INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

30 September 2020 (am)

Subject SA3 – General Insurance

Specialist Advanced
Time allowed: Three hours and fifteen minutes

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

If you encounter any issues during the examination please contact the Examination Team on
T. 0044 (0) 1865 268 873.

SA3 S2020 © Institute and Faculty of Actuaries

1 A weekly national lottery provides prizes on a weekly basis. Along with smaller
prizes where fewer numbers are matched, a fixed share of the overall ticket sales is
allocated to the jackpot prize. The jackpot prize is shared across all ticket holders
matching all six numbers in a draw. The jackpot prize fund rolls over if there are no
winners in a week. The number of tickets sold increases with each rollover.

An established private betting company, ABC Ltd, spots an opportunity and decides
to offer tickets for half the cost of the national lottery. ABC will match the exact
jackpot prize each week but does not offer the smaller prizes for matching fewer
numbers. All its tickets are sold online.

(i) Discuss whether ABC should purchase insurance to cover jackpot payments.
[4]

ABC decides to approach the managing agency for a Lloyd’s syndicate to ascertain
the likely cost of jackpot insurance. The managing agency has offered ABC two
options:

 a weekly renewable contract whereby the premium depends on both the number of
tickets sold by ABC that week and the size of the jackpot
 an open-ended contract that can be renewed following each jackpot win. Under this
contract ABC would be committed to paying a weekly premium until the jackpot is
won. The weekly premium would depend on the number of tickets sold that week.

(ii) Outline factors that the syndicate’s managing agency should consider when
pricing these options. [6]

(iii) Recommend, with reasons, which option is likely to be the most appropriate
for ABC. [2]

The managing agency’s Chief Risk Officer expresses concerns about additional risks
of fraudulent claims under the chosen option.

(iv) Comment on these concerns, considering any potential mitigation options.

[4]
[Total 16]

SA3 S2020–2
2 Worldwide Insurance is a very large insurance company headquartered in the UK but
with offices in over 50 countries worldwide. It has expanded rapidly over the last
3 years through acquiring smaller businesses, and writes a comprehensive range of
liability insurance classes globally.

(i) Comment on whether Worldwide may be more or less exposed to latent claims
than an insurer operating in only one country. [4]

Worldwide has engaged a leading consultancy firm to review its provisions for latent
claims. This consultancy’s estimates are significantly higher than the estimates from
the company’s own actuaries (set 12 months’ prior to the consultancy’s estimates),
which were booked by Worldwide in their latest financial statements. As a result of
this increased loss estimate, Worldwide is looking to reduce its latent claim
exposures.

(ii) Suggest four reasons for the significant difference in estimates. [6]

(iii) Set out two potential options for Worldwide to reduce its latent claim
exposures, considering the advantages and disadvantages of each approach.
[8]
[Total 18]

SA3 S2020–3
3 The insurance regulator has carried out a major review of the personal lines market to
assess whether it is operating fairly with regards to:

 consistency of pricing between different policyholder groups

 value for policyholders
 clarity of communication to policyholders.

As part of this review, the regulator has identified that average premiums for
policyholders in their first year with an insurer are materially lower than average
premiums for policyholders who have been with an insurer for several years.

(i) Suggest possible reasons why this may be the case, including consideration of
potential behaviours of both insurers and policyholders. [8]

The extent of the difference in price between new and renewing policyholders varies
significantly between different classes of business.

(ii) Determine factors that might affect the materiality of the difference for
particular classes of business. [5]

A politician has seen a newspaper article on this review, and has made the following
statement at a press conference:

‘It is clearly unfair that policyholders are being penalised for their loyalty
with higher insurance premiums.’
(iii) Comment on the politician’s statement. [5]

The insurance regulator is considering ways in which it could drive a reduction in the
differences in average premiums between new and renewing policies.

(iv) Outline potential actions the regulator might take. [5]

The regulator has decided to require insurers to have no more than a maximum 5%
difference in average premiums for any class of business between new policyholders
and those renewing the same policy for the fifth consecutive year.

(v) Discuss the potential impacts on the insurance market from these proposals.
[9]
[Total 32]

SA3 S2020–4
4 (i) Define the term ‘Captive’. [2]

(ii) List advantages and disadvantages of setting up a captive. [6]

(iii) Outline the following for product liability insurance:

(a) policy coverage

(b) claims profile

(c) rating factors.

[12]

XYZ Plc is a large and expanding manufacturing company with factories in several
countries producing products for a variety of industries and consumers. XYZ is
currently reviewing its insurance requirements.

Its Finance Director is particularly concerned at the level of spend on insurance and
intends to set up a captive insurance subsidiary to cover some or all of its insurance
requirements.

(iv) Suggest with reasons what insurance XYZ might place in the captive and what
it might still transfer to the external market. [6]

(v) Outline factors that might affect the capital requirements for XYZ’s new
captive. [8]
[Total 34]

END OF PAPER

SA3 S2020–5