Financial Management, Reserving and Solvency
Financial statements
Candidates must understand the balance sheet, income statement and cash flow statement for an insurer. Key items: technical provisions, unearned premium reserve, outstanding claims reserve, IBNR, equalisation reserves, investments and shareholders' funds. Know the difference between earned and written premium, and the impact of acquisition costs and deferred acquisition costs.
Reserving
Understand case reserves, IBNR, IBNER, development factors, chain-ladder and Bornhuetter-Ferguson methods at a conceptual level. Know the meaning of loss ratio, expense ratio, combined ratio and operating ratio.
Solvency
Understand Solvency II pillars: quantitative requirements (SCR, MCR), governance and disclosure. Know the risk margin, best estimate liabilities, own risk and solvency assessment and the solvency capital requirement.
Traps in questions
- Confusing IBNR (incurred but not reported) with IBNER (incurred but not enough reserved).
- Forgetting that a combined ratio above 100% means an underwriting loss.
- Assuming reserves are exact - they are estimates with uncertainty ranges.
Worked example
Earned premium £10m; incurred claims £6m; expenses £3m. Loss ratio = 60%; expense ratio = 30%; combined ratio = 90%, so underwriting profit is 10% of earned premium (£1m) before investment income.
Ethics and Professional Practice
Ethical frameworks
Candidates must understand the difference between ethics, law and regulation, and apply ethical reasoning to dilemmas. Key concepts: integrity, competence, confidentiality, objectivity, fairness and accountability. Know the CII Code of Ethics themes and the role of whistleblowing and speaking up.
Conduct in practice
Understand conflicts of interest, gifts and hospitality, treating customers fairly, vulnerable customers, data protection and anti-money laundering. Know the proceeds of crime obligations and sanctions screening.
Traps in questions
- Assuming legal behaviour is automatically ethical - it is not.
- Overlooking vulnerability indicators such as bereavement, illness or financial distress.
- Forgetting that conflicts must be managed and disclosed, not simply avoided.
Worked example
An underwriter is offered hospitality by a broker shortly before a large renewal. Accepting could compromise objectivity. The ethical response is to decline or declare the gift under the firm's policy, document the decision, and ensure the renewal is assessed on its merits.