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IFoA SP7 practice questions

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Question 1General insurance products, markets and the operating environment

Under the Lloyd's market structure, which statement best describes the role of a managing agent?

  1. It provides day-to-day management of one or more syndicates, including underwriting and claims oversight Correct answer.
  2. It is the regulator responsible for approving syndicate business plans
  3. It guarantees all syndicate liabilities with its own capital
  4. It acts as the broker who places risk on behalf of the policyholder

Explanation

A managing agent runs the operations of a syndicate: it employs the underwriters, sets underwriting strategy and administers claims, while capital is provided by members. Brokers place risk and the PRA and Lloyd's itself perform regulatory functions, so the agent's role is operational management rather than distribution or capital provision.

Question 2General insurance products, markets and the operating environment

A UK motor insurer writes business through a managing general agent (MGA). Which feature most clearly distinguishes this arrangement from a conventional broker relationship?

  1. The MGA is exempt from Financial Conduct Authority authorisation
  2. The MGA is granted delegated underwriting authority to bind the insurer Correct answer.
  3. The MGA collects premium only after the policy period ends
  4. The MGA must be owned by the insurer it represents

Explanation

An MGA acts under delegated authority from an insurer, typically binding risks, issuing documentation and sometimes handling claims within agreed limits. A broker merely intermediates and has no authority to bind the insurer, and ownership independence and FCA authorisation requirements remain, so delegated binding authority is the defining feature.

Question 3General insurance products, markets and the operating environment

Which of the following best describes the purpose of the Financial Services Compensation Scheme (FSCS) in the general insurance market?

  1. It provides last-resort protection to eligible policyholders if an authorised insurer is unable to meet claims Correct answer.
  2. It adjudicates disputes between policyholders and brokers
  3. It sets the maximum premium an insurer may charge for compulsory classes
  4. It reinsures all catastrophe losses above an insurer's retention

Explanation

The FSCS is a statutory compensation fund of last resort, protecting eligible claimants when an authorised financial firm fails. It does not cap pricing, provide reinsurance or resolve individual complaints, which are handled by the Financial Ombudsman Service.

Question 4General insurance products, markets and the operating environment

An insurer's combined ratio is 108% while its investment return on the float is 5% of net earned premium. Which conclusion is most consistent with these figures?

  1. The insurer's expense ratio must be negative
  2. The insurer has made an underwriting profit but an investment loss
  3. An underwriting loss is being offset by investment income to produce an overall profit Correct answer.
  4. The insurer is technically insolvent because the combined ratio exceeds 100%

Explanation

A combined ratio above 100% indicates an underwriting loss, but a positive investment return on the float can more than offset it, giving an overall operating profit. A combined ratio above 100% does not imply insolvency, and it is consistent with an investment gain rather than a loss.

Question 5General insurance products, markets and the operating environment

Which market participant primarily assumes peak or catastrophe risk by issuing insurance-linked securities to capital market investors?

  1. A managing general agent underwriting on behalf of a Lloyd's syndicate
  2. A claims management company
  3. A mutual insurer writing household business
  4. A special purpose insurer sponsored by a reinsurer Correct answer.

Explanation

Catastrophe bonds and similar insurance-linked securities are typically issued by a special purpose insurer that collateralises the risk and passes it to capital market investors. Mutuals, MGAs and claims managers do not perform this risk-transfer function.

Question 6General insurance products, markets and the operating environment

Which statement best describes the principle of utmost good faith (uberrimae fidei) as applied to general insurance contracts?

  1. The policyholder must disclose only information specifically requested by the insurer
  2. The duty ends once the policy is issued and does not affect claims
  3. Both parties must act honestly and disclose material information relevant to the risk Correct answer.
  4. Only the insurer owes duties of good faith to the policyholder

Explanation

Utmost good faith is a mutual duty: the proposer must disclose material facts and the insurer must deal fairly, for example in setting terms and handling claims. It is not one-sided, does not depend solely on questions asked, and continues to influence claims conduct.

Question 7General insurance products, markets and the operating environment

An insurer is assessing the effect of the Insurance Act 2015 on a commercial property policy. The insured failed to disclose a material circumstance but did so without intending to defraud. Which remedy is most likely available to the insurer?

