M80 Chapter 1: The Regulatory Environment Questions

1. Under the Financial Services Act 2012, which of the following is responsible for
monitoring systemic risks across the UK financial system?

A. Prudential Regulation Authority (PRA)

B. Financial Policy Committee (FPC)

C. Financial Conduct Authority (FCA)

D. Prudential Regulation Committee (PRC)

2. The Bank of England and Financial Services Act 2016 primarily aimed to:

A. Separate the PRA from the Bank of England to ensure independence.

B. Place the PRA within the Bank of England as an integrated part of it.

C. Transfer prudential supervision of insurers to the FCA.

D. Merge the FPC and MPC into a single oversight body.

3. Which of the following best describes the PRA's general approach to supervision?

A. Reactive and rule-based.

B. Prescriptive and backward-looking.

C. Judgment-based and forward-looking.

D. Risk-averse and entirely rule-driven.

4. The PRA's secondary objective is to:

A. Prevent the failure of regulated firms.

B. Facilitate effective competition.

C. Protect policyholders from fraud.

D. Promote innovation in financial services.

5. Which of the following does NOT fall under the PRA's remit?

A. Building societies
 B. Life insurers

C. General insurers

D. Insurance brokers

6. Under dual regulation, prudential supervision is carried out by:

A. FCA only

B. PRA only

C. FPC only

D. Both FCA and FPC jointly

7. Which of the following statements about PRA Threshold Conditions is correct?

A. They are optional guidance.

B. They are the minimum requirements for authorisation.

C. They only apply to large insurers.

D. They are set by the FCA under the Consumer Duty.

8. In the PRA's four-category model, a Category 1 insurer is one that:

A. Has minimal capacity to disrupt the system.

B. Can cause very significant disruption to the financial system.

C. Is exempt from routine supervision.

D. Falls under the FCA only.

9. Under Solvency UK, which of the following is NOT a key feature?

A. Risk-based solvency requirements

B. Requirement for Own Risk and Solvency Assessment (ORSA)

C. Prescriptive product pricing

D. Forward-looking supervisory review

10. Which body is the lead regulator for the Society of Lloyd's?

A. FCA

B. PRA

C. Bank of England

D. FPC

11. The FCA's strategic objective under the Financial Services Act 2012 is to:

A. Ensure the safety and soundness of firms.

B. Ensure relevant markets function well.

C. Minimise systemic risk.

D. Prevent firm failure.

12. Which of the following is NOT one of the FCA's operational objectives?

A. Protecting consumers.

B. Enhancing market integrity.

C. Promoting effective competition.

D. Maintaining prudential stability of insurers.

13. The FCA's risk-based approach means it:

A. Applies identical scrutiny to all firms.

B. Focuses supervision where risk to its objectives is greatest.

C. Randomly selects firms for audits.

D. Avoids intervening until consumer harm occurs.

14. The FCA's Firm Systematic Framework (FSF) focuses primarily on:

A. Preventative conduct assessments.

B. Thematic product reviews.

 C. Event-driven complaints.

D. Consumer redress cases.

15. A key feature of event-driven work under the FCA's model is:

A. Routine supervision of all firms.

B. Intervention after emerging or actual problems.

C. Statistical modelling of product outcomes.

D. Quarterly customer surveys.

16. The FCA Handbook contains which of the following essential rulebooks for insurers?

A. PRA Solvency Manual

B. Insurance: Conduct of Business Sourcebook (ICOBS)

C. FCA Auditing Framework

D. Financial Crime Standards Manual

17. Which Principle for Businesses requires firms to deal with regulators in an open and
cooperative way?

A. Principle 1- Integrity

B. Principle 7 - Communications with clients

C. Principle 11 - Relations with regulators

D. Principle 12 - Consumer Duty

18. Which Principles are applied by both the PRA and FCA?

A. All twelve principles

B. Only Principles 1-4, 8 and 11

C. Only Principles 6-12

D. Only Principle 12

19. The Training and Competence (TC) Sourcebook requires firms to:
 A. Delegate training responsibility to third parties.

B. Ensure employees are competent and supervised appropriately.

C. Conduct annual external examinations only.

D. Report all training activities to the PRA quarterly.

20. The Consumer Duty (Principle 12) applies to:

A. All reinsurance and large commercial risk contracts.

B. Retail customers, except certain commercial and reinsurance contracts.

C. Brokers only.

D. Firms authorised under Solvency II only.

21. Which of the following is NOT one of the six Consumer Duty outcomes?

A. Clear information before, during and after sale

B. Products meet identified needs \

C. Unlimited access to compensation schemes

D. No unreasonable post-sale barriers

22. Which FCA Principle explicitly requires clear, fair and not misleading communication?

A. Principle 6

B. Principle 7

C. Principle 8

D. Principle 9

23. Under the Consumer Duty, firms must:

A. Prioritise profit maximisation over customer outcomes.

B. Monitor and use data to test customer outcomes.

C. Only review outcomes annually.

 D. Focus solely on vulnerable customers.

24. The CII Code of Ethics obliges members to treat people fairly regardless of:

A. Only age and race.

B. Financial status.

C. Personal characteristics such as gender or disability.

D. Professional qualification level.

25. Under Principle 3, firms must:

A. Treat customers fairly.

B. Organise and control affairs responsibly with adequate systems.

C. Maintain adequate capital resources.

D. Communicate clearly with clients.

26. Which of the following statements about auditing is true?

A. It replaces the need for regulatory inspections.

B. It should be risk-based and proactive.

C. It is optional for large firms.

D. It is solely a financial process.

27. The Financial Services Compensation Scheme (FSCS) provides 100% protection for
which of the following?

A. Private motor insurance only

B. Long-term insurance policies

C. All general insurance advice

D. Directors' personal claims

28. The Financial Ombudsman Service (FOS) may reject a complaint if:

A. It concerns a firm's proper commercial judgment.

 B. It involves any insurance matter.

C. The claim is below £500.

D. It has not been reviewed by the PRA.

29. Which of the following is the current maximum binding money award the FOS can make
for complaints referred after 1 April 2025?

A. £150,000

B. £200,000

C. £445,000

D. £500,000

30. Which of the following best summarises the relationship between PRA and FCA?

A. They work entirely independently without overlap.

B. Each focuses on its objectives but coordinates where necessary.

C. The PRA reports directly to the FCA.

D. The FCA sets prudential policy and the PRA enforces it.

Answer Key & Explanations

1. B: FPC monitors systemic risks.
2. B: The 2016 Act made the PRA part of the Bank of England.
3. C: The PRA uses judgment-based, forward-looking supervision.
4. B: The PRA's secondary objective is effective competition.
5. D: Brokers are prudentially regulated by the FCA, not the PRA.
6. B: The PRA handles prudential regulation; the FCA handles conduct.
7. B: Threshold Conditions are the minimum authorisation standards.
8. B: Category 1 firms pose major systemic risk.
9. C: Solvency UK is not prescriptive about pricing.
10. B: The PRA is the lead regulator for the Lloyd's Market.
11. B: The FCA ensures markets function well.
12. D: The PRA maintains prudential stability, not the FCA.
13. B: The FCA focuses on higher-risk firms/sectors.
14. A: FSF = preventative conduct assessment.
15. B: Event-driven work = responding to emerging issues.
 16. B: ICOBS governs insurance conduct in the FCA Handbook.
17. C: Principle 11 = openness with regulators.
18. B: The PRA applies Principles 1-4, 8 & 11.
19. B: The TC Sourcebook requires competence and supervision.
20. B: The Consumer Duty applies to retail customers only, not reinsurance/large risks.
21. C: Compensation access is not a Consumer Duty outcome.
22. B: Principle 7 = clear, fair and not misleading.
23. B: The Consumer Duty uses data to monitor outcomes.
24. C: The CII Code demands fairness regardless of characteristics.
25. B: Principle 3 = responsible organisation & control.
26. B: Auditing must be proactive and risk-based.
27. B: 100% cover applies to long-term and compulsory lines.
28. A: The FOS cannot rule on proper commercial judgment.
29. C: £445,000 = max award from April 2025.
30. B: The PRA & FCA coordinate where necessary, but do not overlap fully.

M80 Chapter 2: Commercial and Legislative Factors

Questions
1. Under Principle 4 of the FCA's Principles for Businesses, insurers must: A. Maintain
adequate operational procedures B. Maintain adequate financial resources C. Ensure fair
treatment of customers D. Protect against unfair competition
2. Which statement best defines "capital" in an insurer's context? A. Income from
underwriting profit B. Assets derived solely from investments C. Money raised to acquire
and operate assets used to meet liabilities D. Reinsurance reserves held for solvency
3. The Minimum Capital Requirement (MCR) for UK insurers is the higher of: A. Base
capital requirement and enhanced capital requirement B. Base capital requirement and
general insurance capital requirement (GICR) C. Individual capital assessment and
capital resources requirement D. Enhanced capital requirement and general insurance
capital requirement
4. The Individual Capital Assessment (ICA) aims to: A. Establish the base capital threshold
for all insurers B. Transfer rule-making powers from the FCA to the PRA C. Encourage
firms to take responsibility for assessing their own capital needs D. Determine solvency
margins for cross-border insurers
5. Under Solvency UK, which change distinguishes it from Solvency II? A. Removal of
capital add-ons B. Reduced reporting burden and higher application thresholds C.
Mandatory branch capital reporting for overseas firms D. Abolition of the Matching
Adjustment
6. A highly volatile class of business such as liability insurance requires: A. A lower
premium because losses are rare B. Less capital as losses are long-tailed C. Greater
allocation of capital due to uncertainty and volatility D. Fixed reserves regardless of
volatility
7. Over-reliance on investment income to justify lower premiums can: A. Stabilize
underwriting profit B. Lead to inappropriate pricing and unexpected trading losses C.
Enhance capital adequacy D. Reduce solvency risk
8. An insurer with too little capital may: A. Be forced to reduce reinsurance purchases B.
Face PRA scrutiny and reduced underwriting capacity C. Increase authority limits for
underwriters D. Be considered overly profitable
9. Contract certainty requires all terms to be: A. Finalized before claim settlement B. Fully
agreed before contract inception and promptly documented C. Verbally agreed by broker
and insurer D. Expressed solely in legal terminology
10. Under the Contract Certainty Code of Practice, documents must be provided within: A. 7
days for all clients B. 7 working days for consumers and 30 calendar days for others C.
30 days for consumers and 60 for non-consumers D. Immediately upon acceptance
11. The Consumer Rights Act 2015 allows contract terms to be challenged if they are: A.
Prominent but complex B. Transparent and fair C. Not transparent or not prominent D.
Approved by the FCA
12. The Contracts (Rights of Third Parties) Act 1999 permits enforcement by a third party if:
A. They are named or described in the contract or the contract expressly allows it B. They
are related to the insured C. They are affected by the loss D. They are a consumer
13. Under UK GDPR, the principle of data minimisation means: A. Retaining data
indefinitely for future use B. Processing only the minimum data required for the stated
purpose C. Collecting as much data as possible to avoid re-contacting clients D. Using
anonymised data for profiling
14. Which lawful basis allows processing when it is necessary for a firm to comply with
legislation? A. Legitimate interest B. Consent C. Legal obligation D. Contract
15. Which right allows individuals to request deletion of their personal data? A. Right to
object B. Right to erasure C. Right to rectification D. Right to portability
16. A data breach likely to risk individuals' rights must be reported to: A. PRA B. FCA C.
Information Commissioner's Office (ICO) D. Ombudsman
17. Employers' liability insurance is required by: A. Employers' Liability (Compulsory
Insurance) Act 1969 B. Health and Safety at Work Act 1974 C. Financial Services Act
2012 D. Equality Act 2010
18. Under the Road Traffic Act 1988, insurers must: A. Avoid all claims following a breach
B. Meet third-party liabilities even where certain conditions are breached C. Cancel cover
if a vehicle is defective D. Refuse claims if the driver lacks a licence
19. The Motor Insurers' Bureau (MIB) compensates victims of: A. Stolen vehicles B.
Uninsured and untraced drivers C. Fraudulent claims D. Industrial accidents
20. Under CIDRA 2012, the consumer's duty is to: A. Volunteer all material facts B. Take
reasonable care not to make a misrepresentation C. Guarantee the truth of all answers D.
Disclose only facts asked after policy inception
21. If a consumer's misrepresentation is careless, the insurer: A. Automatically voids the
policy B. Must pay the claim in full C. Applies a proportionate remedy based on what it
would have done correctly D. Keeps the premium and declines all claims
22. The Insurance Act 2015 introduced the duty of: A. Reasonable disclosure B. Fair
presentation of the risk C. Utmost good faith D. Full disclosure of facts
23. Under the IA 2015, if a breach of fair presentation is deliberate or reckless, the insurer
may: A. Reduce the claim proportionately B. Avoid the contract and retain premiums C.
Void only part of the cover D. Add a warranty clause
 24. The IA 2015 changed the effect of breach of warranty so that: A. The contract is
terminated permanently B. The insurer's liability is suspended until the breach is
remedied C. The insured forfeits all premiums D. The warranty ceases to be binding
25. The Equality Act 2010 consolidated previous discrimination laws and covers how many
protected characteristics? A. Five B. Six C. Seven D. Eight
26. Which type of discrimination occurs when a rule applies to everyone but disadvantages a
protected group? A. Direct B. Indirect C. Perceptive D. Associative
27. The EU Gender Directive (Test-Achats case) prohibited: A. Use of gender in
underwriting and premium setting B. Age-based pricing C. Disability exclusions D.
Underwriting based on occupation
28. The Rehabilitation of Offenders Act 1974 allows proposers to: A. Withhold all
convictions B. Avoid answering any conviction-related question C. Legally withhold
spent convictions after rehabilitation periods expire D. Be prosecuted for nondisclosure
of spent convictions
29. The LASPO 2012 reforms affected insurance primarily by: A. Increasing recoverable
referral fees B. Reducing recoverable legal costs and banning referral fees C. Introducing
compulsory ATE insurance D. Increasing rehabilitation periods for all offences
30. One effect of LASPO was: A. An increase in motor premiums B. A reduction in motor
insurance premiums by around 10-12% C. The abolition of personal injury claims D.
Mandatory reinsurance for legal expenses

