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IFoA SP8 practice questions

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Question 1General insurance specialist principles

In general insurance, which statement best describes the principle of indemnity as applied to a property damage claim?

  1. The insured must always be paid the full sum insured even where the loss is smaller.
  2. The insured receives a fixed sum stated in the schedule regardless of the actual loss suffered.
  3. The insured may recover from several insurers in total more than the loss where policies overlap.
  4. The insured is restored to the financial position held immediately before the loss, subject to policy limits. Correct answer.

Explanation

Indemnity means the insured is placed in the same financial position after the loss as before it, no better and no worse. Payment is therefore measured by the loss actually suffered, capped by the sum insured and any policy limits or excesses. It is the underlying principle from which subrogation, contribution and average derive.

Question 2General insurance specialist principles

An insurer has a right of subrogation after paying a claim. Which statement correctly describes the scope of that right in a typical property policy?

  1. The insurer may pursue any third party responsible for the loss, and any recovery belongs to the insured.
  2. The insurer may pursue the responsible third party in the insured's name, recovering only up to the amount paid. Correct answer.
  3. The insurer may recover the full loss from a third party even where it paid only part of it.
  4. The insurer may recover from the insured's own employees without any policy restriction.

Explanation

Subrogation allows the insurer, having indemnified the insured, to step into the insured's shoes and pursue the negligent third party. Recovery is limited to the amount the insurer has actually paid, with any surplus belonging to the insured. The right is exercised in the insured's name and is subject to the terms of the policy.

Question 3General insurance specialist principles

A commercial property policy contains an average (underinsurance) condition. The sum insured is 600,000, the property is worth 800,000 at the time of loss and the loss is 200,000. Ignoring any excess, what amount is payable?

  1. 100,000
  2. 120,000
  3. 200,000
  4. 150,000 Correct answer.

Explanation

The average condition scales the claim by the ratio of sum insured to the value at risk. Here the ratio is 600,000/800,000 = 0.75, so the payable amount is 0.75 x 200,000 = 150,000. The insured bears the remaining 50,000 as the consequence of underinsurance.

Question 4General insurance specialist principles

Which statement best explains why an insurer uses a deductible (excess) rather than simply reducing the premium?

  1. It allows the insurer to avoid setting aside technical provisions for outstanding claims.
  2. It guarantees that the insurer will never pay more than the sum insured on any claim.
  3. It removes small, costly-to-handle claims and gives the insured an incentive to control losses. Correct answer.
  4. It transfers the whole risk of large catastrophic losses to the insured.

Explanation

An excess filters out small claims whose handling cost is disproportionate to their value and gives the insured a financial stake in loss prevention. It therefore reduces expense ratios and moral hazard, and the resulting saving is shared through a lower premium. It does not cap total liability or remove reserving obligations.

Question 5General insurance specialist principles

A reinsurance treaty states that the reinsurer pays 80% of every loss and receives 80% of every premium, with the cedant retaining 20%. Which type of reinsurance is this?

  1. Quota share Correct answer.
  2. Stop loss
  3. Excess of loss
  4. Surplus

Explanation

A quota share treaty cedes a fixed percentage of every risk, premium and loss, with the cedant retaining the balance. Because the proportion is constant across the portfolio, it is described as proportional. Excess of loss, surplus and stop loss operate differently, being non-proportional or variable in share.

Question 6General insurance specialist principles

Which factor most directly explains why reinsurance improves an insurer's ability to write large commercial risks?

  1. It eliminates credit risk from brokers and policyholders.
  2. It guarantees that the insurer will make an underwriting profit on the portfolio.
  3. It removes the need to hold regulatory capital against those risks.
  4. It increases the insurer's capacity by transferring part of the exposure to reinsurers. Correct answer.

Explanation

Reinsurance frees up capacity by allowing the insurer to accept risks larger than its own capital could comfortably support, since part of the exposure is passed on. This supports growth in premium volume and large-limit business. It does not remove capital requirements or guarantee profitability.

Question 7General insurance specialist principles

Under a claims-made professional indemnity policy, which claims are covered?