  1. Referral of the matter to the Financial Ombudsman for determination
  2. A proportionate remedy reflecting what the insurer would have done had it known the truth Correct answer.
  3. Automatic avoidance of the contract from inception with no premium returned
  4. Refusal of the claim in full regardless of the nature of the breach

Explanation

For non-fraudulent breaches of the duty of fair presentation, the Insurance Act 2015 provides proportionate remedies depending on what the insurer would have done with full disclosure, such as applying different terms or reducing a claim. Avoidance is reserved for deliberate or reckless breaches, and the Ombudsman does not determine commercial disputes of this kind.

Question 8General insurance products, markets and the operating environment

A reinsurer agrees to pay all losses above a cedant's retention of GBP 5 million on each risk, with no upper limit. Which type of reinsurance is this?

  1. Surplus treaty
  2. Quota share
  3. Stop loss
  4. Excess of loss on a per-risk basis Correct answer.

Explanation

Per-risk excess of loss responds to individual losses exceeding a stated retention, and the absence of an upper limit is consistent with an unlimited layer. Quota share and surplus are proportional arrangements sharing premium and losses, while stop loss protects an aggregate annual loss ratio.

Question 9General insurance products, markets and the operating environment

An insurer is considering entering a new commercial liability line. Which factor most directly affects the level of capital it must hold under a risk-based capital regime?

  1. The volatility and tail length of the liability claims Correct answer.
  2. The size of its marketing budget
  3. The location of its head office
  4. The number of brokers it appoints

Explanation

Risk-based capital requirements reflect the risk profile of the business, so long-tailed, volatile liability exposures attract more capital than short-tailed predictable ones. Distribution, marketing spend and head office location do not directly drive the capital charge.

Question 10General insurance products, markets and the operating environment

Which statement best characterises the underwriting cycle in general insurance?

  1. Cycles occur only in life insurance because of longevity risk
  2. Periods of soft pricing and relaxed terms alternate with hardening as capital and losses fluctuate Correct answer.
  3. Premiums rise steadily in line with inflation every year without reversal
  4. Underwriting results are independent of capacity and competitor behaviour

Explanation

The underwriting cycle describes the alternation between soft markets, where competition and surplus capacity weaken pricing and terms, and hard markets following losses or capital depletion. It is not a smooth inflation-linked trend, is not independent of competition, and is a general insurance phenomenon.

Question 11General insurance products, markets and the operating environment

A broker places a large industrial all-risks policy with several insurers, each accepting a stated percentage of the risk. Which term describes this arrangement?

  1. Retrocession
  2. Fronting
  3. Co-insurance Correct answer.
  4. Reinsurance

Explanation

Co-insurance occurs when several insurers each accept a share of the same risk under a single placement, usually led by one insurer. Reinsurance and retrocession transfer risk between insurers and reinsurers, while fronting involves one insurer issuing a policy and passing the risk to another.

Question 12General insurance products, markets and the operating environment

An insurer's loss ratio rises sharply in its commercial motor portfolio while its expense ratio is stable. Which action is most consistent with restoring underwriting profitability?

  1. Increasing commission paid to brokers
  2. Reducing the number of claims staff to cut costs
  3. Extending credit terms to brokers
  4. Re-underwriting the portfolio and adjusting rates to reflect claims experience Correct answer.

Explanation

A rising loss ratio points to deteriorating claims experience, so re-underwriting risk selection and correcting rates addresses the cause. Cutting claims staff, extending credit or raising commission affect expenses or cash flow and would not correct the underlying loss trend.

Question 13General insurance products, markets and the operating environment

Which best describes the function of the Prudential Regulation Authority (PRA) in relation to general insurers?

  1. It supervises the safety and soundness of insurers, including capital and governance Correct answer.
  2. It investigates complaints from individual policyholders
  3. It operates the Motor Insurers' Bureau
  4. It sets the standard policy wording for household insurance

Explanation

The PRA is the prudential regulator, focused on the safety and soundness of firms through capital, governance and risk management standards. Complaints are handled by the Ombudsman, wording is a market matter, and the Motor Insurers' Bureau is a separate industry body.

Question 14General insurance products, markets and the operating environment

A firm is designing a product under the FCA's product governance rules. Which requirement is central to the manufacturer's obligations?