Answer Key & Explanations

1. Answer: B Explanation: PRIN 4: Firms must maintain adequate financial resources.
2. Answer: C Explanation: Capital is money raised to acquire assets and meet liabilities.
3. Answer: B Explanation: MCR = higher of base capital and general insurance capital
requirement.
4. Answer: C Explanation: ICA promotes internal responsibility for capital adequacy.
5. Answer: B Explanation: Solvency UK raised thresholds and reduced reporting.
6. Answer: C Explanation: Liability insurance is volatile and capital-intensive.
7. Answer: B Explanation: Over-reliance on investment returns may cause losses.
8. Answer: B Explanation: Low capital draws PRA scrutiny and limits capacity.
9. Answer: B Explanation: All terms must be agreed before inception.
10. Answer: B Explanation: Documents within 7 days for consumers, 30 for others.
11. Answer: C Explanation: Terms not transparent/prominent may be challenged.
12. Answer: A Explanation: Third-party rights apply if named or described.
13. Answer: B Explanation: Process only minimal data necessary.
14. Answer: C Explanation: Legal obligation permits lawful processing.
15. Answer: B Explanation: Right to erasure allows deletion requests.
16. Answer: C Explanation: Breaches must be reported to ICO.
17. Answer: A Explanation: Employers' Liability (Compulsory Insurance) Act 1969.
18. Answer: B Explanation: RTA 1988 requires insurers to meet third-party liabilities.
19. Answer: B Explanation: MIB compensates uninsured/untraced driver victims.
20. Answer: B Explanation: Consumers must avoid misrepresentation under CIDRA.
 21. Answer: C Explanation: Careless misrepresentation = proportionate remedy.
22. Answer: B Explanation: IA 2015: Duty of fair presentation of risk.
23. Answer: B Explanation: Deliberate breach avoid contract, retain premium.
24. Answer: B Explanation: Breach suspends liability until corrected.
25. Answer: C Explanation: Seven protected characteristics under Equality Act.
26. Answer: B Explanation: Indirect discrimination disadvantages protected groups.
27. Answer: A Explanation: Gender Directive banned gender-based pricing.
28. Answer: C Explanation: Spent convictions need not be disclosed.
29. Answer: B Explanation: LASPO banned referral fees, reduced legal costs.
30. Answer: B Explanation: Motor premiums fell 10-12% post-LASPO.

M80 Chapter 3: Underwriting Cycle and Impact of Trends

Questions
1. In the "soft market" phase of the underwriting cycle, insurers often experience rising
expense ratios. What is the primary reason for this, according to the text? A.
Intermediaries demand lower commission rates, reducing overall income. B. Reinsurance
costs increase disproportionately as reinsurers raise their rates. C. Fixed costs, such as
premises, attach to a diminishing premium income. D. Variable costs associated with
handling fewer transactions increase.
2. The text identifies that while the underwriting cycle for property business is claims-cost-
driven, the private motor market is different. What is its primary driver? A. The cost of
weather-related claims, particularly flood and hailstorm. B. Price-driven competition,
amplified by computerized quotation systems. C. The fluctuating price of oil affecting
vehicle usage. D. Changes in legislation regarding liability for new technology.
3. How does the text describe the impact of a reduction in the price of oil on the motor
insurance market? A. It is inflationary, reducing vehicle use and lowering claims. B. It
has no impact, as motor insurance is purely price-driven. C. It leads to lower operating
costs for insurers, resulting in a softer market. D. It increases vehicle use, which is
expected to increase claim frequency and lead to premium rises.
4. What specific impact of the UK recession in the early 1990s led to the creation of the
Claims Underwriting Exchange (CUE)? A. An increase in fraudulent subsidence claims.
B. A withdrawal of capacity from the liability market. C. An approximate doubling of
theft claims between 1989 and 1992. D. A surge in arson-related fire claims.
5. What is the fundamental difference between the purposes of Pool Re and Flood Re? A.
Pool Re is a non-profit fund, whereas Flood Re is a government body. B. Pool Re
provides reinsurance for commercial property terrorism , while Flood Re provides
reinsurance for high-risk homes flood cover. C. Pool Re covers homes and businesses,
while Flood Re only covers homes built after 2009. D. Pool Re is a primary insurer for
terrorism, while Flood Re is a reinsurance mechanism.
6. When discussing weather-related claims for commercial premises, what specific
relationship between physical damage and business interruption (BI) is highlighted? A.
BI cover is only triggered if the physical damage claim exceeds a set percentage of the
sum insured. B. The payout under the BI part of the cover may be far more than for the
physical damage. C. BI claims for weather are generally excluded unless storm is the
specified peril. D. Physical damage claims are typically more costly than the subsequent
BI claims.
7. Which of the following is not one of the six ClimateWise Principles adopted by the
insurance industry? A. Inform public policy making. B. Incorporate climate change into
investment strategies. C. Mandate lower premiums for clients who reduce their
environmental impact. D. Lead in risk analysis.
8. Which of the following properties would be explicitly excluded from the Flood Re
scheme? A. A home in a 1-in-75-year flood risk area. B. A home built in 2008 that has
flooded twice. C. A residential flat in a block built in 2010. D. A high-risk home that is
mortgaged.
9. According to Table 3.2, how does the provision of flood insurance in France differ
significantly from that in Germany? A. France includes flood cover as standard with a
mandatory surcharge and unlimited government guarantee. B. Germany includes flood
cover as standard, while it is optional in France. C. France relies on the private market,
while Germany uses a state-run pool. D. France excludes flood for domestic risks,
whereas Germany mandates it.
10. Based on Table 3.2, which country’s approach to flood insurance is most structurally
similar to the approach in the USA? A. The UK, where the private market provides cover.
B. France, which uses a national catastrophe (CATNAT) programme. C. The
Netherlands, where the government acts as insurer of last resort. D. Germany, where
uptake is low and cover is optional.
11. How has the management of subsidence claims in the UK evolved since the risk became
prominent? A. Immediate underpinning or structural repair is now the standard response.
B. Cover has been largely withdrawn and replaced by substantial excesses. C. The focus
has shifted to remedial action, like tree removal and monitoring, rather than immediate
underpinning. D. The ABI Domestic Subsidence Claim Handling Agreement now
mandates all claims be paid in full.
12. What is the primary function of the Employers' Liability Tracing Office (ELTO)? A. To
provide compensation for mesothelioma victims whose employers are insolvent. B. To
act as a database to help trace the correct EL insurer for long-tail disease claims. C. To
 prosecute employers who fail to have compulsory EL insurance. D. To set standards for
underwriting long-term industrial disease risks.
13. What major legal and regulatory event did the COVID-19 pandemic precipitate, as
highlighted in the text? A. The launch of the Employers' Liability Tracing Office
(ELTO). B. The FCA Test Case focused on clarity for business interruption insurance. C.
The introduction of the Climate Change Act 2008. D. The creation of a government-
backed pandemic reinsurance pool.
14. What was the primary insurance market consequence of the 2010 Eyjafjallajökull
volcanic eruption? A. Widespread property damage claims from ash fall. B. The creation
of Pool Re to cover volcanic eruptions. C. Travel insurers paid significant claims for
delay and abandonment, despite it not being a specified peril. D. Airlines successfully
claimed under their BI policies for airspace closures.
15. How is cover for pollution and contamination typically handled within general liability
policies in the UK? A. All pollution is covered, as EIL is included as standard. B. Cover
is restricted to sudden and unforeseen events. C. Cover is only provided if it results from
an insured peril under a property policy. D. All cover is excluded, as it is mandated that
polluters must buy specialist policies.
16. The SS Torrey Canyon oil spill (1967) and the Deepwater Horizon explosion (2010) both
caused massive environmental damage. How did the legislative outcomes differ? A.
Torrey Canyon led to strict liability via the Civil Liability Convention; Deepwater
Horizon led to no new legislation. B. Both events led to the COMAH regulations. C.
Torrey Canyon had no legislative impact; Deepwater Horizon led to the Civil Liability
Convention. D. Both events resulted in companies agreeing to improve safety standards,
but no new laws were passed.
17. Which industrial disaster led to the original legislation that has since been expanded into
the Control of Major Accident Hazards Regulations 1999 (COMAH)? A. The SS Torrey
Canyon oil spill (1967). B. The Flixborough chemical plant explosion (1974). C. The
Buncefield oil depot explosion (2005). D. The Deepwater Horizon oil platform explosion
(2010).
18. Why is the standard insurance market generally considered unsuitable for covering
nuclear risks? A. The risk is already covered by Pool Re. B. The Civil Liability
Convention 1969 prohibits private insurance for nuclear risks. C. There are too few
reactors for homogeneity, and potential losses are substantial and unpredictable. D. All
nuclear risks are self-insured by governments, so no market exists.
19. A key provision of the Building Safety Act 2022, which significantly impacts insurers'
legacy exposure, is: A. The mandating of sprinkler systems in all high-rise buildings. B.
The transfer of all liability for cladding to the Building Safety Regulator. C. The
extension of the limitation period to 30 years for buildings completed before the Act. D.
The creation of a government-backed reinsurance pool for fire safety risks.
20. In the wake of the Grenfell Tower fire and the Hackitt Report, how are insurers stated to
be managing their exposure to cladding and fire safety risks? A. By offering premium
discounts for ESG-compliant buildings. B. By requiring due diligence and often applying
aggregate limitations and significant self-insured retentions. C. By refusing to insure any
building over seven storeys or 18 metres. D. By relying on the government pledge to
force developers to pay for all remediation.
21. In the context of cyber risks, what does "silent exposure" mean? A. The risk of a cyber-
attack on an insurer's own systems. B. Existing, non-cyber policies responding to cyber
losses that were not intended to be covered. C. The PRA requirement to exclude all cyber
risks from 1 January 2021. D. The low take-up of specific cyber insurance products.
22. What is the stated business rationale for insurers to integrate ESG considerations into
their underwriting process? A. To replace the ClimateWise Principles, which were found
to be ineffective. B. Clients who embrace ESG are arguably better risk-managed, leading
to better-performing business for insurers. C. To comply with the Climate Change Act
2008, which mandates ESG-based pricing. D. To prepare for the end of the Flood Re
scheme in 2039.
23. Which of the following is not listed as one of the main factors that can lengthen or
shorten the underwriting cycle? A. Economic cycles and level of investment return. B.
The establishment of anti-fraud databases like CUE. C. Weather-related claims. D.
Changes to legislation or judicial decisions.
24. Which industrial disaster resulted in the owners being prosecuted and found guilty of
criminal negligence under the COMAH Regulations? A. SS Torrey Canyon (1967). B.
Flixborough (1974). C. Buncefield (2005). D. Deepwater Horizon (2010).
25. Within what timescale must insurers upload mandatory information for a new EL policy
to the ELTO database? A. 7 days B. 30 days C. 90 days D. 12 months
26. How does the text describe the strategy of "prudent insurers" during a "hard market"? A.
They expand the scope of cover at no extra cost to gain market share. B. They build up
reserves from profit to fund future losses at the bottom of the cycle. C. They rely on
actuarial modelling to set lower, more competitive prices. D. They increase investment in
volatile economies to maximise returns.
27. What was a significant secondary global economic impact of the 2011 Tōhoku
earthquake in Japan? A. It caused the collapse of the Flood Re scheme. B. It led to the
Civil Liability Convention being applied to nuclear reactors. C. It interrupted global
industry, such as motor vehicle manufacture, due to supply chain issues. D. It triggered
the global financial crisis.
28. What specific action did the PRA require from insurers regarding cyber risk, effective
from 1 January 2021? A. To exclude all cyber risk from all policies. B. To provide clarity
by either affirmatively providing or explicitly excluding cyber coverage. C. To buy
reinsurance from a government-backed cyber pool. D. To report all cyber losses to the
ELTO database.
29. Which of the following statements about global flood insurance provision, according to
Table 3.2, is correct? A. In the USA, flood perils are covered by the Federal Government.
B. In Germany, flood insurance uptake is high ( >90%). C. In France, flood insurance is
optional and provided by the private market. D. The UK is the only country where the
private market provides flood cover.
30. Which of the following risks is identified as being covered by government-assisted
specialist pools due to a lack of homogeneity and catastrophic potential? A. Nuclear
risks. B. Fracking risks. C. Cladding and fire safety risks. D. Long-term industrial
diseases.
Answers and Explanations
1. C. Fixed costs, such as premises, attach to a diminishing premium income.
o Explanation: A soft market is defined by lower prices. The text states that fixed
costs (like premises) remain the same, so when premium income diminishes, the
ratio of expenses to income rises. Intermediaries actually ask for increased
commission.
2. B. Price-driven competition, amplified by computerized quotation systems.
o Explanation: The text explicitly states that private motor "tends to be more price-
driven" and less volatile than property. It credits computerized quotation systems
with increasing this competitiveness.
3. D. It increases vehicle use, which is expected to increase claim frequency and lead to
premium rises.
o Explanation: The text contrasts this with oil shortages, which reduce vehicle
use . A reduction in price is "passed through to motorists," leading to more use,
higher claim frequency, and likely premium rises.
4. C. An approximate doubling of theft claims between 1989 and 1992.
o Explanation: The text directly links the recession in the early 1990s to this
"doubling of theft claims," which then "led to the first of the major UK anti-fraud
database initiatives, the Claims Underwriting Exchange (CUE)".
5. B. Pool Re provides reinsurance for commercial property terrorism , while Flood Re
provides reinsurance for high-risk homes flood cover.
o Explanation: This is the core distinction. Pool Re was set up with the
government for commercial property terrorism cover. Flood Re is a non-profit
fund for high-risk homes to access affordable flood cover.
6. B. The payout under the BI part of the cover may be far more than for the physical
damage.
o Explanation: The text states that a commercial insurer "may pay out far more
under the business interruption part of the cover than for the physical damage to
the premises".
7. C. Mandate lower premiums for clients who reduce their environmental impact.
o Explanation: The six principles are: 1. Lead in risk analysis, 2. Inform public
policy making, 3. Support climate awareness, 4. Incorporate into investment
strategies, 5. Reduce own environmental impact, 6. Report and be accountable .
Mandating premiums is not one of them.
8. C. A residential flat in a block built in 2010.
o Explanation: The text states Flood Re "excludes properties built after 2009". A
home built in 2010 falls into this exclusion. High-risk homes and those built
before 2009 are the target audience.
9. A. France includes flood cover as standard with a mandatory surcharge and unlimited
government guarantee.
o Explanation: Table 3.2 shows France has a "mandatory" natural catastrophe
coverage with a "premium surcharge" and "Unlimited government guarantee"
(CATNAT). In contrast, Germany's is "optional," "available... for an additional
premium," and has "low uptake".
10. C. The Netherlands, where the government acts as insurer of last resort.
 o Explanation: The table shows that in the USA, "The Federal Government covers
flood perils." In the Netherlands, "the Government acts as insurer of last resort for
flood, as the private market does not provide". Both involve heavy
state/government intervention, unlike the private market approaches in the UK or
Australia.
11. C. The focus has shifted to remedial action, like tree removal and monitoring, rather than
immediate underpinning.
o Explanation: The text states that initially the tendency was for underpinning, but
now "remedial action is taken, such as removing trees or repairing... pipes,
followed by monitoring and repair as needed".
12. B. To act as a database to help trace the correct EL insurer for long-tail disease claims.
o Explanation: The text introduces ELTO to solve the "problems tracing the
correct employers' liability insurer" for long-tail claims. It is a "database" that can
be searched.
13. B. The FCA Test Case focused on clarity for business interruption insurance.
o Explanation: The text states COVID-19 highlighted the importance of policy
terms, with a "particular focus on... business interruption insurance, which
resulted in the High Court decision in the FCA Test Case".
14. C. Travel insurers paid significant claims for delay and abandonment, despite it not being
a specified peril.
o Explanation: The eruption's main impact was airspace closure. "a number of
claims by... policyholders for delay and subsequent travel abandonment were
met" , costing insurers £70m.
15. B. Cover is restricted to sudden and unforeseen events.
o Explanation: The text states that "the cover provided by general liability policies
is still typically restricted to sudden and unforeseen events". EIL is a specialist
cover, not standard.
16. A. Torrey Canyon led to strict liability via the Civil Liability Convention; Deepwater
Horizon led to no new legislation.
o Explanation: The text explicitly states Torrey Canyon "led to the Civil Liability
Convention 1969 which imposed strict liability". For Deepwater Horizon, it "has
not given rise to any further legislation; the top five oil companies have simply
agreed to work harder to improve safety standards".
17. B. The Flixborough chemical plant explosion (1974).
o Explanation: The text states the investigation into the Flixborough disaster "led
to new legislation being passed... this legislation has since been expanded and is
now included within the Control of Major Accident Hazards Regulations 1999
(COMAH)".
18. C. There are too few reactors for homogeneity, and potential losses are substantial and
unpredictable.
o Explanation: The text states "potential losses... would be substantial and almost
impossible to predict" and "With only 400 nuclear reactors... it is clearly
impossible for homogeneity to exist".
19. C. The extension of the limitation period to 30 years for buildings completed before the
Act.
 o Explanation: This is highlighted as "The most controversial provision introduced
so far is the extension of the limitation period to 30 years for buildings completed
before the Act came into force".
20. B. By requiring due diligence and often applying aggregate limitations and significant
self-insured retentions.
o Explanation: The text states "insurers now require due diligence" and "insurers
will typically only offer cover subject to an aggregate limitation and a significant
self-insured retention is often required".
21. B. Existing, non-cyber policies responding to cyber losses that were not intended to be
covered.
o Explanation: The text says "existing policy wordings will respond to some cyber
losses despite insurers not having intended to provide this cover. Insurers are
looking to manage this silent exposure".
22. B. Clients who embrace ESG are arguably better risk-managed, leading to better-
performing business for insurers.
o Explanation: The text states this "should also result in better performing business
for insurers, as clients who embrace ESG issues are arguably better risk managed
than their peers".
23. B. The establishment of anti-fraud databases like CUE.
o Explanation: The listed influences on the cycle are: economic cycles, political
influences, weather-related claims, and changes to legislation . The CUE was a
result of a trend (recession-driven theft) , not an influence on the cycle itself.
24. C. Buncefield (2005).
o Explanation: The text states that for Buncefield, "the owners and operators were
also prosecuted and found guilty of criminal negligence under the COMAH
Regulations". Flixborough led to the regulations.
25. C. 90 days.
o Explanation: After listing the mandatory information for ELTO, the text states:
"All of this information must be provided within 90 days of inception".
26. B. They build up reserves from profit to fund future losses at the bottom of the cycle.
o Explanation: The text states that in a "hard market', prudent insurers build up
reserves from profit" to "fund losses at the bottom of the cycle, thereby ensuring
survival".
27. C. It interrupted global industry, such as motor vehicle manufacture, due to supply chain
issues.
o Explanation: The text states, "The effects from the interruption to Japanese
industry were felt worldwide involving, for example, the temporary suspension of
motor vehicle manufacture".
28. B. To provide clarity by either affirmatively providing or explicitly excluding cyber
coverage.
o Explanation: The text states "the PRA requires all policies to provide clarity on
cyber coverage by either excluding or providing affirmative cover".
29. A. In the USA, flood perils are covered by the Federal Government.
o Explanation: Table 3.2 clearly states for the USA: "The Federal Government
covers flood perils". Germany has low uptake, and France has a mandatory state-
 guaranteed system. Australia also uses the private market, so the UK is not the
only one.
30. A. Nuclear risks.
o Explanation: The text identifies nuclear risks as having low homogeneity (400
reactors) and being unsuitable for the standard market. It states "governments
have assisted with the setting up of specialist nuclear pools".