  1. Claims arising from acts occurring after the policy expires, provided notification is prompt.
  2. Claims notified during the policy period only where the act occurred after inception.
  3. Claims arising from acts occurring during the policy period, whenever reported.
  4. Claims first made against the insured during the policy period, subject to any retroactive date. Correct answer.

Explanation

Claims-made cover responds to the date the claim is first made against the insured, not the date of the negligent act. A retroactive date usually limits cover to acts occurring on or after that date, protecting against unknown past exposures. This contrasts with occurrence-based cover.

Question 8General insurance specialist principles

Which statement best describes the purpose of an occurrence-based public liability policy?

  1. It responds to claims arising from incidents occurring during the policy period, whenever the claim is made. Correct answer.
  2. It responds only to claims notified during the policy period, regardless of when the incident occurred.
  3. It responds only to incidents occurring after the policy has been in force for twelve months.
  4. It responds to claims made after the policy expires only if no other cover exists.

Explanation

Occurrence-based cover is triggered by the date of the incident giving rise to the claim, not the date the claim is notified. This can create long-tail exposures because claims may emerge years after the policy period ends. The insurer must therefore maintain reserves for incidents already covered.

Question 9General insurance specialist principles

An underwriter is assessing a manufacturing risk. Which combination of factors most directly affects the probable maximum loss (PML) for fire damage?

  1. The premium payment method and the broker's commission rate.
  2. The construction, occupancy, protection and exposure features of the site. Correct answer.
  3. The claims history of the finance director and the age of the company.
  4. The number of employees and the company's marketing budget.

Explanation

Probable maximum loss assessment focuses on the physical and process characteristics that determine how a fire would develop and spread. Construction, occupancy, protection (such as sprinklers) and exposure (such as neighbouring buildings) are the core COPE factors. These drive both the likelihood and severity of loss.

Question 10General insurance specialist principles

In property underwriting, which statement best explains the role of a sprinkler system in rating?

  1. It reduces the expected severity of loss and is therefore recognised through rating credits. Correct answer.
  2. It increases the premium because of the cost of maintaining the system.
  3. It has no effect on rating because protection is a matter for the insured alone.
  4. It eliminates the need for any fire insurance because loss cannot occur.

Explanation

Sprinklers control or extinguish fires early, reducing the expected severity of damage and hence the pure premium. Underwriters reflect this through credits or improved terms, often conditional on the system being maintained and certified. They do not remove the risk entirely.

Question 11General insurance specialist principles

A motor insurer observes that young drivers have higher claim frequencies. Which action is most consistent with sound risk classification?

  1. Use age as a rating factor where it is statistically justified and legally permitted. Correct answer.
  2. Refuse to insure all drivers under the age of thirty.
  3. Apply a uniform excess to all policyholders regardless of age.
  4. Charge all policyholders the same rate to avoid unfair discrimination.

Explanation

Risk classification groups policyholders by characteristics that correlate with expected loss cost, so that each group pays a premium reflecting its risk. Age is a well-evidenced rating factor for motor claims, provided it is supported by data and permitted by law. Blanket refusal or uniform pricing would be commercially and actuarially unsound.

Question 12General insurance specialist principles

Which statement best describes adverse selection in a voluntary general insurance market?

  1. Higher-risk individuals are more likely to buy cover, worsening the insurer's expected loss ratio. Correct answer.
  2. Insurers select risks that are better than average, improving their loss ratio.
  3. Policyholders deliberately cause losses in order to obtain claim payments.
  4. The insurer's investment return falls below the assumed rate.

Explanation

Adverse selection arises when those who most need or expect to claim are the most likely to purchase or retain cover. If premiums are not differentiated by risk, the pool deteriorates and the insurer's loss ratio worsens. It is distinct from moral hazard and from investment risk.

Question 13General insurance specialist principles

A candidate is asked to explain why insurers hold technical provisions for outstanding claims. Which reason is most accurate?

  1. To provide a buffer for future reinsurance premium increases.
  2. To pay dividends to shareholders in the current financial year.
  3. To fund the acquisition costs of policies not yet written.
  4. To meet liabilities for claims already incurred but not yet settled or reported. Correct answer.