  1. Avoiding any written product documentation
  2. Delegating all product design decisions to brokers
  3. Identifying a target market and testing that the product meets its needs Correct answer.
  4. Setting a single price for all distributors

Explanation

Product governance requires manufacturers to define a target market, assess the product's value and test that it meets the needs of that market, with documentation throughout the lifecycle. Pricing is not fixed centrally and design responsibility cannot simply be delegated to distributors.

Question 15General insurance products, markets and the operating environment

An insurer writes a portfolio with a very long claims development tail. Which implication for reserving is most significant?

  1. Reduced need for actuarial estimation
  2. Elimination of the risk of reserve deterioration
  3. Lower capital requirements because claims settle slowly
  4. Greater uncertainty in ultimate loss estimates and a larger margin for adverse deviation Correct answer.

Explanation

Long-tailed business means claims take many years to settle, increasing estimation uncertainty and typically requiring larger prudential margins and capital. Slow settlement does not reduce capital needs, remove the need for actuarial work or eliminate reserve risk.

Question 16General insurance products, markets and the operating environment

Which statement best explains why mutual insurers may pursue different objectives from listed insurers?

  1. They cannot purchase reinsurance
  2. They are owned by policyholders and focus on member value rather than shareholder returns Correct answer.
  3. They are required to distribute all profits as dividends
  4. They are exempt from prudential regulation

Explanation

Mutuals are owned by their members, so their objectives centre on delivering value to policyholders rather than maximising returns to external shareholders. They remain subject to prudential regulation, can buy reinsurance, and do not distribute profits as shareholder dividends.

Question 17General insurance products, markets and the operating environment

A reinsurer is assessing a cedant's catastrophe exposure under a risk excess of loss treaty. Which feature of the treaty most directly limits the reinsurer's aggregate exposure across multiple events?

  1. A reinstatement provision specifying the number and cost of additional limits Correct answer.
  2. A profit commission payable to the cedant
  3. A claims control clause requiring notification
  4. A ceding commission expressed as a percentage of premium

Explanation

Reinstatement provisions define how much additional cover is available after a loss and at what cost, directly capping the reinsurer's aggregate exposure. Ceding and profit commissions affect economics but not aggregate capacity, and claims control clauses govern conduct rather than limit aggregate exposure.

Question 18General insurance products, markets and the operating environment

An insurer operates in a jurisdiction introducing a state-backed catastrophe pool covering residential flood above a threshold. Which consequence is most likely for the private market?

  1. Private insurers will cease writing all household business
  2. The pool will set premiums for all commercial lines
  3. Private insurers retain risk below the threshold and may withdraw from the highest exposures Correct answer.
  4. Reinsurance demand will disappear entirely

Explanation

State-backed pools typically take the extreme layer while private insurers retain lower layers, and the residual private exposure may lead some insurers to restrict appetite in the most exposed areas. The pool generally does not eliminate private household business, set commercial pricing or remove all reinsurance demand.

Question 19General insurance products, markets and the operating environment

An insurer's solvency capital requirement is calculated using an internal model. Which governance feature is most important for the model's acceptance by the regulator?

  1. Validation and independent review of the model within a robust risk management framework Correct answer.
  2. Use of the model solely for pricing decisions
  3. Exclusion of senior management from model oversight
  4. Delegation of model approval to an external broker

Explanation

Regulators expect internal models to be embedded in risk management with documented validation, independent review and senior management involvement. Using the model only for pricing, delegating approval to a broker or excluding management would undermine credibility and fail governance expectations.

Question 20General insurance products, markets and the operating environment

A general insurer is evaluating the effect of a prolonged low interest rate environment on its business. Which combination of effects is most plausible?

  1. Lower investment returns on reserves and increased pressure on pricing to maintain profitability Correct answer.
  2. Elimination of duration mismatch risk
  3. Higher investment returns and reduced need for underwriting discipline
  4. Reduced claims inflation and improved combined ratios

Explanation

Low interest rates reduce the return earned on invested reserves, so insurers must rely more on underwriting results and may reprice. They do not raise investment returns, necessarily reduce claims inflation or remove duration mismatch risk.