M80 Chapter 4: Policy and Practice Questions

1. An established insurer in a soft market, facing new entrants, decides to concede market
share rather than reduce rates to a point of unprofitability. This decision is a direct
strategic response to managing the balance between: A. Growth and profit. B. Expense
ratio and claims ratio. C. Physical and moral hazard. D. Corporate and underwriting
strategy.
2. A new insurer, aware it will take time to achieve "critical mass," projects an underwriting
loss for its first three years. This is most likely because: A. Its claims ratio will be high
due to a lack of statistical data. B. Its expense ratio will be high until the portfolio is large
enough to support operating costs. C. Its corporate strategy conflicts with its underwriting
strategy. D. Moral hazard is always higher for new entrants.
3. A large insurer's corporate strategy dictates a 15% rate increase across its motor portfolio
to improve profitability. However, its local area divisions, which have aggressive growth
targets, argue for restraint in applying these increases. This is a clear example of: A. An
internal tension caused by conflicting targets. B. A failure to assess physical hazard. C. A
'loss leader' strategy. D. A new entrant destabilising the market.
4. An underwriter, when assessing a risk, notes that the proposer has a poor history of
responding to risk improvement recommendations and is slow to pay premiums. This is a
key indicator of: A. Physical hazard. B. Moral hazard (post-inception). C. Moral hazard
(pre-inception). D. Moral hazard (post-loss).
5. Which of the following is the best example of a physical hazard in a liability insurance
context? A. The proposer has a history of exaggerating claims. B. The proposer fails to
disclose a previous insolvency. C. The proposer's premises show a lack of compliance
with health and safety requirements. D. The proposer has a careless attitude towards staff
training.
6. An insurer uses a modular policy format for its commercial clients. What is the primary
advantage of this approach? A. It allows the underwriter to construct a policy using
relevant modules, avoiding the need to individually draft policies for larger risks. B. It
eliminates the need for a policy schedule. C. It guarantees a lower expense ratio than pre-
printed policy booklets. D. It automatically satisfies the requirements of the Insurance
Act 2015.
7. A policy contains a warranty (a 'suspensive condition' under s.10 of the IA 2015) that an
alarm system must be inspected annually. The inspection is due on 1st March but is not
completed until 1st April. A theft occurs on 15th April. What is the insurer's liability? A.
The insurer has no liability, as the warranty was breached. B. The insurer is liable, as the
breach was remedied before the loss occurred. C. The insurer is only liable for a
proportionate amount of the loss. D. The insurer has no liability, as the breach was
deliberate.
8. Under s.11 of the Insurance Act 2015, a policy includes a condition that all combustible
waste must be stored 10 metres away from the building. The insured breaches this
condition. A major flood then damages the building. What is the insurer's position
regarding the flood claim? A. The insurer can avoid the claim, as the insured breached a
policy condition. B. The insurer must pay the claim, as the non-compliance did not
increase the risk of the loss which actually occurred. C. The insurer can apply a
proportionate remedy based on the breach. D. The insurer is liable but can charge an
additional premium.
9. A business interruption policy includes a franchise of 12 hours on its prevention of access
extension. Access to the premises is prevented for 11 hours. What is the insurer's liability
for the loss? A. The insurer pays for the 11 hours of loss. B. The insurer pays nothing. C.
The insurer pays for the 11 hours of loss, minus a 12-hour excess. D. The insurer pays the
full loss, as the franchise is illegal under the IA 2015.
10. A policy has a franchise of £500. If a valid loss of £501 occurs, how much will the
insurer pay? A. £1 B. £0 C. £501 D. £500
11. How does a deductible, as defined in the text, primarily differ from a standard
compulsory excess? A. A deductible is voluntary, whereas an excess is compulsory. B. A
deductible applies only to motor, whereas an excess applies to property. C. A deductible
is typically used on large industrial risks and is individually rated, not based on a pre-
determined class-level discount. D. A deductible is paid by the insurer, whereas an excess
is paid by the policyholder.
12. The primary aim of a compulsory excess, from an insurer's perspective, is to: A. Share
profits with the policyholder. B. Eliminate small, high-frequency 'nuisance' claims, which
are costly to administer. C. Meet the minimum requirements of road traffic act
legislation. D. Increase the premium discount offered to the policyholder.
13. An underwriter uses Standard Industrial Classification (SIC) codes to group risks. This is
an example of which stage of the underwriting process? A. Risk categorisation. B. Risk
improvement. C. Risk classification. D. Applying underwriting criteria.
14. An insurer groups postcodes into 10 different "theft rating areas" based on crime statistics
and claims experience. This is an example of: A. Risk classification. B. Risk
categorisation. C. Risk improvement. D. Applying an endorsement.
15. A surveyor, upon inspecting a warehouse, advises the underwriter that while the risk is
acceptable, installing a sprinkler system would significantly improve it. The insurer
offers a premium discount if the insured implements this. This is an example of a: A.
Requirement. B. Recommendation. C. Warranty. D. Policy condition.
16. What is the primary reason complex commercial lines are mainly transacted through
intermediaries, whereas standard personal lines are increasingly sold direct? A.
Intermediaries for commercial lines employ staff with specific expertise and act as
consultants, which is less necessary for commoditised personal lines. B. Price comparison
websites are banned from selling commercial insurance. C. Direct sales channels are
unable to handle the high premiums of commercial lines. D. Delegated authority is only
permitted for personal lines business.
17. The trend for personal lines products to become less differentiated, with customers caring
more about price than the provider, is known as: A. Commoditisation. B. Risk
classification. C. Niche marketing. D. Moral hazard.
18. An insurer offers two different motor products: a "full-cover" version via its broker
channel and a cheaper, "stripped-down" version on price comparison websites. What is
the most likely strategic reason for this? A. To comply with regulatory demands from the
FCA's thematic review. B. To manage internal tensions between its direct and
intermediary divisions. C. To appeal to the price-driven nature of the online market while
offering comprehensive cover elsewhere. D. To test the profitability of the two different
channels.
19. Why is the pricing model for a direct sales channel often a more complex technical build
than for an intermediary channel? A. Because it must include the intermediary's
commission. B. Because it must minimise underwriter referrals and allow for fine-tuning
of rates at short notice. C. Because direct channels only sell non-standard, complex risks.
D. Because the staff in direct channels are more technically skilled.
20. What is the key distinction between a Managing General Agent (MGA) and a traditional
coverholder? A. An MGA funds the claims from its own capital, whereas a coverholder
does not. B. An MGA is an insurer, whereas a coverholder is a broker. C. An MGA
undertakes a wider range of activities, such as marketing and administration, although it
still does not provide the claims funding. D. A coverholder can handle claims, whereas an
MGA is prohibited from doing so.
21. An insurer grants delegated authority to a broker. What is the primary conflict of interest
the insurer must manage? A. The broker may try to reduce their commission to win
business. B. The broker may be pressured to accept risks outside the agreed authority to
boost sales or protect a client relationship. C. The broker may not have the correct
regulatory permissions from the FCA. D. The broker may write too much profitable
business, breaching the aggregate premium limit.
22. An insurer requires its coverholder to submit a monthly detailed report of all risks bound
and claims paid under the binding authority. This report is known as a: A. Bordereau. B.
Risk survey. C. Policy schedule. D. Memorandum.
23. Following Brexit, UK insurers lost their "passporting rights." What practical issue did
this create? A. UK insurers could no longer use the Euro as a currency. B. UK insurers
were no longer permitted to perform insurance contracts covering insureds domiciled in
the EU/EEA. C. EU insurers were given a 15-year period to acquire UK insurers. D. All
EU-based insurers had to cease trading in the UK immediately.
24. A UK insurer wishes to cover a risk in a territory that requires insurance to be bought
from a locally authorised insurer. The UK insurer is not locally authorised. In this
scenario, the UK insurer is considered a: A. Non-admitted carrier. B. Reinsurer. C.
Managing General Agent (MGA). D. Takaful operator.
25. An insurer expanding into an Islamic culture must understand the takaful system of risk-
sharing. This is a key consideration relating to which specific global risk? A. Financial
risk. B. Political risk. C. Cultural risk. D. Reinsurance risk.
26. A parent insures a high-performance car in their own name, declaring themselves as the
main user, when in fact it is primarily for their newly qualified-driver son. This type of
opportunistic fraud is known as: A. 'Fronting'. B. Money laundering. C. A staged motor
accident. D. A 'ghost broker' scam.
27. An insurer's specialist anti-fraud unit uses "conversation management," a technique
involving applied psychology to build rapport and elicit information from a claimant over
 the telephone. This is an example of: A. Investigative interviewing. B. Covert
surveillance. C. Forensic claim scene investigation. D. Data mining via CUE.
28. Which UK anti-fraud body is a specialist police unit funded by the industry and based at
the City of London Police? A. Insurance Fraud Investigators Group (IFIG). B. Insurance
Fraud Bureau (IFB). C. Insurance Fraud Enforcement Department (IFED). D. Claims and
Underwriting Exchange (CUE).
29. An underwriter is assessing a new household proposal. To verify the applicant's declared
claims history, which anti-fraud database would be the most appropriate tool? A. Claims
and Underwriting Exchange (CUE). B. Motor Insurance Anti-Fraud and Theft Register
(MIAFTR). C. The Insurance Fraud Register (IFR). D. Navigate (formerly MID).
30. Following a merger, an insurer's underwriting appetite for a specific, complex class of
business changes. What is the most likely reason for this, according to the text? A. The
acquired entity's poor performance in that class, forcing a market exit. B. The class has
become 'non-core' to the combined operation, or the acquisition has brought in new loss
experience or expertise. C. The EU has banned the writing of that class following Brexit.
D. All data from the acquired entity is incompatible and cannot be rationalised.

