P80 Underwriting Practice

Examination Guide
P80 Underwriting
practice
Diploma in Insurance
April 2012 Examination Guide
SPECIAL NOTICE
Candidates entered for the October 2012 examination should study this Examination Guide
carefully in order to prepare themselves for the examination.
Practice in answering the questions is highly desirable and should be considered a critical
part of a properly planned programme of examination preparation.
P80 April 2012 EG
Examination Guide
P80 Underwriting practice
Contents
Important guidance for candidates
Examiner comments
Question paper
Test Specification
14
Model answers
15
Published August 2012

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2012 The Chartered Insurance Institute
P80 April 2012 EG
Examination Guide
IMPORTANT GUIDANCE FOR CANDIDATES

Introduction
The purpose of this Examination Guide is to help you understand how examiners seek to assess the
knowledge and skill of candidates. You can then use this understanding to help you demonstrate to the
examiners that you meet the required levels of knowledge and skill to merit a pass in this unit. During your
preparation for the examination it should be your aim not only to ensure that you are technically able to
answer the questions but also that you can do justice to your abilities under examination conditions.
Before the examination

Read the current Diploma in Insurance Information for Candidates
Details of administrative arrangements and the regulations which form the basis of your examination entry
are to be found in the current Diploma in Insurance Information for Candidates brochure, which is essential
reading for all candidates. It is available online at www.cii.co.uk or from Customer Service.
Study the syllabus carefully

It is crucial that you study the relevant syllabus carefully, which is available online at www.cii.co.uk or from
Customer Service. All the questions in the examination are based directly on the syllabus. You will be
tested on the syllabus alone, so it is vital that you are familiar with it.
Read widely
It is vital that your knowledge is widened beyond the scope of one book. It is quite unrealistic to expect that
the study of a single coursebook will be sufficient to meet all your requirements. While books specifically
produced to support your studies will provide coverage of all the syllabus areas, you should be prepared to
read around the subject. This is important, particularly if you feel that further information is required to fully
understand a topic or an alternative viewpoint is sought. The reading list which can be found with the
syllabus provides valuable suggestions.
Make full use of the Examination Guide

The best way to understand what the examiners require is to study the CII Examination Guides. You can
purchase copies of Examination Guides online at www.cii.co.uk. CII members can download free copies of
past Examination Guides online at www.cii.co.uk/knowledge. You can use this guide as a mock
examination paper, attempting it under examination conditions as far as possible and then compare your
answers to the model ones. The examiners comments on candidates actual performance in each question
should be noted carefully.
Understand the nature of assessment

This Examination Guide contains a full examination paper and model answers. The model answers show
the types of responses the examiners are looking for and which would achieve maximum marks. However,
you should note that there are alternative answers to some question parts which would also gain high marks.
For the sake of clarity and brevity not all of these alternative answers are shown.
Know the structure of the examination

Familiarise yourself with the structure of the examination paper and the time allowed to complete it. This
information can be found on the question paper included within this Examination Guide.
P80 April 2012 EG
Examination Guide
In the examination
Assuming you have prepared adequately, you will only do justice to yourself in the
examination if you follow two crucial common sense rules:
1.
Spend your time in accordance with the allocation of marks as indicated on the paper. The
maximum marks allocated to each question and its constituent parts are given on the paper; the number
of marks allocated is the best indication of how much time you should spend on each question. If a
question has just two marks allocated, there are likely to be only one or two points for which the
examiner is looking, so a long answer is a waste of time. Conversely, if a question has 12 marks
allocated, a couple of lines will not be an adequate answer. Always remember that if the paper is not
completed, your chances of passing will be reduced considerably. Do not spend excessive time on any
one question; if the time allocation for that question has been used up, leave some space, go on to the
next question and only return to the incomplete question after you have completed the rest of the paper,
if you have time.
2.
Take great care to answer the precise question set. The model answers provided in this
Examination Guide are quite focused and precise; alternative answers will only be acceptable if they still
answer the question. However brilliantly a candidate writes on a particular topic, if it does not provide a
satisfactory answer to the precise question as set, the candidate will not achieve the marks allocated.
Many candidates leave the examination room confident that they have written a good paper, only to be
mystified when they receive a disappointing result. Often, the explanation for this lies in a failure to
think carefully about what the examiner requires before putting pen to paper.
Order of tackling questions

Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any questions
which are felt to be very challenging until the more familiar questions have been attempted, but remember
not to spend excessive time on the questions you are most confident about.
Answering different question parts