Question 21Risk assessment, underwriting and pricing of general insurance

An insurer is pricing a commercial property portfolio. Which of the following best describes the role of the claims experience of the individual risk in a credibility-weighted burning cost approach?

  1. It replaces the portfolio experience entirely whenever the risk has at least one claim in the historical period.
  2. It is ignored because individual risk experience is never statistically credible for property perils.
  3. It is combined with the portfolio's own experience according to a credibility factor reflecting the volume of the risk's exposure and claim count. Correct answer.
  4. It is used only to set the expense loading, with the pure premium taken wholly from the portfolio rate.

Explanation

Credibility theory blends the risk's own experience with the wider portfolio experience, with the weight given to the risk's data (the credibility factor) increasing with the volume of exposure and the number of claims observed. Small or claim-free risks therefore lean heavily on portfolio data, while large credible risks lean on their own record.

Question 22Risk assessment, underwriting and pricing of general insurance

In underwriting a liability risk, an underwriter assesses the moral hazard. Which factor is the clearest indicator of increased moral hazard?

  1. The insured has a strong incentive to allow or cause a loss because the sum insured greatly exceeds the true value at risk. Correct answer.
  2. The insured has recently changed its broker of record.
  3. The insured operates in a sector with a long claims-development tail.
  4. The insured has a large number of small premises spread across the country.

Explanation

Moral hazard arises where the existence of insurance changes behaviour, for example where the insured would gain financially from a loss. A sum insured far above the true value at risk creates exactly that incentive, so it is a direct moral hazard indicator.

Question 23Risk assessment, underwriting and pricing of general insurance

A motor insurer applies a no-claims discount (NCD) scale. Which statement best describes the pricing purpose served by the NCD?

  1. It removes the need to rate by vehicle group or driver age.
  2. It rewards claim-free history, thereby reducing moral hazard and adverse selection by aligning premium with expected claim frequency. Correct answer.
  3. It guarantees that the total premium collected equals the total claims paid within each policy year.
  4. It transfers the risk of large single claims to the reinsurer.

Explanation

The NCD uses the insured's own claim record as a rating factor, so it both reflects expected frequency and gives policyholders a financial reason to avoid claiming. This addresses moral hazard and, to some degree, adverse selection.

Question 24Risk assessment, underwriting and pricing of general insurance

Which of the following is the most appropriate treatment of large individual losses when estimating the expected loss ratio for a book of commercial fire business?

  1. Use only the single largest loss year to be prudent.
  2. Include all large losses in full because every loss must be reflected in the historical average.
  3. Exclude or separately load for large losses so that the estimate reflects the stable attritional experience. Correct answer.
  4. Cap every large loss at the policy excess and ignore the remainder.

Explanation

Large individual losses are highly volatile and can distort an expected loss ratio derived from a short history. Actuaries typically remove them from the attritional estimate and add a separate large-loss load based on frequency and severity analysis.

Question 25Risk assessment, underwriting and pricing of general insurance

An underwriter is assessing a fleet of heavy goods vehicles. Which combination of factors would most increase the expected claim frequency?

  1. Low annual mileage per vehicle combined with daytime operation and long-serving drivers.
  2. Vehicles garaged at a secure depot with telematics monitoring.
  3. A fleet composed entirely of new vehicles with advanced braking systems.
  4. High annual mileage per vehicle combined with night-time operation and a history of driver turnover. Correct answer.

Explanation

Claim frequency rises with exposure (mileage), with higher-risk operating conditions such as night driving, and with less experienced or unstable driver populations. The first option combines all three adverse features.

Question 26Risk assessment, underwriting and pricing of general insurance

In pricing a household contents policy, which of the following is best classified as a catastrophic rather than an attritional peril?

  1. Escape of water from a washing machine.
  2. Theft from an unlocked outbuilding.
  3. Accidental damage to a television.
  4. Flood affecting a wide geographical area simultaneously. Correct answer.

Explanation

Catastrophic perils are those that can generate many large correlated claims from a single event, such as widespread flood. The other options are idiosyncratic, uncorrelated losses that form part of attritional experience.

Question 27Risk assessment, underwriting and pricing of general insurance

An insurer writes employers' liability business. Which of the following best explains why the underwriting information required differs from that for a property policy?

