary may abuse trustand must be effectively monitored
3. Liability for risks underwritten under delegated authority remains with the underwriter
4. Possible conflict of interest between the intermediary’s duties as an agent of the policyholder agents of insurers).

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3. Benefits of delegated authority to insurers

Back 35

1. Access different business
2. Obtain business in countries where it has no office.
3. Benefit from local expertise and knowledge of cover holder
4. Low acquisition costs

Front 36

2. What is risk based capital?

Back 36

Capital requirement set by regulator that is based on the risks faced by the regulator based on the risks faced by the insured. Individual capital assessments and the Solvency II capital requirements are risked based.

Front 37

2. What is the MCR?

Back 37

MCR = Minimum Capital requirement set by the EU for insurers operating in the EU,
Based on a % of premiums or claims. Insurers will not be allowed to trade if their solvency margin falls below the MCR.

Front 38

2. What is the ECR?

Back 38

ECR = Enhanced Capital Requirement. Capital requirement set by UK regulators which is risk based and should be twice the MCR.

Front 39

2. What is the CRR?

Back 39

CRR = Capital Resources Requirement. The higher of the MCR and the ECR. Insurers solvency margin must exceed this in the UK.or the regulator will intervene.

Front 40

2. What is an ICA?

Back 40

ICA = Individual Capital Assessment
U.K. insurers own assessment of what their capital should be based on the risks they face that has to be provided to the regulator.

Front 41

2. What is an ICG?

Back 41

ICG = Individual Capital Guidance. If PRA does not agree that the insurer has sufficient capital they will issue guidance requiring the insurer to either increase its capital or reduce its risks.

Front 42

2. What is the solvency margin?

Back 42

The capital of an insurance company i.e. assets less liabilities.

Front 43

2. What is Solvency II?

Back 43

EU Directive on insurance regulation that will change EU insurers capital requirements not due to be implemented until 2016

Front 44

3. What is an Aggregator?

Back 44

Electronic price comparison site – offer several quotations from both direct insurers and
intermediaries from the completion of one set of questions e.g. confused.com

Front 45

3. Describe what is meant by Corporate Strategy?

Back 45

A plan as to how a company will be successful in the future i.e. attain its corporate objectives Corporate objectives are high level statements of intent usually expressed in very broad simple
terms.
Example:
‘To be the market leader in a particular sector within five years’

Front 46

2. What do we mean by Pandemic

Back 46

A term used to describe an illness, disease or medical problem spread over a wide area, crossing international boundaries and affecting many people.

Front 47

3. What is "white labelling"?

Back 47

A form of product branding where non-insurance entities such as banks and building societies feature on
the insurance documentation for the products they provide as intermediaries so as to take advantage of
their strong brand identity.

Front 48

3. Describe the purpose of the underwriting strategy.

Back 48

Derived from the corporate strategy. The high level objective is distilled into the underwriting strategy through business plans broken down into key elements, including:
Classes to be written
• Premium targets.
• Claims and expense ratios.
• Expected investment returns.

Front 49

2. Describe the features of a hard market.

Back 49

Aspect of market cycle where
• Withdrawal of capacity.
. Less competition
• More stringent underwriting resulting in reduced exposures.
• Increasing premiums.
• eventually increasing underwriting profits

Front 50

2. Describe the features of a soft market.

Back 50

Aspect of market cycle where there is:
- increasing capacity
- increasing competition
- lower premiums
- wider cover and
- lower profits

Front 51

6. What do we mean by Commoditisation?

Back 51

A situation where a product becomes less differentiated / homogenous so that the buyers focus on price and care less about who they buy it from.

Front 52

3. Define "critical mass".

Back 52

Volume of business necessary to ensure expense ratios fall to a level where a profit can be made.

Front 53

Define "loss leading".

Back 53

Marketing strategy where insurers are prepared to make a loss to build market share.

Front 54

6. Define "Estimated Maximum Loss"

Back 54

The amount (often expressed as a percentage of the sum insured) which is considered to be an accurate reflection of the worst financial effect that maximum foreseeable loss would have

Front 55

3. Explain briefly what Underwriting criteria are.

Back 55

Underwriting criteria are used by insurers to determine the degree of hazard (i.e. features or characteristics of a risk) it considers to be acceptable. Brings together physical hazard, classification and categorisation in determining acceptability and conditions of acceptability.

Front 56

3. Describe the purpose of condition clauses

Back 56

Condition clauses define the policyholders rights and obligations, they are contractual terms that the policyholder agrees to comply with throughout the duration of the policy

Front 57

3. What is a lineslip?

Back 57

An agreement between an individual broker and a group of two or more insurers or underwriters. Each insurer/underwriter agrees to accept a pre-agreed proportion of a specified type of risk. The underwriting is delegated to one or more designated members of the group who will act as lead underwriters and accept the risks on behalf of all.

Front 58

3. Define physical hazard.

Back 58

Physical hazard relates to those physical aspects of a risk, that directly impact on its insurability, or the terms, conditions and exceptions at which insurance may be accepted.

Front 59

3. Define moral hazard.

Back 59

Aspects of the risk relating to the attitude of the proposer/insured which are likely to influence the
occurrence and/or the severity of a loss.

Front 60

3. What do we mean by Premeditated insurance fraud?

Back 60

Premeditated insurance fraud is when criminals deliberately take out insurance policies with the specific intention of committing fraud, or deliberately engineer events to enable fraudulent claims to be made.
Examples include:
 Staged motor accidents

Front 61

3. What is the purpose of risk categorisation?

Back 61

Risk categorisation is when an insurer places risk into comparable groups for ease of analysis and rating. Risks in each group will share similar features and characteristics which will have similar claim profiles. E.g. motor car groups.