Always read all parts of a question before starting to answer it, otherwise, you may find that after answering
part (a), the answer you have given is really more appropriate to part (b) and it would be necessary to
duplicate much of what has already been written. The examiners will normally only give credit for an answer
if it is contained within its correct question part.
Handwriting
Provided handwriting is legible, candidates will not lose marks if it is untidy. We strongly recommend that
candidates do not write in block capitals, because they will be slowed down so much by doing so.
Answer format
Unless the question requires you to produce an answer in a particular format, such as a letter or a report,
you should use bullet points or short paragraphs, since this allows you to communicate your thoughts in the
most effective way in the least time. The model answers indicate what is acceptable for the different types of
question.
Calculators
If you bring a calculator into the examination room, it must be a silent battery or solar-powered
non-programmable calculator. The use of electronic equipment capable of being programmed to hold
alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator,
provided it meets these requirements. It is important to show all the steps of your calculation in your answer.
The examination is testing your ability to carry out all the appropriate steps in calculating a value. A
proficient mathematician is someone who follows the correct method, i.e. carries out the appropriate steps.
The majority of the marks will be allocated for demonstrating the correct method of calculation.
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Examination Guide
After the examination

All examiners who mark Diploma in Insurance answer books are either active practitioners in the insurance
industry or are experts on the subject. They have been specially trained to mark papers using a detailed
marking scheme; the model answers in examination guides are based on those marking schemes.
The marking of each Examiner is closely monitored by the Senior Examiner throughout the marking period
and all marked answer books are carefully checked. This process means all answers books are marked to
the same standard.
After all the answer books have been marked, a moderation meeting is held, at which all available statistical
information is considered, together with the views of the Senior Examiner and other assessment experts. At
the meeting a pass mark is set which should ensure that the standard of knowledge and skills required to
pass the paper is comparable with that of previous papers. All candidates at or above the agreed mark will
pass: the CII does not operate a quota system whereby only a fixed percentage of candidates can pass a
paper.
P80 April 2012 EG
Examination Guide
EXAMINER COMMENTS
Question 1
This question was well answered by only very few candidates. In order to perform well, candidates were
expected to address how less favourable terms could be justified rather than simply providing the
circumstances in which an underwriter may offer less favourable terms. Candidates were required to look
further at the reasoning behind the unfavourable terms and how they could be justified. Candidates were
also expected to mention actuarial data as a separate base but most candidates identified only statistical
data and medical reports as a base for justification.
Question 2
This question was answered well by those candidates who had good knowledge in statistical analysis of
data as they were able to identify and recognise the difference between regression and correlation. In
order to do well candidates were expected to distinguish between the two by recognising that correlation
refers to the measure of the 'strength' of the relationship, which would have lead them to go on further in
identifying correlation coefficient and coefficient of determination.
Question 3
A good number of candidates were able to perform well as they recognised the meaning of Contract
Certainty and the rules surrounding the principle. Most candidates were able to identify the main points
regarding terms and conditions being certain before the contract is in place and the need for
documentation to be provided promptly. The stronger candidates were then able to provide timescales
and further details of the principle of Contract Certainty.
The candidates who did not perform so well on this question did not appear to recognise the general
theme of Contract Certainty and confused it with other principles of insurance such as treating customers
fairly and rules around misrepresentation.
Question 4
This question was well answered by majority of the candidates. In part (a), most candidates were able to
provide at least three possible ways through which an insurance company can write international
business.
Part (b) allowed candidates to apply general knowledge and basic understanding of insurance with some
marks being available where they had provided common sense answers as an alternative to those
outlined in the study text. To do well, they could have applied more knowledge and understanding to the
study text answers.
Question 5
This question was well answered by candidates who demonstrated understanding of mathematical
techniques and who were also able to apply them to insurance data. Those who did not were unable to
gain significant marks. Some candidates however did demonstrate a basic understanding of the
technique they were supposed to be applying, but were unable to apply the method correctly to gain
higher marks.
Question 6
Most candidates were able to give examples of fixed and variable expenses, but some struggled to
understand the relevance of them and distinguish between what the two different expenses actually are
and the way in which they are built into the premium differently.
Question 7
The majority of the candidates did not perform well on this question. Some candidates recognised a
couple of the key points about specialist cover being available known as EIL but did not discuss specific
details about the cover provided. Few candidates were able to give the full range of covers available for
contamination of land.
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Examination Guide
Question 8