Answers and Explanations

1. A. Growth and profit.
o Explanation: The text discusses this dilemma in section A3. The established
insurer must choose between maintaining market share (growth) by matching
unprofitably low rates, or maintaining profitability by conceding that market share
.
2. B. Its expense ratio will be high until the portfolio is large enough to support
operating costs.
o Explanation: Section A3 states that a negative underwriting result is likely in the
early years "when expenses will typically be high until the firm's portfolio
achieves the level of income necessary to support set-up and ongoing operating
costs (the point known as 'critical mass')" .
3. A. An internal tension caused by conflicting targets.
o Explanation: Section A4 directly addresses this. "Local area divisions, faced
with aggressive growth targets, might argue strongly for restraint in applying
remedial action, such as rate increases" . This conflict between growth (local) and
profit (corporate) is a key internal tension.
4. B. Moral hazard (post-inception).
o Explanation: Section B2B lists "attitude to surveyor's recommendations" and
"delays in payment of premium" as examples of poor moral hazard evident after
the policy has started .
5. C. The proposer's premises show a lack of compliance with health and safety
requirements.
o Explanation: Physical hazard relates to the "physical aspects of a risk" . For
liability, the text lists "Compliance with health and safety requirements" and
 "Condition of the premises" as key physical hazards. The other options relate to
attitude or history, which are moral hazards.
6. A. It allows the underwriter to construct a policy using relevant modules, avoiding
the need to individually draft policies for larger risks.
o Explanation: Section C1 states that for larger commercial policies, "The
underwriter uses the modules that are relevant to the risk... to construct the policy
wording" . It notes that "Only the very largest risks" require individual drafting,
and even these often use modules as a base .
7. B. The insurer is liable, as the breach was remedied before the loss occurred.
o Explanation: Section C3 explains that under s.10, warranties are 'suspensive
conditions'. The example given states that if the inspection is done late, "the
breach is remedied and cover is only foregone (or suspended)" for the period of
the breach (one month) . Since the fire occurred after the remedy, the cover is
back in force.
8. B. The insurer must pay the claim, as the non-compliance did not increase the risk
of the loss which actually occurred.
o Explanation: Section C3, referencing s.11, states that if non-compliance with a
term (like waste storage) did not increase the risk of the loss which occurred (e.g.,
escape of water or, in this case, flood), the insurer cannot rely on that breach to
refuse indemnity .
9. B. The insurer pays nothing.
o Explanation: A franchise differs from an excess. If the loss is below the franchise
threshold (£500 excess vs £12-hour franchise), the insurer pays nothing. The loss
must meet the threshold for the insurer to pay. 11 hours is less than 12 hours.
10. C. £501.
o Explanation: A franchise differs from an excess in that "once the claim threshold
is met, the entire amount of the loss is paid". The loss of £501 exceeds the £500
threshold, so the entire £501 is paid.
11. C. A deductible is typically used on large industrial risks and is individually rated,
not based on a pre-determined class-level discount.
o Explanation: Section C5 states deductibles are "common in commercial policies
covering large industrial risks" and "a risk with a large deductible is generally
individually rated," whereas excess premium reductions are "generally calculated
at class level" .
12. B. Eliminate small, high-frequency 'nuisance' claims, which are costly to administer.
o Explanation: Section C4 lists the aims of a compulsory excess, including
"eliminating small 'nuisance' claims, which are costly to administer".
13. C. Risk classification.
o Explanation: Section D1 states that the "next level of classification relates to
industry-wide codes," giving "ABI codes" and "Standard Industrial Classification
(SIC) code" as examples .
14. B. Risk categorisation.
o Explanation: Section D2 defines categorisation as grouping risks into
"comparable groups for ease of analysis and rating". "Theft rating areas"
(allocating postcodes based on crime stats) is given as a prime example.
15. B. Recommendation.
 o Explanation: Section D3B on risk surveys splits improvements into two types.
"Requirements" are necessary for cover . "Recommendations" are "optional," but
"may result in wider cover or a reduced premium... if they are implemented" .
This scenario fits the definition of a recommendation.
16. A. Intermediaries for commercial lines employ staff with specific expertise and act
as consultants, which is less necessary for commoditised personal lines.
o Explanation: Section E1 states commercial lines are transacted via intermediaries
who "employ and retain members of staff with very specific areas of expertise"
and act as "consultants" . This contrasts with "commoditisation" in personal lines .
17. A. Commoditisation.
o Explanation: Section E2 defines "commoditisation" as "a situation where a
product becomes less differentiated, so that buyers care less about who they buy it
from and more about the price".
18. C. To appeal to the price-driven nature of the online market while offering
comprehensive cover elsewhere.
o Explanation: Section E2A explains that the "price-driven nature of the online
product" has led "many insurers offering different products through different
channels" . It gives the example of a "cheaper motor product with reduced levels
of cover" online versus a "more comprehensive version available through the
intermediary".
19. B. Because it must minimise underwriter referral and offer the greatest possible
amount of premium flexibility.
o Explanation: Section E3 states the pricing model for the direct channel "is a
more complex technical build" due to "the need to minimise underwriter referral
and offer the greatest possible amount of premium flexibility in response to
customer demand" .
20. C. An MGA undertakes a wider range of activities, such as marketing and
administration, although it still does not provide the claims funding.
o Explanation: Section F1 defines an MGA as an organisation that "not only ‘holds
the underwriting pen’... but also undertakes all the other activities of an insurer,
such as marketing, selling and administration." It explicitly states the MGA "does
not, however, provide the funding for claims" .
21. B. The broker may be pressured to accept risks outside the agreed authority to
boost sales or protect a client relationship.
o Explanation: Section F3 on conflicts of interest states that intermediaries "may
wish to boost sales or protect their relationship with the client and accept risks
which, in normal circumstances, the underwriter would reject" .
22. A. Bordereau.
o Explanation: Section F2A states that records "will be in the form of a bordereau
containing detailed information on the risks accepted and... details of all claims
paid and outstanding".
23. B. UK insurers were no longer permitted to perform insurance contracts covering
insureds domiciled in the EU/EEA.
o Explanation: Section G1 states that Brexit caused UK insurers to "lose their
passporting rights" and they "are no longer permitted to perform insurance
contracts that cover insureds domiciled in the EU/EEA".
 24. A. Non-admitted carrier.
o Explanation: Section G2 discusses this issue. An insurer must be an "admitted
carrier" to adhere to local regulations. "In other cases, participation as a non-
admitted carrier is permitted". If the insurer is not locally authorised, it is non-
admitted.
25. C. Cultural risk.
o Explanation: Section G4 on global risks lists "Cultural risk". It gives the "takaful
system of risk-sharing, which is fundamental to Islamic culture" as an "obvious
example".
26. A. 'Fronting'.
o Explanation: Section H1A on opportunistic fraud gives the specific example of
"‘Fronting’ of private car policies where parents insure a vehicle under their own
name, despite the fact that it is used mostly by their son or daughter".
27. A. Investigative interviewing.
o Explanation: Section H2 describes this technique as "telephone-based
investigative interviewing techniques" that "include aspects of behavioural
analysis and applied psychology" and mentions "conversation management" as
one such method .
28. C. Insurance Fraud Enforcement Department (IFED).
o Explanation: Section H3C defines the IFED as "a specialist police unit set up to
tackle insurance fraud" which is "Funded by ABI members" and "based at the
City of London Police" .
29. A. Claims and Underwriting Exchange (CUE).
o Explanation: Section H4 describes CUE as a "central database of motor, home,
travel, personal injury and sickness incidents". Its purpose is to "prevent... the
misrepresentation of claims history". MIAFTR is only for total loss/theft claims ,
IFR is for known fraudsters , and Navigate is for driving licence details.
30. B. The class has become 'non-core' to the combined operation, or the acquisition has
brought in new loss experience or expertise.
o Explanation: Section I states that "it is not unusual for an insurer’s underwriting
appetite to change as a result of a merger or acquisition". It gives two reasons: the
acquired entity may have "additional loss experience" , or an insurer may "cease
writing a particular class as it has become ‘non-core’ to the combined operations".