Explanation

Technical provisions recognise the insurer's obligation to pay claims that have occurred, whether reported or not, together with their associated handling costs. They include incurred but not reported (IBNR) reserves. This ensures liabilities are matched by assets at the reporting date.

Question 14General insurance specialist principles

Which statement best describes the treatment of unearned premium in a general insurer's accounts?

  1. It is recognised as income in full when the policy is issued.
  2. It is deducted directly from shareholders' equity at inception.
  3. It is set aside as a reserve for incurred but not reported claims.
  4. It is deferred and released over the period of cover to match the exposure. Correct answer.

Explanation

Premium written in advance of the exposure period is unearned and must be deferred. It is released to the revenue account over the period of cover, matching income with the risk carried. This is the purpose of the unearned premium provision.

Question 15General insurance specialist principles

A broker places a commercial combined policy for a client. Which statement best describes the broker's duty in relation to the proposal information?

  1. The broker is responsible for guaranteeing that the insured will not have a loss.
  2. The broker may present the risk in the most favourable light without checking accuracy.
  3. The broker should take reasonable care to ensure information presented to the insurer is accurate and complete. Correct answer.
  4. The broker has no duty to pass on material facts known to the insured.

Explanation

Brokers act as intermediaries and owe duties of care to both client and insurer in the placement process. They should ensure the information presented is fair, accurate and complete, and should pass on material facts. Misrepresentation can allow the insurer to avoid the policy.

Question 16General insurance specialist principles

Which statement best explains the role of the Financial Ombudsman Service in the UK general insurance market?

  1. It resolves disputes between consumers and firms, with powers to make awards within set limits. Correct answer.
  2. It prosecutes individuals who commit insurance fraud in the criminal courts.
  3. It authorises insurers and approves their capital models.
  4. It sets the premium rates that insurers must charge for motor cover.

Explanation

The Financial Ombudsman Service provides an independent dispute-resolution route for eligible complainants against regulated firms. It can make awards up to prescribed limits and its decisions are binding on the firm if accepted by the complainant. It does not set prices, authorise firms or prosecute crime.

Question 17General insurance specialist principles

An insurer is designing a product for small businesses covering property, business interruption and liability. Which statement best describes the purpose of a business interruption extension?

  1. It pays the insured's lost profits and continuing costs following an insured property loss. Correct answer.
  2. It replaces the property damage cover when the damage exceeds the sum insured.
  3. It provides cover for losses caused by the insolvency of a major customer.
  4. It pays fines imposed by a regulator after a health and safety breach.

Explanation

Business interruption cover responds to the financial consequence of an insured property loss, indemnifying lost gross profit and continuing fixed costs during the interruption period. It is triggered by the property damage and does not replace it. Fines and customer insolvency are separate risks.

Question 18General insurance specialist principles

Which statement best describes the effect of a policy aggregate limit on a liability insurance programme?

  1. It applies only to defence costs and not to damages.
  2. It increases the limit automatically each time a claim is paid.
  3. It sets the maximum payable for any single claim only.
  4. It caps the total amount payable across all claims during the policy period. Correct answer.

Explanation

An aggregate limit caps the insurer's total liability across all claims in the policy period, after which no further cover applies. It differs from a per-occurrence limit, which applies to each individual claim. Reinstatement provisions can restore the limit, but this must be expressly stated.

Question 19General insurance specialist principles

A property treaty uses excess of loss with a retention of 500,000 and a layer of 1,500,000. A single loss of 2,600,000 occurs. Ignoring reinstatements, how much does the reinsurer pay?

  1. 1,500,000 Correct answer.
  2. 500,000
  3. 2,100,000
  4. 2,600,000

Explanation

Under excess of loss the cedant retains the first 500,000 and the reinsurer pays the excess above that retention, up to the layer limit. The loss above retention is 2,600,000 - 500,000 = 2,100,000, but the layer is capped at 1,500,000. The reinsurer therefore pays 1,500,000, with the balance retained by the cedant.

Question 20General insurance specialist principles

Which statement best describes the difference between facultative and treaty reinsurance?