  1. Liability policies never require any underwriting information because the premium is set by statute.
  2. Liability risk is determined solely by the sum insured selected by the insured.
  3. Liability claims are always settled within the policy year, so historical data is irrelevant.
  4. Liability claims depend on third-party injury and legal process, so payroll, occupation and claims history are central rather than the physical condition of property. Correct answer.

Explanation

Liability exposure is driven by the number of people exposed (payroll or headcount), the hazardousness of the occupation and the propensity to be sued, rather than by physical property condition. Underwriting therefore focuses on those factors and on claims history.

Question 28Risk assessment, underwriting and pricing of general insurance

A reinsurer is assessing whether to accept a quota share of a casualty portfolio. Which piece of information is least relevant to its assessment of the ceding insurer's underwriting quality?

  1. The colour scheme used on the insurer's customer-facing website. Correct answer.
  2. The insurer's claims handling procedures and reserving philosophy.
  3. The historical loss ratios of the portfolio by underwriting year.
  4. The insurer's underwriting guidelines and authority limits.

Explanation

Underwriting quality is judged from guidelines and authority limits, loss experience and claims and reserving practice. Marketing presentation has no bearing on how risks are selected and priced.

Question 29Risk assessment, underwriting and pricing of general insurance

An insurer calculates a risk premium for a commercial combined policy. Which of the following best describes the relationship between the risk premium and the office premium?

  1. The office premium is always equal to the risk premium because loadings are charged separately as fees.
  2. The risk premium is the office premium less the reinsurance premium only.
  3. The office premium equals the risk premium plus loadings for expenses, profit and any contingency margin, adjusted for investment income where relevant. Correct answer.
  4. The office premium is the risk premium divided by the expected loss ratio.

Explanation

The risk premium covers expected claims and is grossed up for expenses, profit and contingency margins, with allowance for investment income on premiums and reserves, to give the office premium. The relationship is additive with proportional loadings rather than a simple division.

Question 30Risk assessment, underwriting and pricing of general insurance

An underwriter is offered a risk with an unusually high sum insured relative to the insurer's normal appetite. Which response is most consistent with sound risk assessment?

  1. Consider accepting a reduced line and arranging facultative reinsurance for the excess, after assessing the risk in detail. Correct answer.
  2. Decline automatically because the sum insured exceeds the insurer's appetite.
  3. Accept the full sum insured but increase the excess to the maximum permitted.
  4. Accept the full sum insured and rely on the treaty reinsurance without further review.

Explanation

Where a risk exceeds appetite, the insurer can manage the exposure by limiting its retained line and placing facultative reinsurance for the excess, following detailed assessment. Automatic declinature ignores the possibility of a profitable, well-managed risk.

Question 31Risk assessment, underwriting and pricing of general insurance

An actuary is estimating the expected claim frequency for a class of commercial vehicles. The observed claim count is 120 over 2,000 vehicle-years. The actuary wants a 90% confidence interval using a Poisson approximation. Which statement about the resulting interval is correct?

  1. The interval is exactly 0.060 because the observed frequency is the true frequency.
  2. The interval is approximately 0.060 ± 1.645 × sqrt(120)/2,000, reflecting uncertainty in the estimated frequency. Correct answer.
  3. The interval is approximately 0.060 ± 1.645 × 0.060/2,000, because the standard error equals the mean divided by exposure.
  4. The interval cannot be constructed because claim counts are not normally distributed.

Explanation

For a Poisson count N, the variance of the count equals its mean, so the standard error of the estimated rate N/E is sqrt(N)/E. The 90% interval uses the 1.645 normal quantile, giving 0.060 ± 1.645 × sqrt(120)/2,000.

Question 32Risk assessment, underwriting and pricing of general insurance

An insurer is considering a new telematics-based motor product that prices on individual driving behaviour. Which pricing challenge is most specific to this product?

  1. The requirement that all policyholders receive an identical premium.
  2. The impossibility of applying any expense loading to a usage-based premium.
  3. The need to establish credible relationships between the new behavioural variables and claim frequency before the rating structure is finalised. Correct answer.
  4. The absence of any need for regulatory approval of rating factors.