M80 Chapter 5: Statistical Data Questions

1. An underwriter for a professional indemnity portfolio uses 'fee income' as the primary
metric to determine the base premium1. To refine this, they also use the 'firm's specific
area of practice' and 'number of partners' in their pricing model. How are these three
elements best classified according to the text?
o A. Exposure measure: Number of partners; Risk factors: Fee income, Area of
practice; Rating factors: None.
o B. Exposure measure: Fee income; Risk factors: Area of practice, Number of
partners; Rating factors: Area of practice, Number of partners (if used objectively
in the calculation)2.
 o C. Exposure measure: Area of practice; Risk factor: Fee income; Rating factor:
Number of partners.
o D. Exposure measure: Fee income; Risk factor: Area of practice (as a subjective
consideration)3; Rating factor: Number of partners (as an objective measure).
2. A household insurer calculates a base premium of £910 for a property, based on its
rebuild value (exposure measure)4. The insurer then applies a single rating factor based
on the property's build year5. If the house was built in 1932, what is the final risk-adjusted
premium?
o A. £1,001.00
o B. £1,092.00
o C. £1,183.00
o D. £1,274.00
3. When using historical data, why must an underwriter adjust for external factors like
inflation 66, legislative changes, and socio-demographic shifts7?
o A. To reduce the dataset size, making the arithmetic mean easier to calculate.
o B. To make the historical data more appropriate to compare with other years and
more relevant to the current risk environment8.
o C. To fit the data to a Normal distribution, as required by pricing models.
o D. To increase the perceived volatility, justifying higher reinsurance protection.
4. A dataset of 2,000 liability claims has an arithmetic mean of £80,000, a median of
£25,000, and a mode of £10,000. What does this disparity most strongly imply?
o A. The data is normally distributed, and the mean is the most reliable measure.
o B. The data is heavily skewed, with the mean being distorted by a small number
of very large 'outlier' claims99.
o C. The data is flawed, as the mean, median, and mode should always be close in a
large dataset.
o D. The median is the most suitable measure for calculating the total expected
value of claims.
5. In which of the following scenarios would the mode be the most suitable measure of
central tendency for an underwriter?
o A. Calculating the average cost per claim for a portfolio to determine the expected
total loss.
o B. Identifying the mid-point of claim settlement times when the data includes a
few extremely long-running claims.
o C. Determining the 'most common' number of bedrooms in a household portfolio
to understand the typical risk profile10.
o D. Calculating the mean value of 25 motor claims worth a total of £3,000 11.
6. Using the data for "April" in Example 5.1 (5, 6, 7, 4, 3, 7, 6, 5)12, what are the correct
values for the arithmetic mean, median, and mode?
o A. Mean 5.5, Median 5.5, Mode 6
o B. Mean 5.375, Median 5.5, Mode (5, 6, 7)
o C. Mean 5.375, Median 5, Mode 5
o D. Mean 5.5, Median 6, Mode 7
7. An underwriter is analyzing the claim experience of two motor portfolios. Portfolio A has
a high standard deviation, and Portfolio B has a low standard deviation13. What is the
primary underwriting implication?
 o A. Portfolio A is more stable and predictable than Portfolio B14.
o B. Portfolio B has a higher arithmetic mean than Portfolio A.
o C. Portfolio A's experience is more volatile, suggesting occasional large claims,
and may require contingency loadings or a review of reinsurance151515.
o D. Portfolio B is a larger portfolio, which is why the standard deviation is lower.
8. For the following set of 7 motor claim amounts: £20, £27, £75, £100, £600, £980, £416.
What is the range of the data?
o A. £976
o B. £980
o C. £600
o D. £258 (the mean)
9. What is a key advantage of using a frequency distribution (like in Example 5.3) to
analyze 1,000 individual claims17?
o A. It eliminates outliers, providing a more accurate arithmetic mean.
o B. It is the only method that allows for the calculation of the median.
o C. It is less time-consuming than individual analysis and presents a clearer picture
of how the data is grouped1818.
o D. It converts all data into a Normal distribution for easier analysis.
10. The text suggests a large retail insurer's premium values might follow a Normal
distribution19. Which of the following datasets would most likely be modeled using a
Poisson distribution?
o A. The distribution of policyholder heights in a life insurance portfolio20.
o B. The distribution of claim costs for a household portfolio, which is skewed by
large losses.
o C. The distribution of the number of claims per policy per year21.
o D. The distribution of the total sum insured across a property account.
11. The typical relationship between frequency and severity in mass-market motor and
household insurance is22:
o A. High frequency of high-severity losses.
o B. Low frequency of low-severity losses.
o C. High frequency of low-severity losses, and low frequency of high-severity
losses23.
o D. A relationship where frequency and severity are independent and
unpredictable.
12. The text states that high-frequency/low-severity claims (Point 'A' in Figure 5.3) tend to be
predictable24. Why is this?
o A. Because the total cost is always low, so it does not impact the insurer.
o B. Because the law of large numbers applies, making the actual outcome more
likely to tend towards the expected outcome25.
o C. Because these claims are always caused by natural perils, which are easily
modeled.
o D. Because the high frequency allows for a high standard deviation, which
implies stability.
13. An underwriter is pricing a policy for a new aviation prototype. This risk is best
characterized as:
o A. High frequency / Low severity (Point 'A' in Figure 5.3).
 o B. Low frequency / High severity (Point 'B' in Figure 5.3)2626.
o C. High frequency / High severity.
o D. A risk where the frequency and severity are predictable.
14. What is the fundamental difference between Method 2 (Relative Frequency) 2727and
Method 3 (Subjective Probabilities) 28 for deriving probabilities?
o A. Method 2 is used for high-frequency events, while Method 3 is used for low-
frequency events.
o B. Method 2 is data-driven, assuming the future will be like the past 29, while
Method 3 relies on underwriter skill and judgment, often used when data is
unreliable or non-existent3030.
o C. Method 2 uses the formula $\sum P(x)x$, while Method 3 uses the formula $\
Sigma x/\Sigma f$.
o D. Method 2 produces a probability between 0 and 1, while Method 3 produces a
percentage.
15. What is the primary limitation of using Method 1 (total interested outcomes / total
possible outcomes) 31 for pricing most insurance policies?
o A. In the real world, the total number of all possible outcomes (e.g., future losses)
is unknown, and outcomes are rarely equally likely32.
o B. It relies on subjective judgment, making it unreliable.
o C. It can only be used for events with a probability of 0 (impossible) or 1
(certain)33.
o D. It always overestimates the probability of a loss, leading to uncompetitive
premiums.
16. Using the data from Question 5.834, what is the relative frequency (Method 2 probability)
of a fire claim costing $\ge$ £200?
o A. 8.0%
o B. 9.4%
o C. 14.1%
o D. 41.2%
17. Why is it critical for an underwriter to price for low-frequency/high-severity events, even
if no such claims have occurred in the portfolio's history?
o A. To ensure the common pool has a high standard deviation.
o B. Because the impact of such a claim, if it occurs, can be critical to the insurer's
solvency, and the lack of past data does not mean the risk is zero3535.
o C. Because the law of large numbers guarantees such an event will happen in the
next policy year.
o D. To satisfy the requirements of a Poisson statistical distribution.
18. The text identifies asbestos-related diseases as "latent claims"36. What is the defining
characteristic of such claims that makes them complex to predict?
o A. They are caused by natural perils37.
o B. They exhibit a long delay between the incidence (exposure) and the
manifestation (claim)38.
o C. They always result in multiple claims from a single event (accumulation) 39.
o D. They are generated by stochastic models.
19. Using the 'Number of claims' table40, what is the expected number of claims (expected
frequency) for the property account?
 o A. 3.00
o B. 2.41
o C. 2.50
o D. 1.00
20. Using the 'Cost of claim' table 41and the method from Example 5.542, what is the expected
cost per claim (expected severity)?
o A. £350.50
o B. £660.00
o C. £401.00
o D. £500.00
21. If the expected number of claims is 2.41 43and the expected cost per claim is £40144, the
expected total value of claims is £966.41. What is the primary significance of this
£966.41 figure?
o A. It represents the total profit the underwriter will make from the account.
o B. It is the minimum premium the underwriter must charge to meet the expected
cost of losses, before loadings for expenses or profit45.
o C. It is the standard deviation of the portfolio, used for reinsurance calculations.
o D. It is a statistical figure only useful for comparison and has no monetary
interpretation46.
22. How does an insurer operating a common pool 47 benefit from the law of large
numbers?
o A. By charging a higher premium to all members, the insurer guarantees a profit.
o B. By bringing many risks together, the insurer's actual losses (paid to the few)
become more predictable and closer to the expected losses funded by the
premiums from the many48.
o C. The law of large numbers ensures that the number of claims will be small.
o D. The common pool allows the insurer to insure heterogeneous (dissimilar) risks,
which is the basis of the law.
23. Why is charging an "equitable premium" (e.g., charging a young, high-risk driver more)
49
essential for the stability of the common pool?
o A. It is not essential; the law of large numbers works best if all premiums are
identical.
o B. It ensures that those who bring a higher degree of risk to the pool contribute
proportionally, preventing the insurer from being uncompetitive (due to
overpricing low risks) or unprofitable (due to underpricing high risks)50.
o C. It is a legal requirement from the census bureau.
o D. It increases the standard deviation of the pool, which is desirable.
24. Personal and motor lines underwriters benefit from large, homogeneous groups of risks51.
Why is this combination so valuable?
o A. It allows the underwriter to use subjective (Method 3) probability for pricing.
o B. It ensures that the portfolio will only experience low-severity claims.
o C. It allows the law of large numbers to apply, giving the underwriter a higher
degree of certainty and predictability about future claims525252.
o D. It satisfies the criteria for a stochastic model, which requires all risks to be
identical.
25. An insurer's data from 2010 shows very few claims for a specific peril. However, the
insurer introduced a new, stricter exclusion for that peril in 2020. This is an example of
which limitation of statistical data?
o A. A change in inflation53.
o B. An inaccuracy in data input54.
o C. A change in the "shape of that product" 5555or "underwriting policy"56, making
the old data irrelevant to the new risk profile.
o D. A change in the external environment, such as climate change5757.
26. What is the fundamental reason that statistical analysis, even when sophisticated, must be
combined with "sound judgment based on commercial experience"58?
o A. Because statistical models are always wrong.
o B. Because statistical techniques rely on past data 59, which may not be a relevant
or complete indicator of future performance due to changes in risk, policy, or the
external environment 60.
o C. Because underwriters are not skilled in mathematics.
o D. Because technology like AI has made statistical data obsolete.
27. The text asks the reader to consider the effect of 'no win-no fee' arrangements61. This
change in the legal environment would most likely impact an insurer's historical data
analysis by:
o A. Affecting only the frequency of personal injury claims.
o B. Affecting only the severity of personal injury claims.
o C. Potentially affecting both the frequency (more claims being brought) and the
severity (claim values), as an "unknown element"6262.
o D. Having no impact, as it is an external factor not related to the underlying risk.
28. How does the use of telematics in motor insurance directly overcome the traditional
limitations of statistical data?
o A. It allows insurers to use subjective (Method 3) probability.
o B. It prevents all claims by controlling the vehicle remotely.
o C. It collects real-time data that is more accurate and reflective of the individual
risk's exposure, rather than relying on broader, historical, or proxy data63.
o D. It creates a larger, homogeneous data pool by making all drivers behave
identically.
29. According to the text, what is the key benefit of Artificial Intelligence (AI) in this
context?
o A. It replaces the need for reinsurance by perfectly predicting catastrophes.
o B. It allows for the collection and storage of larger data sets, which enhances the
use and application of the law of large numbers64.
o C. It provides a single, static result, which is simpler than a stochastic model 65.
o D. It eliminates all "unknown elements" 66 from the pricing process.
30. A stochastic model is described as "generating a large number of statistically simulated
scenarios"67. In which situation would this tool be most useful?
o A. Calculating the arithmetic mean of 25 claims68.
o B. Estimating the future occurrence and cost of low-frequency, high-severity
catastrophe claims, for which little or no past data exists6969.
o C. Determining the most common number of bedrooms in a household portfolio70.
o D. Calculating the relative frequency of 85 past fire claims71.
Answers and Explanations
1. B. Exposure measure: Fee income; Risk factors: Area of practice, Number of partners;
Rating factors: Area of practice, Number of partners (if used objectively in the
calculation)72.
o Explanation: The 'exposure measure' is the main metric for the basic premium
(fee income)73. 'Risk factors' are all additional considerations that define the risk74.
'Rating factors' are the risk factors that are actually used objectively in the
calculation75. Therefore, B is the most complete answer.
2. C. £1,183.00
o Explanation: The base premium is £91076. The build year 1932 falls into the
'1921-1939' category in the table for Question 5.277. This category has a rating
factor of 1.378. The risk-adjusted premium is £910 * 1.3 = £1,183.00.
3. B. To make the historical data more appropriate to compare with other years and more
relevant to the current risk environment79.
o Explanation: The text states that these external factors impact premiums and
claims80808080. Therefore, insurers adjust the data to "make the data more
appropriate to compare with other years" 81and account for changes in the "overall
risk"82.
4. B. The data is heavily skewed, with the mean being distorted by a small number of very
large 'outlier' claims8383.
o Explanation: When the mean is significantly higher than the median, it indicates
a positive skew. The text notes that the mean "can be easily distorted by... very
large values (called outliers)" 84, and the mode is also mentioned as being more
suitable in such situations85.
5. C. Determining the 'most common' number of bedrooms in a household portfolio to
understand the typical risk profile86.
o Explanation: The mode is defined as the number that "occurs most often"87. The
text gives the "most common number of bedrooms in a house" as a typical
example of where the mode is the most useful measure88.
6. B. Mean 5.375, Median 5.5, Mode (5, 6, 7)
o Explanation:
 Data sorted: 3, 4, 5, 5, 6, 6, 7, 7
 Mean: (3+4+5+5+6+6+7+7) / 8 = 43 / 8 = 5.37589.
 Median: 8 values (even), so the mean of the two central values (5 and 6).
(5+6) / 2 = 5.590.
 Mode: 5, 6, and 7 all appear twice. The text states "There can be more
than one mode"91.
7. C. Portfolio A's experience is more volatile, suggesting occasional large claims, and may
require contingency loadings or a review of reinsurance929292.
o Explanation: A "high standard deviation suggests that [the data] is more volatile,
with occasional large claims"93. A "low standard deviation suggests that the claim
experience is stable"94. The text states an insurer can address volatility with
"contingency loadings" 95or by reviewing "reinsurance arrangements"96.
8. A. £976
o Explanation: The range is "The difference between the largest and smallest
values"97. The largest value is £980, and the smallest is £4. Range = £980 - £4 =
£976.
9. C. It is less time-consuming than individual analysis and presents a clearer picture of how
the data is grouped9898.
o Explanation: The text states that adding 1,000 individual claims would be "time-
consuming" 99and that "by grouping the data... we have already presented a clearer
picture of the data"100.
10. C. The distribution of the number of claims per policy per year101.
o Explanation: The Poisson distribution "expresses the probability of a certain
number of events occurring within a given time frame"102. This perfectly describes
the number of claims (events) in a year (time frame). The other options describe
values (premiums, heights, costs), which are more likely to be continuous or
Normal distributions.
11. C. High frequency of low-severity losses, and low frequency of high-severity losses103.
o Explanation: The text explicitly states this relationship: "where there is a high
frequency of low-severity losses, and a low frequency of high-severity losses"104.
12. B. Because the law of large numbers applies, making the actual outcome more likely to
tend towards the expected outcome105.
o Explanation: The text says these high-frequency/low-severity claims "tend to be
predictable" "based on the law of large numbers"106.
13. B. Low frequency / High severity (Point 'B' in Figure 5.3)107107.
o Explanation: A major crash (like a satellite failure) is a rare event (low
frequency) but extremely costly (high severity). This fits the description of Point
'B' and is "difficult to predict"108. The 'Consider this...' box prompts this thought109.
14. B. Method 2 is data-driven, assuming the future will be like the past 110, while Method 3
relies on underwriter skill and judgment, often used when data is unreliable or non-
existent111111.
o Explanation: Method 2 uses "relative frequency" based on "past" events112112112112.
Method 3 is "based on subjective probabilities" 113and is used "When no historic
data is available"114.
15. A. In the real world, the total number of all possible outcomes (e.g., future losses) is
unknown, and outcomes are rarely equally likely115.
o Explanation: The text highlights these two exact limitations. An underwriter
won't know all "possible outcomes in advance" 116, and outcomes are "rarely
equally likely"117.
16. B. 9.4%
o Explanation: The frequency for '>= 200' is 8. The total frequency is 85118. The
relative frequency is 8 / 85 = 0.0941, or 9.4%.
17. B. Because the impact of such a claim, if it occurs, can be critical to the insurer's
solvency, and the lack of past data does not mean the risk is zero119119.
o Explanation: The text states, "their impact can be critical" and "Just because they
have not happened in the past does not mean we should not factor them in"120.
Section I reiterates that for these risks, "past claims experience may not be an
accurate reflection of the underlying risk"121.
18. B. They exhibit a long delay between the incidence (exposure) and the manifestation
(claim)122.
o Explanation: This is the definition provided in the text: "These claims can
exhibit a long delay between incidence and manifestation" 123, with asbestos being
an example124.
19. B. 2.41
o Explanation: Using the formula $\sum P(x)x$125:
 (1 * 0.20) + (2 * 0.30) + (3 * 0.40) + (4 * 0.09) + (5 * 0.01)
 = 0.20 + 0.60 + 1.20 + 0.36 + 0.05 = 2.41. This is also stated in the text126.
20. C. £401.00
o Explanation: Using the formula $\sum P(x)x$127:
 (£200 * 0.500) + (£500 * 0.400) + (£750 * 0.060) + (£1,300 * 0.020) +
(£1,500 * 0.020)
 = £100 + £200 + £45 + £26 + £30 = £401. This is also stated in the text128.
21. B. It is the minimum premium the underwriter must charge to meet the expected cost of
losses, before loadings for expenses or profit129.
o Explanation: The text states, "the underwriter should charge at least this in
premiums to meet the expected cost of losses" 130, and "Further loadings are
generally included... for expenses, profit margin etc."131.
22. B. By bringing many risks together, the insurer's actual losses (paid to the few) become
more predictable and closer to the expected losses funded by the premiums from the
many132.
o Explanation: The insurer "takes contributions... from many people and pays out
the losses to the few"133. In doing this, the insurer "benefits from the law of large
numbers" 134, which makes the actual results tend towards the expected135.
23. B. It ensures that those who bring a higher degree of risk to the pool contribute
proportionally, preventing the insurer from being uncompetitive (due to overpricing low
risks) or unprofitable (due to underpricing high risks)136.
o Explanation: The text states it is important "to charge each customer an equitable
premium, i.e. one that represents the degree of risk they bring to the pool"137. The
example of the young vs. middle-aged driver illustrates this138. If premiums are
not equitable, the insurer will be uncompetitive or unprofitable139.
24. C. It allows the law of large numbers to apply, giving the underwriter a higher degree of
certainty and predictability about future claims140140140.
o Explanation: The text states this "large group of homogeneous risks, given the
law of large numbers, means that the actual claims will – in general – tend to be
as expected"141. This gives a "degree of certainty"142.
25. C. A change in the "shape of that product" 143143or "underwriting policy"144, making the
old data irrelevant to the new risk profile.
o Explanation: This is a core limitation. The text discusses how the "shape of that
product may have changed over time" (like new excesses)145145145145. Section I lists
"Changes in underwriting policy" (like new exclusions) as a key reason why past
data may not be indicative of the future146.
26. B. Because statistical techniques rely on past data 147, which may not be a relevant or
complete indicator of future performance due to changes in risk, policy, or the external
environment 148.
 o Explanation: The text states "statistical techniques rely on the quality of past
data" 149but "past data may not be indicative of the future" 150for many reasons
(e.g., changes in risk, policy, legislation) 151. Judgment 152 is needed to bridge this
gap.
27. C. Potentially affecting both the frequency (more claims being brought) and the severity
(claim values), as an "unknown element"153153.
o Explanation: The text poses this exact question 154after stating that "Unknown
elements can affect both the frequency of claim events and their severity in
different ways"155. The logical conclusion is that such a change could impact both.
28. C. It collects real-time data that is more accurate and reflective of the individual risk's
exposure, rather than relying on broader, historical, or proxy data156.
o Explanation: Telematics "allow[s] for real-time data to be collected" 157, which is
"more accurate data, reflective of the individual risk"158. This overcomes the
"limitations of relying on past data"159.
29. B. It allows for the collection and storage of larger data sets, which enhances the use and
application of the law of large numbers160.
o Explanation: The text explicitly states that AI "allows for the collecting and
storage of larger sets of data" 161, which in turn "enhances the use and application
of the law of large numbers"162.
30. B. Estimating the future occurrence and cost of low-frequency, high-severity catastrophe
claims, for which little or no past data exists163163.
o Explanation: Stochastic models are contrasted with static models164. They are
introduced as a tool for "low frequency and high severity claims" 165for which
"little or no past claims experience" exists 166to "estimate the future occurrence
and cost of claims"167.