  1. Facultative is arranged risk by risk, while treaty covers a defined class or portfolio automatically. Correct answer.
  2. Facultative reinsurance is compulsory for all insurers, while treaty is optional.
  3. Treaty reinsurance is arranged risk by risk, while facultative covers the whole portfolio.
  4. Facultative covers only catastrophe losses, while treaty covers only attritional losses.

Explanation

Facultative reinsurance is negotiated for individual risks, giving the cedant and reinsurer freedom to accept or decline each one. Treaty reinsurance is an agreement covering a defined portfolio automatically, within agreed terms. The distinction concerns the basis of cession, not the type of loss.

Question 21General insurance specialist principles

An underwriter is considering moral hazard on a commercial fire risk. Which observation is most relevant to that assessment?

  1. The site is located near a river with a history of flooding.
  2. The policy has a large deductible relative to the loss size.
  3. The business has recently suffered a sharp decline in turnover and is heavily indebted. Correct answer.
  4. The building is of brick construction with a modern sprinkler system.

Explanation

Moral hazard concerns the attitude and behaviour of the insured, including incentives to cause or exaggerate loss. Financial distress and heavy indebtedness increase that concern. Construction, flood exposure and deductibles relate to physical hazard or policy structure rather than the insured's conduct.

Question 22General insurance specialist principles

Which statement best describes the purpose of the risk-based capital regime for general insurers?

  1. To ensure capital held is proportionate to the risks an insurer underwrites and invests in. Correct answer.
  2. To fix a single capital amount for all insurers regardless of their business.
  3. To guarantee that policyholders will always receive a profit share.
  4. To replace technical provisions entirely with shareholders' funds.

Explanation

Risk-based capital links required capital to the nature and size of the risks run, including underwriting, reserving, market and credit risk. It encourages sound risk management and protects policyholders. It supplements rather than replaces technical provisions.

Question 23General insurance specialist principles

A liability insurer writes a policy with a self-insured retention (SIR) of 250,000. A claim of 900,000 is settled. Which statement best describes the insurer's payment?

  1. The insurer pays 900,000 and seeks reimbursement of 250,000 from the insured.
  2. The insurer pays 650,000, with the insured bearing the first 250,000 of the loss. Correct answer.
  3. The insurer pays nothing until the insured has paid the full 900,000.
  4. The insurer pays 250,000 and the insured bears the remaining 650,000.

Explanation

A self-insured retention operates like a deductible: the insured bears the first 250,000 of each loss and the insurer pays the excess, here 650,000. Unlike a deductible in some contexts, an SIR may also carry obligations such as the insured handling the claim within the retention. The insurer does not pay in full and then reclaim.

Question 24General insurance specialist principles

Which statement best describes the concept of utmost good faith in modern insurance contract law?

  1. The insurer may avoid the policy for any non-disclosure, however minor.
  2. The insured must disclose every fact in exhaustive detail, however trivial.
  3. Both parties must make a fair presentation of the risk, with remedies proportionate to any breach. Correct answer.
  4. The duty applies only to the insurer and not to the insured.

Explanation

Modern insurance contract law frames the duty as a fair presentation of the risk owed by both parties, with the insured disclosing material circumstances. Remedies for breach are proportionate to the nature of the failure, ranging from avoidance to adjustment of the claim. It is not an obligation to disclose every trivial fact.

Question 25General insurance specialist principles

An insurer is analysing why its loss ratio deteriorated after a soft market period. Which explanation is most consistent with underwriting cycle theory?

  1. Reinsurance was unavailable, forcing insurers to retain all risk.
  2. Regulatory capital requirements were abolished during the period.
  3. Rates were reduced to retain business, so premium per unit of exposure fell while claims remained. Correct answer.
  4. Claims inflation fell sharply, reducing the cost of each claim.

Explanation

In a soft market, competition drives premiums down and terms widen, so premium per unit of exposure falls. If claim costs do not fall in parallel, the loss ratio rises and profitability deteriorates, eventually prompting a hardening of the market. The cycle is driven by competition and capacity, not by the removal of regulation.

Question 26General insurance specialist principles

In general insurance, which term describes the situation where the insured deliberately causes a loss in order to claim under the policy?