With this question, many candidates seemed to be confused and answered by explaining what the
burning cost method is and what the shortcomings of the burning cost method are, rather than how
prospective risk analyses looks to address these issues. Stronger candidates were able to describe in
detail the meaning of prospective analysis and the advantages of using this method over the burning cost.
They also identified several of the advantages which addressed the shortcomings of the burning cost
method and included most of the key points.
Question 9
The majority of candidates performed well on part (a) of the question as they had good knowledge in
using the correct calculation.
In part (b), several candidates seemed to have not read the question correctly to identify that the answer
should specifically relate to the differences in the accounts in relation to 'the level of assets required
relative to premium income'. Many candidates rightly discussed in depth the type of claims emanating
from the two accounts and how these differed rather than referring to how the assets would need to
change on each account.
Question 10
The majority of the candidates did not provide good answers. Candidates did not demonstrate good
knowledge of what a flood map was, as they were unable to identify the key information that can be
provided about an area from a flood map.
In part (b), few candidates recognised that some insurers would want to produce their own flood maps as
the information provided by the UK Environmental Agency was given several years ago and may
therefore be viewed as out of date. The main reason behind this seemed to be due to a lack of
knowledge following on from candidates not being aware of the type of information given and
consequently not being able to recognise that this could be out of date. Many candidates also overlooked
that, if you have your own map, it can be relevant to their own data and results and help them make
decisions which are appropriate for them.
Question 11
To do well candidates were expected to provide the required amount of depth in their answer in
accordance to the mark allocated to this question. Some candidates were able to state the FSA's
objectives but not relate these back to how the risk based approach was based around them. Other
candidates went on to discuss irrelevant information about the FSA's principles of business.
Candidates who performed well had identified the objectives of the FSA and how the FSA identify and
base their regulation around threats to these objectives. They also went on to explain the way in which
the FSA does this and how it prioritises its monitoring and regulation.
Question 12
This question was the least popular. Candidates focussed unnecessarily on the control of aggregation of
risks in general rather than relating the answer to liability insurance. An example would be that although
many mentioned the using reinsurance, few identified 'clash reinsurance' as a specific means of
controlling the accumulation of risk caused should more than one insured be involved in a single event.
There was also little appreciation shown of one feature of liability covers, which is that the businesses
covered can often move about, (eg PL or EL), as opposed to a property cover, the subject of which tends
to stand still, making it particularly difficult to measure aggregation and particularly important that
underwriters protect the account, through, for example, the clash reinsurance.
Question 13
Some candidates produced very good answers as they were capable of learning case law and reciting the
main points addressed in the case. However, many candidates did not recognise the case law Callery vs
Gray (2002). The question mentioned funding of personal injury claims several candidates automatically
connected this to periodical payments and the effects of the Courts Act 2003, then went on to discuss the
effects this had on personal injury payments.
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Examination Guide
Question 14
The majority of candidates provided good answers. Part (a) again gave an opportunity for candidates to
use basic knowledge and list the benefits of reinsurance. Part (b) required further application of
knowledge of reinsurance in order to perform well in this question. However on the whole, candidates
recognised how reinsurance would work in the various scenarios. Some found it difficult under the last
scenario to recognise that once the reinsurance had been used up, the insurer would be responsible for
the remaining loss on top of the original amount they paid before the excess point.
This question clearly demonstrated that candidates lacked depth in the application side of the question.
Question 15
Some candidates correctly defined the term commoditisation in relation to insurance products but were
then unable to discuss in significant detail how insurers in the UK could sell their products direct. Weaker
answers failed to focus on direct means and simply discussed the various methods of distribution
available including those that were not direct. The question required candidates to outline how insurers
could sell their products direct and required them to suggest direct means of sale i.e. telephone or internet
and to discuss how this is done, for example in a more automated way with specific referral triggers.
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Examination Guide
THE CHARTERED INSURANCE INSTITUTE
P80
Diploma in Insurance
Unit P80 Underwriting practice
April 2012 examination
Instructions
Three hours are allowed for this paper.
Do not begin writing until the invigilator instructs you to.
Read the instructions on page 3 carefully before answering any questions.
Provide the information requested on the answer book and form B.
You are allowed to write on the inside pages of this question paper, but you must NOT write your name,
candidate number, PIN or any other identification anywhere on this question paper.
The answer book and this question paper must both be handed in personally by you to the invigilator
before you leave the examination room. Failure to comply with this regulation will result in your
paper not being marked and you may be prevented from entering this examination in the future.
P80 April 2012 EG
Examination Guide
Unit P80 Underwriting practice