Explanation

Novel rating variables lack established loss experience, so the insurer must build credibility, often using external data and expert judgement, and monitor emerging experience. This is the distinctive pricing challenge for behaviour-based products.

Question 33Risk assessment, underwriting and pricing of general insurance

A property insurer's portfolio is concentrated in a single coastal city. Which risk management action most directly reduces the portfolio's catastrophe exposure?

  1. Extending cover to include accidental damage.
  2. Increasing the average policy excess for theft claims.
  3. Purchasing a catastrophe excess of loss treaty with a low attachment point for that territory. Correct answer.
  4. Reducing the expense ratio by cutting marketing spend.

Explanation

Catastrophe excess of loss cover responds to the accumulation of losses from a single event, so a treaty attaching at a low level in the exposed territory directly limits the insurer's net catastrophe exposure. The other actions do not address event accumulation.

Question 34Risk assessment, underwriting and pricing of general insurance

An underwriter reviews a manufacturing risk and notes that the insured has installed a new automated production line. Which underwriting concern is most directly raised by this change?

  1. An automatic reduction in the property sum insured required.
  2. A reduction in the number of employees, which eliminates the employers' liability exposure.
  3. A potential increase in the maximum probable loss from fire or machinery breakdown and possible business interruption exposure during commissioning. Correct answer.
  4. The elimination of any need for a business interruption indemnity period.

Explanation

New automated plant can increase the value at risk and the maximum probable loss, and commissioning creates heightened machinery breakdown and interruption exposure. These are the direct underwriting concerns arising from the change.

Question 35Risk assessment, underwriting and pricing of general insurance

An actuary is analysing a liability portfolio where claims take many years to settle. Which feature most complicates the estimation of the ultimate loss ratio?

  1. The fact that all claims are reported and settled within twelve months.
  2. The need to estimate development factors from immature accident years and to allow for claims inflation over a long settlement period. Correct answer.
  3. The fact that policy limits are always identical across risks.
  4. The absence of any need to discount reserves.

Explanation

Long-tail liability business requires projection of immature accident years using development patterns and an allowance for future claims inflation, both of which introduce substantial uncertainty into the ultimate loss ratio.

Question 36Risk assessment, underwriting and pricing of general insurance

A broker presents a large commercial property risk with an excellent loss record over ten years. Which underwriting judgement is most appropriate?

  1. Decline the risk because a claim-free record suggests the insured is underinsured.
  2. Recognise the favourable experience but check whether risk improvements or a benign period explain it before granting a large discount. Correct answer.
  3. Ignore the loss record because past experience never informs future losses.
  4. Apply the maximum discount immediately because ten claim-free years prove the risk is safe.

Explanation

A good loss record is valuable evidence but may reflect recent risk improvements or simply a favourable period, so the underwriter should validate the causes before reflecting it fully in the rate. This guards against over-discounting.

Question 37Risk assessment, underwriting and pricing of general insurance

An insurer is setting rates for a new scheme of professional indemnity insurance for small accountancy firms. Which approach to the absence of the insurer's own experience is most appropriate?

  1. Apply the rates used for large accountancy firms without adjustment.
  2. Set a uniform rate for all firms regardless of size or specialism.
  3. Set rates arbitrarily and correct them only after five years of losses.
  4. Use market and industry data plus expert judgement, then monitor emerging experience and adjust rates as credible data accumulates. Correct answer.

Explanation

In the absence of own data, actuaries use market benchmarks and expert judgement to set initial rates, then monitor and revise as the insurer's own experience becomes credible. This is standard practice for new schemes.

Question 38Risk assessment, underwriting and pricing of general insurance

An insurer notes that its motor portfolio has a rising average claim severity while claim frequency is stable. Which explanation is most consistent with these observations?

  1. Claims inflation has reduced the cost of each claim while frequency is unchanged.
  2. Drivers have become more careful, reducing the number of accidents while increasing repair costs.
  3. Increases in repair costs and vehicle technology have raised the cost per claim without changing how often claims occur. Correct answer.
  4. The number of insured vehicles has fallen while the cost per repair has remained constant.

Explanation

Severity reflects the average cost of a claim, so rising repair costs and more complex vehicle technology increase severity while leaving frequency unchanged. The two components of expected loss must be analysed separately.