  1. Moral hazard Correct answer.
  2. Adverse selection
  3. Morale hazard
  4. Anti-selection

Explanation

Moral hazard refers to the risk that the insured's behaviour changes because of the existence of insurance, including deliberate acts to cause a loss. Morale hazard is carelessness rather than intent, and adverse selection concerns the mix of risks applying for cover.

Question 27General insurance specialist principles

Which document issued by an insurer provides temporary evidence of cover before the formal policy is issued?

  1. Cover note Correct answer.
  2. Endorsement
  3. Renewal notice
  4. Certificate of insurance

Explanation

A cover note provides temporary evidence that insurance is in force, typically pending issue of the full policy or completion of underwriting. Endorsements amend existing policies, certificates evidence cover for specific purposes, and renewal notices invite renewal.

Question 28General insurance specialist principles

Which principle requires an insured to disclose all material facts that a prudent insurer would want to know when assessing a risk?

  1. Subrogation
  2. Utmost good faith Correct answer.
  3. Indemnity
  4. Contribution

Explanation

Utmost good faith (uberrimae fidei) requires both parties to act with the highest standard of honesty, including disclosure of material facts by the insured. Indemnity, subrogation and contribution are other principles governing the amount and recovery of claims.

Question 29General insurance specialist principles

What is the primary purpose of a deductible (excess) in a general insurance policy?

  1. To limit the insurer's liability to a fixed sum
  2. To exclude certain perils from cover
  3. To increase the premium charged to the insured
  4. To reduce the number of small claims and share risk with the insured Correct answer.

Explanation

A deductible requires the insured to bear the first part of any loss, which reduces the volume of small claims and encourages risk management. It also lowers the premium compared with a nil excess, rather than increasing it.

Question 30General insurance specialist principles

In reinsurance, which term describes the situation where the reinsurer has no right to decline individual risks ceded under the agreement?

  1. Retrocession
  2. Fronting
  3. Facultative reinsurance
  4. Treaty reinsurance Correct answer.

Explanation

Treaty reinsurance is an agreement under which the reinsurer automatically accepts all risks falling within the defined scope, without case-by-case acceptance. Facultative reinsurance allows the reinsurer to accept or decline each risk individually.

Question 31General insurance specialist principles

Which of the following is a key function of the claims function within a general insurer?

  1. Designing new policy wordings for future products
  2. Calculating the insurer's solvency capital requirement
  3. Setting the investment strategy for technical reserves
  4. Investigating and settling claims fairly and promptly Correct answer.

Explanation

The claims function is responsible for validating, investigating and settling claims in accordance with policy terms, while managing fraud and controlling costs. Investment strategy, product design and capital modelling are typically performed by other functions.

Question 32General insurance specialist principles

Which statement best describes the purpose of a no-claims discount (NCD) in motor insurance?

  1. To provide cover for uninsured losses
  2. To reward claim-free years and encourage careful driving Correct answer.
  3. To guarantee renewal on the same terms
  4. To penalise insureds who report claims late

Explanation

A no-claims discount reduces the premium for each claim-free year, rewarding low-risk behaviour and incentivising careful driving. It does not penalise late reporting, cover uninsured losses, or guarantee renewal terms.

Question 33General insurance specialist principles

Which of the following best describes the role of an insurance broker in a commercial insurance transaction?

  1. To act as the insurer's agent for underwriting decisions
  2. To provide capital to the insurer
  3. To settle claims directly on behalf of the insurer
  4. To act on behalf of the insured in placing and negotiating cover Correct answer.

Explanation

A broker acts as an intermediary for the insured, advising on cover and negotiating terms with insurers. The broker is not the insurer's underwriting agent, does not usually settle claims on the insurer's behalf, and does not provide capital.

Question 34General insurance specialist principles

A property policy has a sum insured of 500,000 and an average (underinsurance) condition. A loss of 100,000 occurs when the property is valued at 800,000. What amount is payable, assuming no deductible?

  1. 62,500 Correct answer.
  2. 50,000
  3. 80,000
  4. 100,000

Explanation

The average condition reduces the claim in proportion to the underinsurance: (sum insured / value at risk) × loss = (500,000 / 800,000) × 100,000 = 62,500. The insured bears the shortfall of 37,500.