Instructions to candidates
Read the instructions below before answering any questions
Two hours are allowed for this paper, which contains 15 short answer questions and carries a total of
130 marks.
Read carefully all questions and information provided before starting to answer. Your answer will be
marked strictly in accordance with the question set.
The number of marks allocated to each question part is given next to the question and you should spend
your time in accordance with that allocation.
You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you
should cross through these notes before you hand in the booklet.
It is important to show each step in any calculation, even if you have used a calculator.
If you bring a calculator into the examination room, it must be a silent battery or solar-powered
non-programmable calculator. The use of electronic equipment capable of being programmed to hold
alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific
calculator, provided it meets these requirements.
Answer each question on a new page. If a question has more than one part, leave six lines blank after
each part.
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Examination Guide
PART I
Answer ALL questions in Part I
Note form is acceptable where this conveys all the necessary information
1.
The Disability Discrimination Act 1995 gave new rights to disabled persons in areas
including access to goods, facilities and services including insurance.
Outline briefly how an underwriter can justify less favourable terms for a disabled
person.
2.
3.
Explain briefly the following terms.

(a)
Regression.
(3)
(b)
Correlation.
(3)
The Contract Certainty Code of Practice provides principles and guidance relating to
the formation and performance of insurance contracts.
(10)
Outline the main principles.
4.
5.
(3)
(a)
State four possible ways through which an insurer can write international
business.
(b)
Identify six practical issues that insurers should consider when deciding to write
international business.
(6)
Identify two reasons why it is important for an underwriter to understand the

main numerical methods used to measure risk and relationships.
(2)
(a)
(b)
(4)
The following numbers represent 20 household claim values in a given year.

65
65
80
100
65
110
100
80
85
400
80
110
125
140
125
150
150
180
180
65
(i)
Calculate the arithmetic mean.
(2)
(ii)
Identify the median.
(2)
(iii)
Identify the mode.
(2)
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Examination Guide
6.
Explain briefly how fixed expenses differ from variable expenses and how they apply to
the setting of premiums, giving an example of each type of expense.
(6)
7.
Outline the insurance coverage available in the UK for contamination of land.
(7)
8.
Define the term prospective risk analysis and explain briefly how this addresses
shortcomings in the burning cost method of premium calculation.
(8)
9.
An insurer writes various general insurance portfolios. Below are the assets used to
back an employers liability and household accounts and their respective annual
premium income.
Assets used
Annual premium income
Employers liability
500m
200m
Household
150m
150m
The insurers investors wish to see a minimum return of 20% on their capital.
(a)
(b)
10.
(6)
Explain briefly the difference between the two accounts in relation to the level of
assets required relative to premium income.
(4)
The UK Environmental Agency provides information on the risk of flooding across the
whole of England and Wales by way of a National Flood Risk Assessment.
(a)
(b)
11.
Calculate the percentage return (profit) on premium needed in each case in

order to ensure a return of 20% on the assets.
Outline the information an underwriter can establish about the general area in
which a risk is situated by referring to a flood map.
(8)
Explain briefly why some insurers have developed their own flood models.
(4)
The Financial Services Authority adopts a risk based approach to regulation for all
authorised firms.
Explain what is meant by a risk based approach to regulation.
12.
State four examples of how an underwriter can identify and control potential
aggregations of risks to single events, in relation to liability insurance.
Questions continue over the page
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(10)
(8)
Examination Guide
13.
14.
15.
Explain briefly the significance of the case Callery v Gray (2002) in relation to funding
of personal injury claims.
(a)
Outline the main benefits to an insurance company of purchasing reinsurance.
(b)
Insurer A has arranged excess of loss reinsurance cover with reinsurer B for
1,000,000 in excess of 2,500,000.
(i)
Identify the excess point and the amount in this arrangement.
(ii)
Identify how much each party would expect to pay out in the event of a
loss amounting to:
(10)
(9)
(2)
1,500,000
(1)
3,250,000
(1)
5,000,000
(1)
(a)
Define the term commoditisation in relation to insurance products.
(2)
(b)
Outline how insurers in the UK sell their products direct to consumers.
(6)
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Examination Guide
TEST SPECIFICATION
Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
April 2012 Examination P80 Underwriting practice