Question 39Risk assessment, underwriting and pricing of general insurance

An underwriter is assessing a contractor's liability risk. Which factor most directly affects the level of the insurer's exposure to bodily injury claims?

  1. The number of administrative staff employed in the office.
  2. The contractor's accounting software.
  3. The contractor's marketing budget.
  4. The nature and hazard level of the work undertaken, such as working at height or with hazardous substances. Correct answer.

Explanation

Liability exposure to third-party bodily injury is driven by the hazardousness of the operations, since working at height or with hazardous substances raises the likelihood and severity of injury. Administrative and financial factors are far less relevant.

Question 40Risk assessment, underwriting and pricing of general insurance

An insurer is analysing the effect of a proposed increase in the policy excess on a household portfolio. Which outcome is most likely?

  1. A reduction in the frequency of small claims and a reduction in the insurer's expected claims cost, with some offsetting increase in the risk of underinsurance. Correct answer.
  2. No change in claims cost because the excess is returned to the insured at renewal.
  3. An increase in the frequency of large claims because insureds become careless.
  4. An increase in the insurer's expense ratio because claims handling becomes more complex.

Explanation

A higher excess removes small claims from the insurer's cost and can deter marginal claims, reducing expected claims cost. The trade-off is that insureds may reduce sums insured or fail to claim, increasing underinsurance risk.

Question 41Risk assessment, underwriting and pricing of general insurance

A reinsurer is pricing a per-risk excess of loss treaty for a property portfolio. Which factor most directly determines the reinsurer's expected loss cost?

  1. The average premium charged for household contents cover.
  2. The total number of policies in the ceding insurer's portfolio.
  3. The ceding insurer's marketing expenditure.
  4. The frequency and severity of losses that exceed the attachment point of the treaty. Correct answer.

Explanation

For a per-risk excess of loss treaty, the reinsurer pays only the portion of each risk loss above the attachment, so its expected cost depends on how often losses breach the attachment and how large they are above it.

Question 42Risk assessment, underwriting and pricing of general insurance

An actuary is setting a risk margin in a general insurance premium. Which statement best describes the purpose of the risk margin?

  1. It provides a buffer for uncertainty in the estimated expected claims cost, reflecting the insurer's risk appetite and the volatility of the class. Correct answer.
  2. It is the profit share returned to the insured at the end of the policy term.
  3. It is the amount set aside to pay the insurer's own staff salaries.
  4. It is a statutory levy collected on behalf of the regulator.

Explanation

The risk margin (or contingency loading) compensates the insurer for bearing uncertainty and volatility in the expected claims cost and reflects its risk appetite. It is distinct from expense loadings and statutory charges.

Question 43Risk assessment, underwriting and pricing of general insurance

An insurer observes that a commercial liability class has an increasing trend in reported claim frequency but stable ultimate frequency. Which explanation is most plausible?

  1. Claims are being reported faster due to improved notification processes, so development patterns are shortening rather than true frequency rising. Correct answer.
  2. Claims inflation has reduced the number of claims reported.
  3. The insurer has written significantly more policies, which always increases frequency.
  4. The insurer's reinsurance programme has changed, altering reported frequency.

Explanation

Reported frequency can rise while ultimate frequency is stable if claims are notified more quickly, for example through improved processes. This shortens development patterns and is a reporting phenomenon rather than a genuine change in risk.

Question 44Risk assessment, underwriting and pricing of general insurance

An underwriter is offered a risk where the insured has a history of disputed claims and litigation with previous insurers. Which underwriting response is most appropriate?

  1. Decline the risk automatically because any dispute indicates fraud.
  2. Accept the risk on standard terms because disputes are a normal feature of insurance.
  3. Increase the premium by a fixed percentage regardless of the cause of the disputes.
  4. Investigate the nature of the disputes and assess whether they reflect coverage disputes, claims handling issues or the insured's conduct before deciding on terms. Correct answer.

Explanation

Disputed claims may reflect coverage ambiguity, poor claims handling or the insured's own conduct, and each has different underwriting implications. Investigation is needed before terms are set, rather than automatic declinature or a blanket loading.

Question 45Risk assessment, underwriting and pricing of general insurance

An insurer is deciding between a proportional treaty and a non-proportional treaty for a growing property portfolio. Which consideration most favours the non-proportional structure?