Question 35General insurance specialist principles

An insurer uses a coinsurance clause requiring the insured to carry at least 80% of the property value as insurance. If the insured carries 60% and a loss of 100,000 occurs, what percentage of the loss is payable under the clause (ignoring deductibles)?

  1. 80%
  2. 60%
  3. 75% Correct answer.
  4. 100%

Explanation

Under a coinsurance clause, the insured must insure to the stated percentage of value; if not, the claim is reduced by the ratio of insurance carried to insurance required. Here, 60% / 80% = 75% of the loss is payable.

Question 36General insurance specialist principles

A liability policy has a limit of indemnity of 1,000,000 per occurrence and a deductible of 50,000. A claim of 1,200,000 is settled. What is the insurer's payment, assuming no other limits apply?

  1. 1,000,000
  2. 1,150,000
  3. 1,200,000
  4. 950,000 Correct answer.

Explanation

The insurer pays the claim up to the limit, less the deductible: 1,000,000 - 50,000 = 950,000. The insured bears the deductible and the amount above the limit.

Question 37General insurance specialist principles

Which of the following best explains why an insurer might use a claims-made policy for professional indemnity cover?

  1. Because it allows the insurer to avoid setting reserves
  2. Because it eliminates the need for retroactive cover
  3. Because it reduces the insurer's exposure to fraudulent claims
  4. Because claims are notified long after the work is done, making occurrence cover impractical Correct answer.

Explanation

Professional indemnity claims often arise years after the professional service was provided, so a claims-made trigger (claims first made and notified during the policy period) provides certainty for the insurer. It does not remove the need for retroactive cover or reserves.

Question 38General insurance specialist principles

An insurer is assessing a commercial property risk. Which factor would most likely increase the moral hazard perceived by the underwriter?

  1. The presence of a fire suppression system
  2. A long trading history with no claims
  3. A recent change of ownership with limited maintenance records Correct answer.
  4. A well-documented business continuity plan

Explanation

Moral hazard is higher where the insured may have less incentive to prevent loss, such as when ownership has changed and maintenance history is unclear. Fire suppression, a clean claims history and a continuity plan reduce moral hazard.

Question 39General insurance specialist principles

In the context of reinsurance, what does a 'proportional' treaty mean?

  1. The reinsurer pays losses only above a specified retention
  2. The reinsurer pays a fixed amount for each loss regardless of size
  3. The reinsurer pays only for catastrophic events
  4. The reinsurer shares a fixed percentage of premiums and losses Correct answer.

Explanation

Proportional reinsurance (such as quota share or surplus) involves the reinsurer sharing a defined proportion of premiums and losses. Non-proportional reinsurance (such as excess of loss) responds only above a retention.

Question 40General insurance specialist principles

Which of the following best describes the purpose of an insurance-linked security (ILS), such as a catastrophe bond?

  1. To replace the need for reinsurance entirely
  2. To provide compulsory motor insurance
  3. To transfer insurance risk to capital markets Correct answer.
  4. To fund the insurer's day-to-day expenses

Explanation

ILS instruments transfer specified insurance risks (typically catastrophe risk) to capital market investors, providing the insurer with additional capacity. They do not replace reinsurance entirely and are not used for routine expenses.

Question 41General insurance specialist principles

An insurer is calculating its loss ratio. If earned premiums are 10,000,000 and incurred losses are 6,500,000, what is the loss ratio?

  1. 60%
  2. 154%
  3. 65% Correct answer.
  4. 35%

Explanation

The loss ratio is incurred losses divided by earned premiums: 6,500,000 / 10,000,000 = 65%. It measures the proportion of premium used to pay claims.

Question 42General insurance specialist principles

Which statement best describes the role of an underwriter when assessing a new commercial risk?

  1. To determine the premium and terms based on the risk's characteristics Correct answer.
  2. To settle any claims that arise under the policy
  3. To design the insurer's investment portfolio
  4. To audit the insurer's financial statements

Explanation

Underwriters evaluate the risk, decide whether to accept it, and set appropriate terms and pricing. Claims settlement, investment management and auditing are performed by other functions.