CII M80: Pricing (Chapter 6) Questions

Section A: Main Elements of the Premium

Question 1

An insurer is pricing a long-tail liability risk. According to the definition of the risk premium,
which one of the following factors presents the greatest and most unpredictable challenge when
forecasting the ultimate cost in claims?

A. Applying the standard rate of general inflation to the sum insured.

B. Accurately assessing the total value of fixed expenses and acquisition costs.

C. Forecasting the adverse effect of future legislative changes and developments in case law on
claim settlements.

D. Determining the minimum premium ('walk-away price') to cover expenses and catastrophe
losses.
Question 2

When calculating the total expense loading for a policy, the insurer classifies certain costs as
variable expenses. Which of the following is most accurately classified as a variable expense
rather than a fixed expense or a levy?

A. The annual premium agreed for a non-proportional catastrophe reinsurance treaty.

B. The Insurance Premium Tax (IPT) levied by the government.

C. The costs associated with a mandatory pre-cover site survey and specialist legal review for a
complex commercial risk.

D. The percentage of premium paid to the Motor Insurers' Bureau (MIB).

Question 3

An insurer's underwriting strategy is designed to produce an underwriting loss, relying on

investment returns to achieve overall profitability. What is the primary and most immediate
financial consequence of a small reduction in the overall loss ratio for this insurer?

A. It necessitates a capital injection to cover the larger than anticipated loss.

B. It significantly increases the Return on Capital Employed (ROCE).

C. It forces the insurer to abandon this strategy in favour of achieving a break-even scenario.

D. It automatically translates to an increased dividend for shareholders.

Section B: Burning Cost and Prospective Risk Analysis

Question 4

The Burning Cost rating method is deemed a valid method for premium calculation when the
risk's claims profile displays which two characteristics?

A. High frequency of claims and a wide size distribution of claim values.

B. Low frequency of claims and a narrow size distribution of claim values.

C. Low frequency of claims and a wide size distribution of claim values.

D. High frequency of claims and a narrow size distribution of claim values.

Question 5
A Commercial Fleet risk has an average annual wage roll of £5,000,000. Over a five-year period,
the total incurred claims for the risk are £450,000. Which of the following best represents the
average Burning Cost expressed as a rate, and what is the typical measure of exposure used here?

A. 9.0%; Earned Premium

B. 1.8%; Number of vehicles

C. 1.8%; Wage roll

D. 9.0%; Wage roll

Section C: Interpreting Claims Data

Question 6

An underwriter is calculating the Loss Ratio for an Employers' Liability portfolio. If the period
of insurance has been running for only eight months when the calculation is made, which of the
following best describes the earned premium that must be used in the denominator of the loss
ratio calculation?

A. The total premium received, as the insurer is liable from inception.

B. The total premium received for the whole policy period, multiplied by $8/12$.

C. The total premium received less the IBNR reserve.

D. Only the total of paid claims for the eight months run.

Question 7

The cost of settling bodily injury claims consistently outstrips general inflation. Which of the
following is the most accurate and specific action an underwriter must take when using claims
data to revalue liability claim costs to today's level?

A. Apply a standard general inflation factor to all claim types universally.

B. Apply specific inflationary factors, often in excess of 10% per annum, to bodily injury claims.

C. Exclude all outstanding claims from the data to avoid inflation distortion.

D. Apply inflationary factors equally to both long-tail and short-tail claims.

Section D: IBNR Claims

Question 8
In the context of outstanding claims reserves, what is the fundamental difference between IBNR
(Incurred But Not Reported) and IBNER (Incurred But Not Enough Reserved) exposures?

A. IBNR relates only to property damage claims, while IBNER relates only to liability claims.

B. IBNR relates to claims that have not yet been reported, while IBNER relates to reported
claims where the initial reserve proves inadequate.

C. IBNR is an estimation made by the underwriter, while IBNER is a calculation made by the
claims handler.

D. IBNR is used for short-tail business, while IBNER is exclusively used for long-tail business.

Question 9

When an underwriter uses a triangulation table to analyse claims data, which type of business is
most likely to show a higher degree of uncertainty and a longer time to reach the 'maturity' in its
claims experience?

A. Household Insurance

B. Motor Damage

C. Property Damage

D. Employers' Liability

Section E: Liaison Between Underwriting and Claims Functions

Question 10

Effective liaison between the Claims and Underwriting functions is vital. What is the most
significant negative consequence for the insurer when a claims handler mis-codes a 'flood' claim
as an 'escape of water' loss?

A. It compromises external communication with key brokers.

B. It may lead to the underwriter incorrectly interpreting the policy wording.

C. It produces skewed statistical results, leading to incorrect premium rates being set for both
covers.

D. It results in a delay in reporting new claims to the underwriter.

Question 11
In the process of assessing a liability claim that is open (unsettled), an underwriter approaches a
claims handler for background information. What is the underwriter NOT permitted to influence
regarding this specific claim?

A. The philosophy behind the setting of the claim estimate.

B. The decision to defend the claim or not.

C. The level of the claim estimate.

D. The possibility of a recovery action against a third party.

Question 12

Which development in the legal system is most directly relevant for a liability underwriter to
monitor via the Claims function, as it relates to the cost of future claim settlements?

A. The FCA rule on treating renewing customers fairly.

B. New rules on Conditional Fee Arrangements (e.g., LASPO).

C. Changes to the tax regime on insurance premiums.

D. The introduction of the Insurance Act 2015 (IA 2015).

Section F: The Role of the Actuary

Question 13

In the context of the pricing process for a class of business, what is the actuary's primary role
regarding the Return on Capital Employed (ROCE) requirement?

A. To dictate the minimum level of ROCE to the capital providers.

B. To evaluate if the potential profit of the class of business is sufficient to meet the required
ROCE, and advise on necessary price adjustments.

C. To solely coordinate the calculation of the technical provisions required by the regulator.

D. To take responsibility for setting the final premium rates for complex risks.

Question 14

In their wider role, the insurance company actuary plays a crucial part in the implementation of
the solvency rules. Which of the following is a specific duty imposed on the actuary in this
context?
A. Expressing an opinion on the overall underwriting policy.