  1. The insurer wishes to reduce its expense ratio by ceding acquisition costs.
  2. The insurer wishes to retain more of the premium and profit from small and medium losses while protecting against large individual losses. Correct answer.
  3. The insurer wishes to transfer the entire portfolio risk to the reinsurer.
  4. The insurer wishes to share all losses and premiums proportionally with the reinsurer.

Explanation

Non-proportional cover responds only to losses above a retention, allowing the insurer to keep more premium and profit from attritional experience while ceding the tail of large losses. Proportional treaties share all losses and premiums in fixed proportion.

Question 46Risk assessment, underwriting and pricing of general insurance

An underwriter is assessing a commercial fire risk and is told the building has an approved sprinkler system with a monitored alarm and annual third-party inspection. Which underwriting action is most directly supported by this information?

  1. Removing the risk from the portfolio because fire cover is no longer needed
  2. Applying a premium credit because the loss frequency and severity are both expected to fall Correct answer.
  3. Increasing the excess because the protective measures signal poor housekeeping
  4. Declining the risk because sprinkler systems introduce water damage exposure

Explanation

Physical protective features such as sprinklers, alarms and inspection regimes reduce both the likelihood of a large fire loss and its expected severity, so the underwriter can reflect this in the rate as a credit. The other responses misread the risk signal, since protective measures improve rather than worsen the expected loss profile.

Question 47Risk assessment, underwriting and pricing of general insurance

Which statement best describes the role of the risk premium within a general insurance gross premium?

  1. It is the loadings added to cover commission and administrative expenses
  2. It is the amount held as technical reserves for incurred but not reported claims
  3. It is the expected cost of claims and claim settlement before any expense or profit loading Correct answer.
  4. It is the margin required by the regulator to cover insurer insolvency risk

Explanation

The risk premium represents the expected claims cost, including claim handling, before expenses, profit and contingency loadings are added. The gross premium is then built up from the risk premium plus expense, commission, profit and any capital-related loadings.

Question 48Risk assessment, underwriting and pricing of general insurance

An actuary is credibility-weighting the experience of a small commercial property book against a larger, more homogeneous reference class. The book has few claims and its observed loss ratio is well above the reference. Which approach is most appropriate?

  1. Blend the two using a credibility factor that increases with the volume of the book's exposure Correct answer.
  2. Adopt the observed loss ratio in full because it reflects the most recent experience
  3. Apply full weight to the reference loss ratio because the book is too small to be credible
  4. Discard both figures and price using the insurer's overall portfolio loss ratio

Explanation

Credibility theory weights the class's own experience by a factor reflecting its volume and stability, with the complement coming from the reference or prior estimate. A small book receives limited weight, so its high observed ratio is tempered rather than adopted outright.

Question 49Risk assessment, underwriting and pricing of general insurance

An insurer is reviewing a public liability portfolio and finds that average claim settlement amounts have risen steadily while reported claim counts are flat. Which explanation is most consistent with this pattern?

  1. A reduction in the insurer's expense ratio achieved through cost savings
  2. A rise in the policy excess selected by policyholders at renewal
  3. A fall in the number of policies in force during the period
  4. An upward trend in court awards and claimant legal costs per claim Correct answer.

Explanation

Stable frequency with rising average cost per claim points to severity inflation, typically driven by higher court awards, legal costs and medical or repair inflation. Frequency-based explanations cannot account for a change in the average amount paid per claim.

Question 50Risk assessment, underwriting and pricing of general insurance

An insurer is designing a new commercial combined product and wants to reward policyholders who accept a larger deductible. Which consideration most limits the effectiveness of this design as a risk-selection tool?

  1. Deductibles increase the insurer's expense ratio because claims handling rises
  2. Deductibles reduce small claims but leave the insurer exposed to the same large losses Correct answer.
  3. Deductibles are not permitted in commercial lines under local conduct rules
  4. Deductibles transfer risk to the reinsurer rather than to the policyholder

Explanation

A deductible mainly removes high-frequency, low-severity claims and so reduces expenses and small losses, but it does little to change the exposure to severe events that dominate the tail. It also tends to attract policyholders who expect few small claims, which can worsen selection if not priced carefully.