Front 62

3. What is the purpose of the operative clause in a policy wording?

Back 62

Details the subject matter of insurance.and the risks/perils to be covered.

Front 63

3. What is a warranty?

Back 63

Definition – warranty is an undertaking by the insured that something shall or shall not be done or that a certain state of affairs does or does not exist.

Front 64

3. What do we mean by opportunistic fraud?

Back 64

Committed by otherwise law abiding citizens which consider for example inflating an insurance claim as a victimless crime.

Front 65

4. What is a stochastic model?

Back 65

Model which involves generating a large number of statistically simulated scenarios of the: - claim frequency;
- claim amounts;
timing of future claims;
to predict the future occurrence and cost of claims.

Front 66

4. What do we mean by homogeneous risk?

Back 66

Risk with very similar characteristics e.g. households

Front 67

4. What is subjective probability?

Back 67

Subjective probabilities are where the underwriter will have to depend upon their own skill and judgement to determine the associated probability of an event but does provide a quantitative measure of likelihood

Front 68

4. Explain briefly the law of large numbers.

Back 68

Law of large numbers states that the actual number of events will tend towards the expected number, where there are a large number of similar situations.

Front 69

4. What is the mode?

Back 69

The most common value in a set of data

Front 70

6. Describe catastrophe modelling.

Back 70

Catastrophe modelling is a mathematical prediction model, designed and used primarily by actuaries to assess catastrophe exposure and potential impact of any associated losses.
It analyses historical events over long timescales (sometimes hundreds of years).
This information is then used to create other possible future events including ones that have never happened before.

Front 71

6. What is stop loss reinsurance?

Back 71

Also known as aggregate excess reinsurance; it is a non-proportional form of reinsurance. It provides protection for a whole portfolio of business rather than just an individual risk and generally covers an annual period. If claims exceed a specified retention in the period, amounts can be recovered from reinsurers

Front 72

6. Define treaty reinsurance

Back 72

Treaty reinsurance of a portfolio of risks. Its is obligatory as the cedant must cede all risks that fall within the treaty and the reinsurer is obliged to accept all risks written within the treaty.

Front 73

6. Define proportional reinsurance

Back 73

Types of reinsurance where the cedant shares a proportion of a risk and the same proportion of premium with the reinsurer e.g. quota share.

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6. Define non-proportional reinsurance

Back 74

Types of reinsurance where the premium and risk are not shared proportionately. Reinsurers pay only when the cedant’s retention has been exceeded

Front 75

6. Define quota share reinsurance

Back 75

Proportional reinsurance where premium and losses are shared between cedant and reinsurer in a fixed proportion.

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6. Define excess of loss reinsurance.

Back 76

Non proportional reinsurance when reinsurer agrees to pay an amount £Y in excess of an amount £X that is retained by the cedant e.g £50M excess of £10M.

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6. Define catastrophe excess of loss reinsurance

Back 77

Specialist form of excess of loss reinsurance which provides protection in respect of losses that are caused by a single event and exceed a specified retention

Front 78

5. Define IBNER

Back 78

Incurred but not enough reserved.

Front 79

5. Define IBNR

Back 79

Incurred but not reported.
Relates to incidents that have happened but not yet reported to insurers.

Front 80

5. What are fixed expenses

Back 80

Costs incurred with the processing of a risk that apply independently of its size, premium or complexity.

Front 81

5. What are variable expenses?

Back 81

These are dependent on the individual risk.
• Calculated to cater for increased input by underwriting and processing staff, ongoing servicing requirements, surveys, site visits, claims etc.

Front 82

5. Describe the burning cost method.

Back 82

Is used for risks which have a high frequency of
claims but within a narrow size distribution e.g. Employers Liability incurred claims divided by payroll.

Front 83

5. Define competitor analysis.

Back 83

Understanding what competitors and potential competitors are doing in terms of price, coverage, service, products etc.

Front 84

5. What is prospective risk analysis?

Back 84

An alternative to burning cost method of rating used by underwriters to make sound judgment on the future insurance period using past data. Underwriter will:
- Analyse the claims data and project the ultimate net loss
- Re-evaluate historic claims to current day values.
- Factor in large loss potential
- Adjust the claims experience in line with cover and risk now
- Analyse trends in the data/loss ratio consider how they effect the forecast
- Factor in risks of the future, emerging claims trends etc,

Front 85

5. Define loss ratio.

Back 85

The ratio between premiums and claims. It is calculated by dividing the claims by the premiums, usually incurred claims and earned premiums; and is usually expressed as a percentage.

Front 86

5. What is the role of an actuary?

Back 86

Actuaries use their mathematical and analytical and statistical modelling skills to try and predict
uncertain future financial events such as claims experience.
Assisting underwriters with rating, reserving and capital calculations.

Front 87

5. Define adjustable premium

Back 87

Premium which is calculated based on estimated values at the beginning of the policy period and adjusted at the expiry of the policy when the insured is obliged to declare the actual values e.g. actual wageroll on EL.

Front 88

5. Define minimum premium.

Back 88

The minimum economic premium at which it is cost effective for an insurer to write a piece of business – will include expenses as well as an allowance for catastrophe loss/reinsurance..

Front 89

5. Define risk premium.

Back 89

The expected ultimate cost in claims for a risk being accepted including an allowance for the degree of uncertainty.attaching to claims cost (whether in the estimating process or due to the nature of claims).

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5. What is the mean?

Back 90

The sum of all the variables in a set of data divided by the number of variables.