(Papers) ACET Paper June 2015 "ST3 – General Insurance"
i) An insurer finds from his personal accident (PA) portfolio
that out of the accident claims from Metro-city policyholders, 80% are in
respect of accidents taking place in Metro-city areas and 20% are in respect of
accidents taking place in other cities and towns. Similarly, the figures for
policyholders from other cities and towns are: 30% Metro-cities and 70% other
cities and towns. The insurer’s PA portfolio comprises of 75% living in
Metro-cities and 25% living in other cities and towns. A claim is notified in
respect of an accident, which took place in an area falling under other cities
and towns. What is the probability that the policyholder lives in a Metro-city
ii) a) An insurer has been operating an experience rating system with
credibility factors equal to 75% of the values derived from the EBCT Model 1 and
rounded to two decimals for its group health business portfolio where group size
is above 999 and below 9999. For group size 10000 and above, the 75% reduction
factor does not apply and for groups below 1000 there is no experience rating
facility. The insurer is now in its fourth year of businesswith the first one
being a partial year. The experience rating system is recognized in all policy
contract documents issued by the insurer. A small number of clients who have
taken policies with the insurer in its very first year have complained about the
reduction in the credibility factor during the current year under their
policies. Suggest possible reasons as to why such a reduction in the credibility
factor could have arisen.
b) The management of the insurer in part (a) above have felt that there is a
good untapped market potential for group health business where group size is 100
or more but less than 1000. In order to tap this market they have decided to
extend the experience rating system to such groups also. They have sought your
advice on a review and modification of the existing system and desire that the
new system should achieve the twin objectives of premiums reflecting the risk
more closely and no reduction in profitability. Set out the aspects you would
consider before you send a response containing your interim recommendations for
discussion and finalization.
i) An insurer has reinsurance arrangements operating in the order given
- Surplus: Maximum retention of Rs. 30,00,000, maximum 7 lines
- QS: 70% of risk is retained on all risks
- XOL: Rs.100,00,000 in excess of Rs. 30,00,000 on individual claims and
covering all risks
- Stop Loss: 90% of aggregate losses between 120% and 150% of original
There were 3 claims as stated below:
A. Sum Insured Rs. 200,00,000 EML: Rs. 40,00,000 Claim:Rs. 25,00,000
B. Sum Insured Rs. 300,00,000 EML: Rs. 125,00,000 Claim:Rs.175,00,000
C. Sum Insured Rs. 225,00,000 EML: Rs. 80,00,000 Claim:Rs.75,00,000
Calculate the total claim amount recoverable from stop loss reinsurer. The
total premium for the portfolio was Rs.35,00,000 and the retention under the
surplus arrangement has always been the maximum.
ii) An insurer operating in one of the countries affected by Tsunami of 26
December, 2004 is now in its 4th year. As at the end of the last financial year
as on 31 March 2004, the insurer was 9th in rank by premium volume out of 14
companies operating in the country and its actual solvency margin was 220% of
the statutory required minimum margin. During the financial year ended 31 March
2005, there is a marginal loss in the company’s accounts compared to a modest
profit in the previous financial year.
(a) List possible classes of business and nature of claims, which the insurer
would have received because of the Tsunami event.
(b) The reinsurer who has a treaty with this insurer recently served a notice
for a substantial increase in its premium rates for Catastrophe excess of
loss(CAT) cover. All policy decisions on reinsurance are taken by the insurer’s
Board. The reinsurer’s notice was discussed by the Board in a special meeting
and they decided not to renew the CAT cover and instead set up internal reserves
in the company’s accounts. The Board have asked your opinion in the matter and
and also to suggest an appropriate level for the internal reserves to be set up
over the next 3 years.
i) Set out the points for your opinion on setting up internal reserves in
stead of renewing the CAT cover.
ii) Outline steps you would go through in order to arrive at an appropriate
figure for the internal reserves.
i) An insurer has on its books a small number of
“contractors-all-risks” (CAR) policies. Under these policies, insurance is
provided for a defined period against material damage and third party liability.
The period of cover is defined in the policy based on expected time to complete
the project. Risk expires on earlier completion of work and no refund of premium
is made in such a case. Extension of period of cover is possible with additional
premium. Termination of policy is allowed if the incurred claim ratio is less
than 60% and if unexpired period is at least 3 months or 25% of the original
period, which generally ranges from 18 months to 9 years. Sum insured is the
expected value of the property but adjustable by declaration of policyholder on
actual values. Premium is allowed to be paid in instalments with an initial
instalment large enough and appropriate for the policy and the balance is
payable in equal monthly or quarterly instalments ending at least 6 months
before the policy contract period ends.
The insurer is planning to increase its business under this
type of policies. The insurer uses 365ths method for all its other types of
policies to provide for UPR. For the CAR policies, the underwriter’s opinion is
sought every time UPR is provided. The Finance department of the insurer has
sought your help in developing a formula to be incorporated in to the computer
programs to generate the UPR automatically for each policy at the end of each
month and for incorporation in the company’s accounts.
a) Defining any symbols you use and giving reasons, suggest
such a formula.
b) Discuss briefly limitations of the method you suggest and steps to be taken
to improve the usefulness of the formula.
ii) An insurer who is in its fifth year of operation has a
motor portfolio growing at around 15% over last 3 years. The break-up of the
gross written premiums has been as follows:
The insurer has been using case estimates to set up
outstanding claims reserves under its motor portfolio. As soon as a claim is
notified over telephone, on line or other mode quick steps are taken to obtain
preliminary data and a provision, which considers all known individual aspects
of the claim, is raised in the accounts. As the claim progresses towards
settlement, any new and material information coming up is immediately considered
and the provision revised upwards or downwards, as necessary. IBNR is separately
provided every quarter using an actuarial method. To cover all expected delays
in settlement 5% inflation is assumed. The Chief of the claims department also
organizes a review conference of estimators every halfyear to review the
estimating procedures, discuss for use market information and internal trends.
Recently as a first step towards introducing statistical
methods for claim estimation, the basic chain ladder method using paid claims
data drawn from IT systems claim file, was tried by the chief of claims and the
results were as follows:
List reasons why the basic CL method has given a lower claims
i) The marine insurance in a country’s market includes marine
cargo and freight for any transit by one or more of land, air or water and also
includes warehouse risks or similar risks. In respect of marine cargo business
in this market, describe briefly measure of exposure, risk factors, rating
factors and underwriting methods including exclusions, if any.
ii) A motor insurer is considering offering the following
add-on benefits on an optional basis to its private car motor policyholders.
A. Emergency medical attention in the event of an accident to driver and/ or
B. Cover against loss of or damage to personal belongings in the car
C. Provision of an alternative car in case of theft of or accident to car for a
suitably predefined period
In respect of each of the above three benefits, discuss the
- response of customers/ policyholders
- advantages to insurer
- disadvantages to insurer