B. Approving all individual risk pricing decisions made by senior underwriters.

C. Negotiating the terms of all reinsurance treaties.

D. Managing the day-to-day claims settlement process.

Section G: Competitor Analysis

Question 15

In a competitive market, an insurer decides to charge a premium lower than the technical, cost-
based premium for a high-volume product. What is the most significant, long-term risk of
charging too low a premium compared to competitors?

A. The insurer will suffer a general loss of support from its intermediaries.

B. The account will inevitably run at a loss, leading to the erosion of capital.

C. The insurer will fail to establish a critical mass for the class of business.

D. The regulator will mandate a minimum premium to be used.

Question 16

The FCA requires that renewing customers for private motor, household, and some other general
insurance policies must be treated fairly. What specific pricing strategy does this rule effectively
prohibit?

A. Using a predetermined pricing structure for high-volume risks.

B. Adjusting the premium at expiry based on estimated values (adjustable premiums).

C. Charging a lower premium for new business and increasing the renewal premium back to a
profitable level over time.

D. Applying discounts for positive rating features, such as superior fire protection.

Section H: Other Risk Data

Question 17

Which of the following is the most accurate description of the information provided by
Thatcham Research and its application by motor underwriters?
A. It provides a benchmark for bodily injury claim costs, used to calculate general inflation
factors.

B. It provides rating recommendations and information on vehicle security, repair costs, and
safety, used to inform private car pricing.

C. It supplies flood hazard data based on proximity to a watercourse.

D. It develops statistical models for claim reserving and IBNR projections.

Question 18

An underwriter is assessing a proposal for a large commercial property in a coastal region. The
underwriter needs highly detailed, property-specific data regarding the potential for loss from a
tidal event. What is the most likely primary source for this granular data?

A. The latest government statistics on fire accident rates.

B. A standard postcode rating factor for property insurance.

C. Property-specific databases from third-party data exchange providers.

D. The Society of Lloyd's definition of 'emerging risks.'

Question 19

Catastrophe models are used by both insurers and reinsurers. What is the primary purpose of
these models in the pricing and exposure management process?

A. To set the appropriate level of Insurance Premium Tax (IPT).

B. To estimate the losses that could be sustained due to a catastrophic event, such as a hurricane
or earthquake.

C. To calculate the proportion of earned premium for a long-tail business.

D. To determine the percentage commission to be paid to an intermediary.

Question 20

Lloyd's defines an emerging risk as "an issue that is perceived to be potentially significant but
which may not be fully understood or allowed for in insurance terms and conditions, pricing,
reserving or capital setting." Which of the following examples best illustrates an emerging risk
that has already transformed into a significant source of long-tail claims for insurers?

A. Fluctuations in crime rates within the economic cycle.

B. The financial impact of the UK leaving the European Union (Brexit).

C. The dangers of exposure to asbestos in the construction industry.

D. The increased incidence of subsidence claims due to climate change.

Answers and Explanations

Detailed Explanations

1. Answer: C

Explanation: While inflation is considered, the most unpredictable factors affecting the future
cost of claims, especially in long-tail business like liability, are Legislation or developments in
the law1111. These changes (e.g., judicial process, specific laws) can adversely affect the cost of
claims by potentially increasing the value of settlements over many years, which must be
factored into the risk premium2222.

2. Answer: C

Explanation: Variable expenses are those that depend on the nature of the individual risk3. A
complex commercial risk requiring surveys and site visits and additional staff resources (e.g.,
specialist legal review) results in additional costs charged over and above the standard fixed
expenses, thus making it a variable cost4. In contrast, the IPT, MIB levy, and reinsurance treaty
premiums are generally viewed as fixed or semi-fixed costs for the business as a whole5555.

3. Answer: B

Explanation: Even a small reduction in an insurer's overall loss ratio can produce a
significantly increased return on capital employed (ROCE)6. A good loss ratio (lower claims
plus expenses relative to premium) generates profit, which is essential for meeting capital
providers' expectations for ROCE and dividend payments7. Option B is the direct and most
significant financial linkage stated in the text.

4. Answer: D

Explanation: The Burning Cost calculation is best suited to risks that have a high frequency of
claims but within a narrow size distribution8. This means the risk generates a large number of
claims, but the value of each claim does not vary significantly9. Employers' liability and motor
fleet are given as examples of risks that usually display these characteristics10.

5. Answer: D
Explanation: Burning cost is calculated by taking the total claims cost and dividing it by the
appropriate measure of exposure11. For an employers' liability risk, the measure of exposure is
typically the wage roll12121212.

 Burning Cost = Total Incurred Claims / Appropriate Measure of Exposure

 Burning Cost = £450,000 / £5,000,000 = 0.09
 Expressed as a percentage (a rate): 0.09 * 100 = 9.0%13.

6. Answer: B

Explanation: The loss ratio is calculated using earned premium14. Earned premium means the
proportion of premium related to the period of insurance that has already run15. If only eight
months of an annual policy have run, then only $8/12$ of the total premium will be used for the
calculation16.

7. Answer: B

Explanation: Bodily injury claim costs continue to outstrip general inflation17. Special
consideration must be given to the inflation factors applied to these claims, with the document
noting that the rate of inflation has increased to in excess of 10% since a 2007 study, presenting
a major concern to underwriters18.

8. Answer: B

Explanation: IBNR (Incurred But Not Reported) relates to claims that have occurred but the
insurer has not yet been notified of them19. IBNER (Incurred But Not Enough Reserved)
relates to claims that have been reported, and a reserve opened, but the value of this reserve
proves to be inadequate compared to the final settlement20.

9. Answer: D

Explanation: Employers' Liability is a classic example of a long-tail class of business21. The

final outcome of such a claim can be uncertain for several years, meaning the triangulation will
take longer to show a reliable, mature claims experience compared to short-tail business like
property damage or motor damage22.

10. Answer: C

Explanation: If a claims handler wrongly logs a flood claim as an escape of water loss,
inaccuracy is immediately built into the system23. This leads to skewed statistical results2424.
The underwriter, using this incorrect data, will then set the wrong rates for both flood and
escape of water covers, exposing the insurer to significant losses or missed business
opportunities25252525.

11. Answer: C
Explanation: It must be understood that the underwriter has no influence on the level of the
claim estimate26. The purpose of approaching the claims handler is to understand the philosophy
behind the estimate (e.g., if it's based on medical evidence, or if the claim will be defended/a
recovery action is possible) to make reasoned underwriting judgments27.

12. Answer: B

Explanation: New rules on Conditional Fee Arrangements (e.g., LASPO) 28and other legal
developments (like changes to access to justice or periodic payment orders 29) are monitored by
the Claims function as emerging claims trends because they significantly affect the cost and
settlement of liability claims30.

13. Answer: B

Explanation: The actuary assists the underwriter by assessing whether the potential profit of a
class of business is at a level needed to meet the return on capital requirement for that
class, and whether the prices need adjustment to meet that requirement31. The amount of required
ROCE is influenced by the degree of volatility, which the actuary helps to assess32.

14. Answer: A

Explanation: In the wider context of their role in financial planning and complying with
solvency rules, the actuary's duties include expressing an opinion on the overall underwriting
policy33333333. They also coordinate the calculation of technical provisions and assess the
sufficiency of data34.

15. Answer: B

Explanation: While charging too high a premium results in a loss of business, charging too little
could mean the account is running at a loss35. An underwriting loss (Claims + expenses >
premium) is not sustainable in the longer term, as it forces the insurer to use up its existing
capital rather than adding to it36363636.

16. Answer: C

Explanation: FCA rules now require renewing customers for certain products (e.g., private
motor, household) to be treated fairly and not charged more than the equivalent new business
price37. This prohibits the past strategy of offering a lower premium for new business with the
intention of retaining the customer and increasing the renewal premium back to a profitable level
over several years38383838.

17. Answer: B

Explanation: Thatcham Research (a listed key term) provides data and information primarily
used by motor underwriters. This includes assessing vehicle security, repair costs, and safety39.
This information is crucial for determining rating factors and calculating the risk premium for
private cars40.

18. Answer: C

Explanation: Detailed flood hazard data, particularly property-specific information like flood-
depth maps, is often necessary for accurately assessing the risk to a specific property41. The most
likely primary source for this granular, commercially available data is property-specific
databases that provide this level of detail from third-party data exchange providers42.

19. Answer: B

Explanation: Catastrophe models are specifically used to estimate the losses that could be
sustained due to a catastrophic event such as a hurricane or earthquake434343. Insurers and
reinsurers use these to assess exposure, estimate potential losses, and inform the setting of
catastrophe funds and reinsurance purchases444444444444444444.

20. Answer: C

Explanation: Asbestos is explicitly given as an example of a past emerging risk that became an
industrial hazard45. Insurers have paid millions of pounds in claims to workers who contracted
diseases, demonstrating how this once unknown risk evolved into a significant source of long-
tail claims46.

CII M80: Risk Exposure and Control Questions

Section A: Single Risks and Single Events

Question 1

An insurer uses the Estimated Maximum Loss (EML) as its measure of exposure for a large
industrial property risk. If the underwriter underestimates the EML, what is the most significant
financial consequence for the insurer?

A. The insurer unnecessarily purchases expensive proportional reinsurance, undermining long-

term profitability1.

B. The risk may be inadvertently accepted in excess of the maximum capacity, risking a loss for
which no provision has been made2.

C. The insurer is forced to decline the risk for commercial reasons, leading to a loss of market
share3.

D. The Surveyors or risk engineers will be required to perform a full valuation, increasing initial
acquisition costs4.
Question 2

What is the primary definition of the term 'Maximum Capacity' as it relates to an insurer's single
risk exposure, as established by senior management in the underwriting policy?

A. The total regulatory capital required to support the entire portfolio of risks5.

B. The maximum exposure that an insurer is willing or able to accept, typically expressed as a
sum insured or limit of indemnity6.

C. The total value of assets available to pay claims, less fixed and variable expenses7.

D. The absolute maximum loss expected from a 1-in-200 year catastrophic event in any single
geographical zone8.

Question 3

Which of the following is a key element of the process used by underwriters to identify and
control property accumulation at a single location, involving the recording of location and
maximum exposure?

A. Catastrophe modelling, using historical frequency and severity data9.

B. Risk zoning, particularly through the use of the CRESTA system10.

C. Accumulation logging, using the postcode and total sums insured or EMLs for the location11.

D. Applying a 'clash' reinsurance cover to protect against multiple policies being affected by one
event12.

Question 4

Why is the task of identifying and controlling potential aggregation from a single event more
difficult for liability risks than for property risks?

A. Liability claims are long-tail and rely more heavily on IBNR reserves13.

B. Liability aggregation typically arises from unforeseen natural perils which are difficult to
model14.

C. Liability aggregations are not usually specific to a fixed geographical location1515.

D. Liability policies always have a high frequency of claims, which exhausts the reinsurance
cover quickly16.

Section B: Aggregation of Risks and Catastrophe Modelling

Question 5

What is the precise definition of the term 'Aggregation' of risks in the context of an insurer's
exposure management?

A. The combination of an insurer's property and liability portfolios in a single geographical

area17171717.

B. An accumulation of insured risk to a single insurer which exposes that insurer to a significant
flow of claims arising from a single cause of loss181818.

C. The pooling of all premiums from a given class of business to meet the losses of the few19.

D. The total of the full value sums insured at a single location, often triggering different
covers20.

Question 6

Beyond calculating the potential loss from a specific return point event (e.g., 1-in-200 year loss),
which of the following is a strategic area where catastrophe modelling primarily assists both
insurers and regulators?

A. Determining the percentage of premium to be ceded under a proportional treaty2121.

B. Capital assessment and allocation, to set profit targets and satisfy external regulatory
requirements22222222.

C. Calculating the Expected Maximum Loss (EML) for a single property risk based on
construction materials23.

D. Providing a definitive projection of future claim costs, removing all uncertainty and
assumption24.

Question 7

A key feature of catastrophe models is that they create other possible future events based on
historical data. To account for the dynamic nature of risk, the models make allowances for
changes in all of the following EXCEPT:

A. The frequency with which events occur over time25.

B. The severity of the impact events have26.

C. The latest developments in the reinsurance pricing cycle2727.

D. The insurer's portfolio and exposure28.

Question 8

In the context of geographical exposure control for natural perils, what is the core function of the
CRESTA (Catastrophe Risk Evaluation and Standardizing Target Accumulations) system?

A. To provide property-specific data for flood hazards and proximity to water courses29.

B. To create a definitive historical record of all natural disaster losses globally over the last 500
years30.

C. To divide countries into internationally recognised zones and sub-zones based on the degree
of hazard, enabling aggregation identification31.

D. To dictate the maximum capacity available in specific geographical areas for all lines of
business32.

Section C: The Role of Reinsurance in Controlling Exposure

Question 9

An insurer relies heavily on reinsurance to 'smooth results by capping any large losses' and avoid
fluctuations in claim costs. Which key benefit of purchasing reinsurance does this best describe?

A. Providing capacity33.

B. Protecting against catastrophes34.

C. Maintaining financial stability35353535.

D. Increasing Return on Capital Employed (ROCE)3636.

Question 10

In a reinsurance arrangement, the direct insurer is also referred to as the Cedant and the
Reinsured. Who is the party that is the provider of protection?