Syllabus learning outcome(s) being examined
2 - Know the main influences on underwriting
4 - Understand the main statistical techniques of measuring risks and relationships and their
application to insurance
1 - Understand key aspects of the regulatory and legal environment of underwriting
4 - Understand the main statistical techniques of measuring risks and relationships and their
application to insurance
6 - Understand the principles and practices of risk pricing
3 - Understand underwriting policy and practice
3 - Understand underwriting policy and practice
5 - Understand the role and significance of reinsurance
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Examination Guide
NOTE ON MODEL ANSWERS

The model answers given are those which would achieve maximum marks. However, there are
alternative answers to some question parts which would also gain high marks. For the sake of
clarity and brevity not all of these alternative answers are shown. An oblique (/) indicates an
equally acceptable alternative answer.
Model answer for Question 1

An underwriter can only justify less favourable terms for a disabled person if the terms are based on:
Statistical data.
Actuarial data.
Other information on which it is reasonable to rely e.g. medical reports.

(a)
A mathematical expression of the relationship between a dependent and an independent variable.

When the relationship is known, the independent variable can be used to predict the dependent
variable.
The equation for establishing the dependent variable is:
Dependent variable = a + b* (independent variable).
(b)
The method used to measure the strength of an underlying relationship between two variables.
The strength of the relationship can be measured by calculating the:
correlation coefficient, and the
coefficient of determination.

Insurer and broker must ensure all terms are clear and unambiguous by the time the offer is made to
enter into contract or offer is accepted.
All terms must be clearly expressed including conditions or subjectivities/warranty.
After entering into the contract, documentation must be provided to the insured promptly (within 7 days
for retail customers and 30 days for all other customers).
The timescale for issuing documents is measured from inception date of the contract or date at which
the insured or insurer enters into contract or if more than one insurer, from the date on which the final
insurer enters into contract.
Insurer and broker (where applicable) must resolve any issues around the achievement of contract
certainty principles as soon as practicable and without any delay.

(a)
Appointing local agents or representatives/ binding authorities/ MGA/ local intermediaries.

Entering into a joint venture with a local insurer / broker.
Acquiring a local insurer.
Opening a local branch or using a foreign subsidiary within its own group/dealing direct.
(b)
Any six of the following:

Local legislation may require certain cover to be purchased from a Iocally authorised insurer
regardless of any master or global programme on the rest of the business.
Some territories insist on state insurers covering all or a percentage of certain types of risks.
Local taxes may be payable.
Exchange controls and potential of inflation which may affect the level of cover provided and
accentuate claims levels over a period of time.
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Examination Guide
The requirement for documentation to be produced locally in some territories.
Certain cover easily available in the UK may not be desirable to provide abroad e.g. flood or
earthquake depending on local conditions.
Exchange rate fluctuations.
In some countries, Fronting is frowned upon or even legally prohibited.
Different regulatory requirements.
Economical and political stability.
Market cycle.

(a)
It is important so that the underwriter can:

decide on whether or not to accept/price a proposed risk.
analyse and monitor the ongoing performance of the accepted business.
(b)
(i)
Arithmetic Mean = Sum of all numbers = 2455 = 122.75

Total number
20
(ii)
Median arrange all the numbers in ascending order and pick out the middle number
65,65,65,65,80,80,80,85,100,100,110,110,125,125,140,150,150,180,
180,400
As the set contains an even number, the median is the mid-point between 100 and 110
therefore
100+110 = 210 = 105
2
2
(iii)
The mode is the most common (most recurring) number i.e. 65.

Fixed Expenses
Cost incurred with the processing of a risk that apply independently of its size, premium or
complexity.
An amount is built into every premium (which may vary between risk type and class of business)
which is used to pay for operation costs.
Examples include office costs, IT costs, staff costs, head office costs etc.
Variable Expenses
Costs that is dependent on the individual risk.
Calculated to cater for increased input by underwriting and processing staff, ongoing servicing
requirements and charged over and above standard fixed expenses.
Examples include survey costs, site visits, reinsurance costs, commission etc.

General liability policies provide cover for pollution but this is typically restricted to sudden and
unforeseen events.
Material Damage property policies also provide some limited pollution or contamination resulting from
the operation of an insured peril under the Removal of Debris/make good/ remediation clause.
Specialist markets provide specialist covers known as environmental impairment liability (EIL) which
provide wider cover including gradual pollution and clean up costs.
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Examination Guide

An alternative method to the 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 for each underwriting year.
Re-evaluate historic claims to current day values.
Factor in the potential for large losses.
Adjust the claims experience in line with the cover and risk now being presented.
Analyse trends in the data/loss ratio and consider the effect of them when forecasting future losses.
Factor in risks of the future, emerging claims trends, changes in legislation, impact of climate
change etc.