Question 43General insurance specialist principles

A broker is placing a commercial combined policy. Which of the following best describes the broker's duty regarding disclosure of material facts to the insurer?

  1. The broker has no duty to disclose; only the insured must disclose
  2. The broker must disclose only facts specifically asked about by the insurer
  3. The broker must disclose facts only if the insured instructs them to
  4. The broker must disclose all material facts known to them or which they ought to know Correct answer.

Explanation

A broker acting for the insured has a duty to disclose material facts to the insurer, including facts they know or ought to know. This reflects the principle of utmost good faith in placing the risk.

Question 44General insurance specialist principles

Which of the following best describes the purpose of an insurer's reinsurance programme?

  1. To reduce the insurer's exposure to large or catastrophic losses Correct answer.
  2. To guarantee a profit in all years
  3. To increase the insurer's retention of risk
  4. To eliminate the need for technical reserves

Explanation

Reinsurance protects the insurer against large individual losses and accumulations of losses, thereby reducing volatility and supporting capital. It does not eliminate reserves or guarantee profit.

Question 45General insurance specialist principles

In the context of general insurance, what is 'IBNR'?

  1. Incurred but not reported claims Correct answer.
  2. Incurred but not reserved claims
  3. Insurance broker's negotiated rate
  4. Initial base net reserve

Explanation

IBNR stands for incurred but not reported, referring to claims that have occurred but have not yet been notified to the insurer by the reporting date. It is an important component of technical provisions.

Question 46General insurance specialist principles

An insurer is considering writing a large property risk. Which of the following best explains why it might seek facultative reinsurance for this specific risk?

  1. Because it wants to avoid disclosing the risk to its treaty reinsurers
  2. Because facultative reinsurance is always cheaper than treaty reinsurance
  3. Because facultative reinsurance automatically covers all similar risks
  4. Because the risk exceeds the capacity available under its treaty arrangements Correct answer.

Explanation

Facultative reinsurance allows an insurer to obtain cover for individual risks that exceed treaty capacity or fall outside treaty terms. It is arranged risk by risk and is not automatically cheaper or broader.

Question 47General insurance specialist principles

An underwriter is assessing a commercial liability risk. Which of the following best describes the impact of a claims-made policy with a retroactive date?

  1. The retroactive date has no effect on cover
  2. Claims arising from incidents before the retroactive date are excluded Correct answer.
  3. Claims arising from incidents after the retroactive date are excluded
  4. The retroactive date sets the maximum limit of indemnity

Explanation

A retroactive date excludes claims arising from incidents that occurred before that date, even if the claim is first made during the policy period. It defines the earliest date from which covered incidents can arise.

Question 48General insurance specialist principles

Which of the following best describes the concept of 'insurable interest' in general insurance?

  1. The insurer must have a financial interest in the risk
  2. The insured must benefit from the preservation of the subject matter and suffer loss if it is damaged Correct answer.
  3. The insured must own the subject matter outright
  4. The insured must have a moral obligation to insure

Explanation

Insurable interest exists where the insured has a financial relationship with the subject matter such that they benefit from its safety and are prejudiced by its loss. Ownership is not always required.

Question 49General insurance specialist principles

In the context of general insurance, which of the following best describes the term 'utmost good faith' as it applies to the insured?

  1. The insured must pay the premium before cover starts
  2. The insured must accept all policy terms without negotiation
  3. The insured must disclose all material facts and not misrepresent the risk Correct answer.
  4. The insured must report all claims within 24 hours

Explanation

Utmost good faith requires the insured to act honestly and disclose all material facts when applying for insurance. It does not impose obligations to accept terms, pay immediately, or report claims within a fixed short period unless specified.

Question 50General insurance specialist principles

An insurer is assessing the adequacy of its technical provisions. Which of the following best describes why an insurer might hold a prudential margin in its reserves?

  1. To satisfy the requirements of the claims function
  2. To reduce the premium charged to policyholders
  3. To increase the reported profit in the current year
  4. To provide for uncertainty in the estimation of future claims Correct answer.

Explanation

A prudential margin is held to cover the risk that actual claims experience is worse than the central estimate, providing for uncertainty. It does not increase reported profit, reduce premiums, or relate specifically to the claims function.