General insurance
Domain 6 tests general insurance: pricing, reserving, reinsurance and the underwriting cycle.
Core ideas
- Rating: frequency × severity, exposure rating, experience rating, credibility weighting, no-claims discounts.
- Reserves: case reserves, IBNR, IBNER, unearned premium reserve, deferred acquisition costs; discounting for long-tailed claims.
- Reinsurance: quota share, surplus, excess of loss, stop loss and catastrophe cover; each changes net risk and capital.
- The underwriting cycle: soft markets erode margins, hard markets restore them, and reserving adequacy is tested in both.
Worked example
For accident year 2024, paid claims at 12 months are £800k. Historical development factors are 1.25 (12 to 24 months), 1.10 (24 to 36) and 1.03 (36 to ultimate). Estimated ultimate = 800 × 1.25 × 1.10 × 1.03 = £1,133k, so the outstanding reserve is £333k. Reasoning: the chain-ladder assumes past development patterns continue. If the mix has shifted to a more volatile class, or case reserving has strengthened, the factors are inappropriate and a Bornhuetter–Ferguson or expected-loss-ratio approach may be better.
Traps
Confusing IBNR with IBNER; applying factors without checking triangle stability; ignoring reinsurance recoveries and discounting; mixing accident-year and underwriting-year bases; treating the UPR as a claims reserve.