(a)
EL
20% of Assets = 20% of 500 = 100M
Therefore 100M divided by the total premium income 200M expressed as a % age = 100M x
100 = 50% return/profit needed
200M
Household
20% of Assets = 20% of 150M = 30M
Therefore 30M x 100 = 20% return/profit needed
150M
(b)
The differences between the two accounts:

A higher level of assets relative to the premium income is required for EL than for a household
account.
There is consequently a higher return on premium needed on an EL account to deliver a 20%
return on assets.

(a)
From the flood map, an underwriter can establish whether the general area a risk is situated in
falls into a category of significant moderate or low.
Geographical features e.g elevation.
The categories are based upon the likelihood of flooding from rivers and the sea at a location,
taking into account the presence and effect of flood defences and flood mitigation.
(b)
This is a snapshot of flood risk at a national scale taken in summer 2004 and therefore is
probably out of date.
Some insurers have invested in their own flood models to assist in the pricing of the peril and
to keep their information up to date and relative to their portfolio.
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Examination Guide
FSA seeks to identify the key risks to its statutory objectives posed by individual firms, markets and
market mechanisms and new developments and occurrences. Then allocates its supervisory resources
according to the degree of risk assessed. The greater the perceived risk in respect of confidence in the
financial system, customer protection or financial crime, the higher the priority for regulatory attention.
Resources are therefore concentrated on specific firms, specific industry or market sectors or
mechanisms or on specific themes of current concern, for example a particular type of product PPI.
Since regulatory action is risk driven, routine monitoring visits are only a minor feature of the framework.
This approach recognises the respective responsibilities both of consumers and the firms senior
management.
It also recognises the undesirability of seeking to remove all risk of failure from the financial system
which would escalate costs for decreasing benefit.

Underwriters can identify and control such potential aggregations by
Any four of the following:
Examining exposure to similar trades e.g. train operators and track maintenance companies
working on the same track; motor part manufacturers and companies involved in the final vehicle
assembly; food manufacturers.
By examining proximity of insureds e.g. different contractors working on the same site.
By careful scrutiny of the underwriting criteria and limiting the monetary amount of indemnity given
per insured. Limiting capacity.
Placing restrictions on policy cover.
Reinsurers - by purchasing clash reinsurance cover, which protects the insurer should two or more
insureds be involved in one event. Such reinsurance cover, however, only applies to unknown or
inadvertent accumulation.

The case addressed the issue regarding the ability to recover legal expenses insurance premiums from
defendants.
In the case, it was held that the premium paid by the claimant for an after the event (ATE) legal
expenses policy could be recovered from the losing defendant as part of costs.
However, the success fee which solicitors charge above their standard fee will be reduced if the case
was straightforward and settled quickly (in this case the success fee was reduced from 40% to 20%).

(a)
Reinsurance is a means of transferring risks.

Stability
Helps to avoid fluctuations in claims costs between one period to the next.
Large variations in underwriting results can damage companys reputation and cause shareholder
concern.
Reinsurance smoothes results by capping any large losses arising within a particular account year
or from a particular event.
Capacity
An insurer can increase their capacity to write more business and accept larger or more unusual
risks by purchasing reinsurance.
Protection against catastrophes
Reinsurance can protect the insurer against either a greater number (frequency) than expected
losses or a larger than expected single loss.
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Examination Guide
Technical Expertise
Insurers can benefit from the technical expertise and knowledge of a reinsurer especially when the
insurer is a new start up or is venturing into a new area of business.
(b)
(i)
The excess point is the reinsureds retention. In this case 2.5M.
(ii)

(a)
Commoditisation of insurance products refers to 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.
(b)
Direct business is now transacted almost exclusively through telephone call centres and the
internet/aggregators.
There is a tendency for risk acceptance to be limited to standard personal lines business. Referral
points exist to handle cases requiring an element of individual underwriting.
The automated approach influences the types and complexity of product normally transacted
through the direct channel.
P80 April 2012 EG
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P80 Underwriting Practice

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Examination Guide

April 2012 Examination Guide

P80 April 2012 EG