A. The Reinsured37.

B. The Cedant38.

C. The Reinsurer39.

D. The Reinsurance Broker40.

Section D: Types of Reinsurance and their Application

Question 11

An insurer decides to place a high-value, complex chemical plant risk via facultative reinsurance
rather than submitting it to its existing Motor and Household treaty. What is the most likely
reason for this decision?

A. The risk is excluded from the scope of the existing treaty41.

B. The facultative placement allows for automatic reinsurance cover42.

C. The insurer wishes to receive profit commission on the risk43.

D. The administration of facultative reinsurance is quicker and easier than treaty reinsurance44.

Question 12

What is the fundamental, defining characteristic of a treaty reinsurance arrangement compared to

facultative reinsurance?

A. It provides specialist knowledge for unusual risks45.

B. It is an optional contract where both parties can choose to decline46.

C. It is an obligatory contract that protects a portfolio of risks, where the reinsurer must accept a
fixed amount of business47.

D. It is individually underwritten on a separate contract4848.

Question 13

Which of the following is a major disadvantage of using facultative reinsurance, particularly if

the reinsurer is also a market competitor?

A. The insurer may lose control over the handling of the risk, potentially invalidating protection
if changes are not advised49.

B. The reinsured must disclose full information regarding the original underwriting terms and
conditions50.

C. Placement cannot be certain, which affects the insurer's ability to underwrite the underlying
risk51.

D. The administration is labour- and cost-intensive, causing delays in issuing the policy52.

Question 14
Under a Quota Share proportional reinsurance arrangement, what dictates the sharing of
premiums and losses?

A. A variable proportion agreed based on the Estimated Maximum Loss (EML) of each
individual risk53.

B. The amount of loss in excess of the insurer's chosen retention (deductible)5454.

C. A fixed proportion (or quota) which is applied to all risks covered in the contract55.

D. A multiple of the insurer’s original retention, known as a 'line'56.

Question 15

An insurer has a retention of £100,000 for a surplus reinsurance arrangement and purchases a
nine-line treaty. What is the maximum capacity (sum insured value) that the insurer can accept
for a risk under this arrangement?

A. £900,000 (9 lines only)57.

B. £1,000,000 (£100,000 retention + 9 lines)58.

C. £100,000 (retention only, as the surplus is ceded)59.

D. £1,100,000 (£100,000 retention + 10 lines)60.

Question 16

An insurer purchases an Excess of Loss (XOL) protection of £500,000 in excess of £100,000. If

the insurer suffers a loss of £700,000 arising from a single event, how much is the ultimate
liability of the Reinsurer?

A. £700,00061.

B. £600,00062.

C. £500,00063.

D. £400,00064.

Question 17

An insurer collects £30 million in annual premiums and buys a Stop-Loss treaty of 30% xs 90%.
When does the reinsurance company become liable for annual losses, and what is the maximum
reimbursement the insurer can collect?
A. Liable when losses exceed £3.0m; Maximum reimbursement is £9.0m65.

B. Liable when losses exceed £27.0m; Maximum reimbursement is £9.0m66.

C. Liable when losses exceed £9.0m; Maximum reimbursement is £27.0m67.

D. Liable when losses exceed £30.0m; Maximum reimbursement is £30.0m68.

Question 18

What is the fundamental difference in the basis of sharing risk between proportional and non-
proportional reinsurance arrangements?

A. Proportional reinsurance is based on a fixed percentage of claims, while non-proportional is

based on a fixed percentage of premium69696969.

B. Proportional reinsurance is based on sums insured or indemnity limits, while non-proportional

is based on the underlying losses (above a retention)707070.

C. Proportional reinsurance is treaty-based, while non-proportional reinsurance is facultative-

based71717171.

D. Non-proportional reinsurance always protects a whole portfolio, while proportional

reinsurance only protects a single risk72727272.

Question 19

What is the key distinguishing factor between Catastrophe Excess of Loss (Cat XOL) and Risk
Excess of Loss (Risk XOL) reinsurance?

A. Cat XOL is non-proportional, while Risk XOL is proportional73737373.

B. Cat XOL is triggered by each and every loss occurrence, while Risk XOL is triggered by each
and every risk74.

C. Cat XOL is only used for property, while Risk XOL is only used for liability75.

D. Cat XOL is designed to smooth results, while Risk XOL provides capacity7676.

Section E: Interaction between Insurer and Reinsurer

Question 20

What is the primary factor that historically causes a hard reinsurance market, leading to
reinsurers holding the negotiating advantage, restricting coverage, and demanding higher
premiums?
A. An absence of significant market losses and increased capital inflow77.

B. The renewals of individual direct policies spreading evenly throughout the year78.

C. A series of abnormally large losses, particularly due to major natural perils like severe
windstorm or earthquake797979.

D. The insurer buying reinsurance below the generally accepted retention level80.

Question 21

In a soft reinsurance market, which action can the insurer take to seize the opportunity to redress
the balance of power, as noted in the provided text?

A. Imposing higher retentions on their own direct policies81.

B. Clustering their treaty renewals around a single date like 1 January82.

C. Buying reinsurance below the generally accepted retention level83.

D. Withdrawing capacity from high-exposure geographical areas8484.

Question 22

When providing claims experience data to a reinsurer, what is the required history period for
long-tail liabilities such as Employers' Liability, and why is it longer than for short-tail business?

A. Five years, as this is adequate for all short-tail and long-tail business85.

B. At least seven years, because the final outcome of claims in this class is uncertain for a longer
period86.

C. At least ten years, to comply with the Insurance Act 2015 (IA 2015)87.

D. At least seven years, due to the legislative aspects of jurisdiction and propensity to claim88.

Question 23

In the modern reinsurance market, what is cited as the main function of the reinsurance broker?

A. To manage the insurer’s day-to-day claims settlement process for large losses89.

B. To dictate the most favourable renewal terms and conditions to the insurer90.

C. To solely coordinate the calculation of technical provisions required by the regulator91.

D. To advise and assist the insurer in the process of risk transfer9292.

Section F: Other methods of controlling exposure

Question 24

What is the primary purpose of a government-encouraged reinsurance pool for terrorism risks,
such as the UK's Pool Re scheme?

A. To provide commercial property owners with mandatory, first-loss insurance93.

B. To create a vehicle for oil companies to self-insure their exploration and drilling
activities94949494.

C. To allow individual companies to share profits and gain a competitive edge in a specialist
market95.

D. To ensure insurers can continue to provide cover by preventing the government from being
called upon as 'insurer of last resort' in the absence of adequate commercial capital9696.

Question 25

What is the core feature and benefit to the insured of First Loss Insurance for a property risk,
where the maximum loss is deemed significantly less than the sum insured?

A. The risk is shared equally between multiple insurers through a co-insurance arrangement97.

B. The insured retains the entire risk, having set aside funds via self-insurance98989898.

C. Any claim made is subject to a maximum payout without the application of average99.

D. The premium is calculated based on the full sum insured, multiplied by an Estimated
Maximum Loss (EML) factor100.

Answers and Explanations

Detailed Explanations

1. Answer: B
Explanation: Underestimating the EML could lead the insurer to unwittingly accept a risk that is
over the maximum capacity laid down in the underwriting policy. The most direct consequence
is that the insurer will find itself paying for a loss for which no provision has been made,
ultimately affecting its profits101. Options A and C relate to overestimating the EML102.

2. Answer: B

Explanation: Maximum capacity is formally defined as the maximum amount of exposure

that an insurer is willing or able to accept103. This limit is typically expressed as a sum
insured or a limit of indemnity and is a cornerstone of the underwriting policy104.

3. Answer: C

Explanation: To identify and monitor accumulations at a single location, insurers undertake risk
logging105. This involves recording the location (usually via postcode) and the maximum
exposure (total sums insured or EMLs) to ensure the aggregation does not exceed the
maximum capacity106.

4. Answer: C

Explanation: While liability aggregation is a concern (e.g., Piper Alpha), the task of identifying
and controlling it is more difficult than for property risks because the aggregations tend not
to be so specific to a fixed location107107107107.

5. Answer: B

Explanation: The term Aggregation is specifically defined as: "An accumulation of insured risk
to a single insurer which exposes that insurer to a significant flow of claims arising from a single
cause of loss"108.

6. Answer: B

Explanation: Catastrophe modelling is essential for capital assessment and allocation. It is used
for internal purposes (setting profit targets) and, critically, externally to satisfy regulators
regarding solvency rules and overall financial modelling109109109109.

7. Answer: C

Explanation: Catastrophe models make allowances for changes to the frequency, severity, and
the insurer's own portfolio110. The reinsurance pricing cycle (Option C) is a separate, although
related, market phenomenon and not a direct input or allowance factored into the internal,
science-based core of the catastrophe model111111111111.

8. Answer: C
Explanation: CRESTA (Catastrophe Risk Evaluation and Standardizing Target Accumulations)
is a system used for risk zoning. It divides countries into zones and sub-zones based on the
degree of hazard, which are recognised worldwide, allowing insurers to identify their
aggregation in specific geographical areas112.

9. Answer: C

Explanation: The ability to smooth results by capping any large losses and avoid fluctuations
in claim costs is the key function of reinsurance in maintaining financial stability113113113113.

10. Answer: C

Explanation: The insurer transferring the risk is called the Reinsured (or Cedant)114. The
Reinsurer is the party that provides the protection115.

11. Answer: A

Explanation: Facultative reinsurance is often used when a risk is excluded from the scope of
the treaty116. Treaties generally have a list of excluded risks, often hazardous or complex, which
require individual facultative placement117117117117.

12. Answer: C

Explanation: A treaty is an obligatory contract where the reinsured is bound to offer a fixed
amount of business, and the reinsurer is obliged to accept it118.

13. Answer: B

Explanation: While all options are disadvantages 119, the specific expert-level disadvantage
related to a competitor is the requirement that the ceding company must disclose full
information regarding the original underwriting terms and conditions120.

14. Answer: C

Explanation: Under a Quota Share arrangement, the premium and losses on all risks covered in
the contract are shared at a fixed proportion (or quota)121.

15. Answer: B

Explanation: The maximum capacity is the insurer's retention plus the multiple lines of
protection122.

 Retention: £100,000
 One Line = £100,000
 Nine Lines = 9 * £100,000 = £900,000
 Maximum Capacity = £100,000 + £900,000 = £1,000,000123.
16. Answer: C

Explanation: The insurer pays the first £100,000 (retention)124124. The reinsurer pays the amount
in excess of the retention, up to their limit of £500,000125125125.

 Total Loss = £700,000

 Insurer pays = £100,000
 Remaining Loss = £700,000 - £100,000 = £600,000
 Reinsurer's liability is capped at £500,000, so the Reinsurer pays £500,000126. The
remaining £100,000 (£600k - £500k) falls back to the insurer127.

17. Answer: B

Explanation: A Stop-Loss X% xs Y% means:

 Liability (Y%): The reinsurer is liable when annual losses exceed Y% of the premium
income (90% of £30m = £27.0m)128.
 Maximum Reimbursement (X%): The cover is calculated as X% of the premium
income (30% of £30m = £9.0m)129.
 Therefore: Liable when losses exceed £27.0m; Maximum reimbursement is £9.0m130.

18. Answer: B

Explanation: Proportional reinsurance is concerned with the proportions of values at risk,

generally measured by the sums insured or indemnity limits131. Non-proportional reinsurance
arrangements are based on the underlying losses above a deductible, not the sums
insured132132132132.

19. Answer: B

Explanation: Catastrophe Excess of Loss (Cat XOL) provides specific protection against
aggregation from one identified event and assesses the impact of 'each and every loss
occurrence'133. Risk Excess of Loss (Risk XOL) assesses the impact of 'each and every
risk'134.

20. Answer: C

Explanation: Hard reinsurance markets tend to follow an abnormally large loss or series of
large losses, particularly due to a major natural peril, such as a severe windstorm or
earthquake135. This causes some underwriters to withdraw, limiting capacity and allowing the
remaining reinsurers to negotiate favourable terms136136136136.

21. Answer: C
Explanation: In soft markets, when negotiating power shifts to the insurers, insurance
companies sometimes seize the opportunity to redress the balance by buying reinsurance
below the generally accepted retention level137.

22. Answer: B

Explanation: For long-tail liabilities such as Employers’ Liability, at least seven years of claims
experience may be required, compared to five years for short-tail liabilities. This is because the
period of analysis must be longer due to the protracted nature of claims in this class138.

23. Answer: D

Explanation: While reinsurance brokers perform many duties (e.g., information gathering,
negotiation), the text explicitly states that the main function of the modern reinsurance broker is
to advise and assist the insurer in the process of risk transfer139139139139.

24. Answer: D

Explanation: Governments encourage the establishment of special pools for terrorism, like Pool
Re, because if the commercial market could not insure or reinsure these risks, the country’s
government could be called upon to act as ‘insurer of last resort’140. Pool Re ensures insurers
can continue to provide cover, preventing this141.

25. Answer: C

Explanation: The key feature of First Loss Insurance is that, once accepted, any claim made is
subject to a maximum payout without the application of average142. This appeals to an insured
who believes the maximum possible loss is significantly less than the total sum insured 143.